by Jean Miller | Accounting News, News, Retirement, Retirement Savings
Retirement planning involves careful consideration of various financial strategies, and while traditional retirement accounts such as 401(k)s and IRAs are still go-to options, the Health Savings Account (HSA) is becoming a valuable retirement tool. Here’s why.
What is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to set aside funds especially for medical expenses. It is intended to work jointly with a high-deductible health plan (HDHP), which is a type of health insurance plan with lower premiums but higher deductibles compared to traditional health insurance plans. Though it was originally designed to help individuals cover medical expenses, the HSAs has evolved to offer unique advantages that make it an increasingly attractive option for saving for retirement.
An Increase in Maximum Contributions
The IRS recently announced the largest-ever increase in maximum contributions to HSA accounts. In 2024, the maximum HSA contribution will be $4,150 for an individual (up from $3,850) and $8,300 for a family (up from $7,750). Add to this the bonus $1,000 individuals over 55 can contribute, and the maximum contributions are $5,150 for individuals and $10,300 for couples.
Triple-Tax Advantage
Contributions made to HSAs are tax-deductible, meaning that individuals can lower their taxable income by the amount contributed. Additionally, earnings on the funds within the account grow tax-free. Finally, withdraws from an HSA for qualified medical expenses are also tax-free.
Long-Term Savings Potential
Unlike flexible spending accounts (FSAs), which typically must be used by the end of the year, HSAs offer an opportunity for long-term growth as they are not subject to an annual deadline for spending. HSA funds can be invested in stocks and other securities, potentially allowing for higher returns over time. Because of this, individuals can accumulate substantial savings in HSAs to supplement their retirement income.
Medicare Premium Payments
HSA funds can be used to pay for Medicare premiums, including Medicare Part B, Part D, and Medicare Advantage premiums, deductibles, copays, and coinsurance. By utilizing HSA funds for these expenses, individuals can free up their retirement savings in other accounts, such as 401(k)s or IRAs, for other essential expenses or investments.
Healthcare Costs in Retirement
HSAs can serve as a dedicated savings tool for healthcare costs in retirement. Savers can build up a substantial nest egg dedicated specifically to healthcare expenses – including premiums, deductibles, and other out-of-pocket costs – by maximizing contributions to their HSAs during their years in the workforce.
Flexibility and Portability
Unlike traditional retirement accounts that have required minimum distributions (RMDs) starting at age 72, HSAs do not have RMDs. This allows individuals to retain control over their funds and decide when and how they want to use them. Additionally, HSAs are portable, meaning they move with the account holder from job to job, in between employment, or even into retirement. This provides individuals with consistent access to savings.
As healthcare costs continue to rise, individuals who incorporate HSAs into their retirement planning strategy can bolster their financial security and ensure they are well-prepared for any healthcare expenses in their golden years.
by Pete McAllister | Accounting News, News, Retirement, Retirement Savings, Tax Planning, Tax Planning - Individual
A key approach to minimizing taxes, especially as you near retirement, is to implement tax planning strategies that can help you save money and maximize your retirement savings. Here are some tax-efficient strategies to consider.
Contribute to Tax Advantage Retirement Accounts
When you contribute to a retirement account such as a 401(k), IRA, and Roth IRA, you can lower your taxable income in the year you make the contribution. With a traditional 401(k), you defer income taxes on contributions and earnings, which means you won’t pay taxes on them until you withdraw the funds in retirement. With a Roth IRA, your contributions are made after taxes and your earnings may be withdrawn tax-free in retirement.
Utilize Catch-Up Contributions
Workers over the age of 50 are eligible for an additional tax break when they make catch-up contributions to retirement accounts. In 2023 individuals can contribute an additional $1,000 to an IRA (up to $7,500 in total). For 401(k) plans, individuals can contribute an additional $7,500 for a total tax-deductible contribution of as much as $30,000. Catch-up contributions help to save more for retirement and reduce taxable income.
Consider a Health Savings Account
A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. If you have a high-deductible health plan, you may be able to contribute to an HSA. The contributions are tax-deductible, the earnings grow tax-free, and you can withdraw the funds tax-free in retirement to pay for qualified medical expenses.
Make Use of the Saver’s Credit
In order to be eligible for the saver’s credit in 2023, you must contribute to a 401(k) or IRA and earn up to $36,500 for individuals, $54,7500 for heads of household, and $73,000 for married couples. You can claim the saver’s credit on retirement account contributions of up to $2,000 ($4,000 for couples). Depending on your income, it is worth between 10% and 50% of the amount contributed (bigger credits go to lower-income savers). The saver’s credit may be claimed in addition to the tax deduction for traditional retirement account contribution.
Refrain from Triggering the Early Withdrawal Penalty
You could be subject to a 10% tax penalty if you make IRA withdrawals before age 59 ½ and 401(k) withdrawals before age 55. The penalty may be avoided for certain specific purchases such as:
- Up to $10,000 for a first home purchase
- College costs
- Extensive health care costs
- Health insurance following a layoff from your job
If a Roth IRA is at least five years old, you may be able to withdraw funds that you contributed, but not the earnings, without prompting the early withdrawal penalty.
Don’t Sleep on Required Minimum Distributions
After age 73, savers are generally required to take required minimum distributions (RMDs) from IRAs and 401(k)s, and income tax will be owed on each distribution. Should you withdraw the incorrect amount, you could be subject to a 25% penalty of the amount that should have been withdrawn. This is in addition to the income tax due. However, if you act quickly to amend the error, that penalty could drop to 10%. Your first RMD is due by April 1 of the year after you turn 73. All following distributions must be taken by Dec. 31 each year in order to avoid the penalty.
Put Off 401(k) Withdrawals if You’re Still Employed
If you are still employed in your 70s and beyond, you may be able to delay withdrawals from your 401(k) account until your retirement (provided you don’t own more than 5% of the company sponsoring the retirement plan). Just be aware that after age 75, you will still be required to take RMDs from IRAs and 401(k)s associated with previous jobs in order to avoid the 25% tax penalty.
Plan Your Withdrawals
When you start withdrawing funds from your retirement accounts, plan in a way that minimizes taxes. For instance, you can withdraw funds from taxable accounts first to avoid triggering taxes on Social Security benefits. During your 60s, you can take penalty-free withdrawals from your retirement accounts without being required to take distributions each year. You can also take advantage of tax-efficient withdrawal strategies, such as the bucket approach, which involves dividing your assets into different buckets based on when you plan to use them.
by Stephen Reed | Accounting News, News, Retirement, Retirement Savings
Retirees routinely withdraw cash from retirement accounts to cover basic living expenses, but selling low could negatively affect your retirement portfolio. If the economy experiences a downturn during your retirement years, you can use the strategies discussed below to minimize the impact to your long-term financial plan.
Before Making Any Withdrawals
While younger investors are generally advised to leave their cash invested and wait for the market to rebound, retirees typically rely on market withdrawals to create cash flow. In an effort to avoid or postpone withdrawals during tricky market conditions, try to find assets unlinked to the market that you can tap into until the market normalizes. Market downturns and steep inflation can be considered financial emergencies if you’re struggling to make ends meet, so you can certainly dip into emergency funds without feeling guilty. Just be sure to prepare a plan to replenish the funds as soon as possible. If you must withdraw from your investment accounts, it’s important to be strategic in your withdrawals.
Begin with Interest and Dividends
Before selling low, try to leave your original investment intact by only withdrawing the interest and dividends from your taxable accounts. This move could allow you to conceivably grow your income when the market rebounds in the future.
Sell Lower Volatility Investments
Short-term bonds and bond funds generally aren’t as affected by market unpredictability, and their values are ordinarily stable. Selling them in a down market can supply necessary cash and not cause too much damage to your retirement savings. They also favor smaller price fluctuations than stocks during stretches of market volatility.
Rebalance Your Portfolio
If your investment portfolio is out of alignment with your asset allocation goals due to market volatility, it’s an opportune time to look for opportunities to raise needed cash by rebalancing. In order to return your allocation to its original goal, sell assets where values have increased disproportionately in value relative to your desired allocation, and buy assets that may have dropped in value.
Make Tax-Smart Choices
If you’re forced to sell assets from taxable accounts for needed cash flow, be sure to make tax-smart choices. You can minimize your taxes owed by selling investments that you’ve held longer than one year. Those gains are taxed at the long-term capital gains tax rate of 20% and not at the federal ordinary income tax rate. Keep in mind that some gains may also be subject to state and local taxes.
by Jean Miller | Accounting News, Financial goals, News, Retirement, Retirement Savings, Uncategorized
Individual Retirement Accounts (IRAs) allow for a tax-advantaged way to invest your money long-term. Whether you choose to invest in a traditional IRA or a Roth IRA (or a combination of the two), you’ll defer paying income tax on the money you set aside for retirement. Follow these IRA investment strategies to boost your retirement savings and maximize the value of you IRA.
Max it Out
The maximum amount you can contribute to an IRA for 2022 is $6,000, and it is generally worth making the maximum contribution. Note that there are income limits. You can make a full contribution if your income is less than $144,000 ($214,000 if you are married filing jointly). For 2022, retirement savers age 49 and younger can max out an IRA by saving $500 per month or making a deposit any time before the 2022 IRA contribution deadline of April 15, 2023.
Make Catch-Up Contributions
As of the calendar year you turn age 50, you are eligible to contribute an extra $1,000 to your IRAs for that year, and all following years. If you weren’t able to save as much as you would’ve liked earlier in your career, catch-up contributions offer an opportunity to boost your yearly savings until retirement.
Don’t Wait Until the Contribution Deadline
It’s true that you can make a contribution to an IRA up until the mid-April tax filing deadline and apply it to the previous tax year. By shifting some funds into an IRA, you may be able to reduce your tax bill or boost your refund. However, that may not be the most beneficial move depending on your circumstances. When you wait to contribute, you miss out on potential growth. There is also the chance that you will be making an investment at a high point in the market. Contributing to an IRA at the beginning of the tax year enables the funds to compound for a longer stretch of time. You can also consider making small monthly contributions as a budget-friendly approach that will still yield favorable results.
Low- and Moderate-Income Workers Can Claim the Savers Credit
If your adjusted gross income (AGI) is below $34,000 as an individual or $68,000 as a couple in 2022, you may be eligible to claim the saver’s tax credit as well as the tax deduction for your IRA contribution. This credit is worth between 10% and 50% of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.
Use Your Tax Refund to Contribute to Your IRA
You can use IRS Form 8888 to deposit all or part of your tax refund directly into an IRA. Provided the deposit is made by the due date of your tax return, you can file a tax return claiming a traditional IRA contribution before the money has actually been deposited in the account. In other words, if you file earlier rather than later, it’s possible to use your tax refund to make an IRA contribution you already claimed on your tax return.
Consider Converting to a Roth IRA
For some taxpayers, it may be beneficial to convert an existing traditional IRA to a Roth IRA. Expect to pay income taxes on the conversion amount, which could be substantial, so be sure to do the math before you make the leap. The funds that are moved into the Roth grow tax-free and will be tax-free upon withdrawal in the future, provided the account is at least five years old. The decision to convert to a Roth IRA basically boils down to whether you want to take the tax hit now or later. The farther away you are from retirement, the more advantageous a Roth IRA could be, because the Roth’s earnings will have more years to compound.
by Pete McAllister | Accounting News, News, Retirement Savings
No matter the reason for leaving a company, you need to decide what to do with your employer-sponsored retirement plan within 60 days of leaving. If you miss this deadline, you risk the plan being automatically distributed to you or moved to another retirement account. You have several options for your 401(k) plan, and we’ll go over them below.
Keep the Money Where It Is
First, your company should be clear about whether you can keep the funds where they currently are—in your former employer’s plan. Some employers approve this if you have at least a $5,000 balance. You might choose this option simply because you are familiar with the investment options, or because the fees are lower than your new employer’s plan.
Choose a Plan-to-Plan Rollover Option
Many employers offer a plan-to-plan rollover into their 401(k) or other qualified retirement plans. This move doesn’t acquire any tax consequences or penalties. As long as you like the investment options in the new plan, this rollover option can be an obvious choice to keep your savings momentum.
Keep in mind that if you move the money as a withdrawal from the old plan and deposit it to a new plan, rather than choosing the rollover option, your employer may withhold 20% of the sum for taxes. It is your responsibility to report this amount on your taxes for the year the distribution was made.
Roll the Money Over Into an IRA
A direct rollover into an IRA does not incur tax consequences or penalties, and there is an abundance of investment options to choose from—including stocks, bonds, mutual funds, and ETFs. If you typically move jobs intermittently, moving the money into a rollover IRA might be a good option. This way all of your 401(k)s and retirement plans can have one home.
One drawback to this option is that you will no longer be making automatic contributions, so that might curb your savings drive. However, rollover IRAs are commonly flexible, so moving your assets into a future employer’s plan might be an option.
Use the Money
Using the money for personal expenses is an option by taking a lump-sum distribution, but it will cost you. You will owe income taxes on it, and for workers under age 59 ½, you will likely pay a further 10% penalty. Depending on your tax bracket and state and local taxes, you could lose a significant amount of your retirement stash.
Employer Distribution
If your 401(k) balance is less than $1,000, your employer could release the funds via a lump-sum distribution, whether or not you requested it. If this happens and you are within 60 days of terminating your old plan, immediately roll the money into a new employer’s plan or a rollover IRA.
If your balance is more than $1,000 but less than $5,000, your plan administrator is required to move the funds into an IRA unless you specifically request another type of distribution.
In general, according to the Internal Revenue Service (IRS), if your savings is less than $5,000, your employer is permitted to distribute the funds from the plan without your authorization. You should be able to claim on your tax return any taxes or penalties your previous employer triggered when the distribution was made, but it might help to discuss this situation with a tax professional before you file.
