With the end of the year approaching, there is still time left to consider retirement planning opportunities. Below are some simple, but potentially financially rewarding, retirement planning ideas to think about:
- IRA Contributions: For 2016, the maximum IRA contribution is $5500 or $6500 if over the age of fifty and will remain the same for 2017. The deadline is April 15, 2017 for making 2016 IRA or Roth IRA contributions. Contributions can be made in pre-tax, after-tax or Roth, if applicable. When saving for retirement, it pays to be consistent because saving even a few dollars a day can lead to real retirement wealth in the future. For example, if an individual started making IRA contributions of just $4 a day at the age of twenty-five and continued to the age of 70 and was able to earn a 6% annual rate of return (From January 1, 1900, through December 31, 2013 the average return of the S&P 500, which tracks the 500 largest stocks based on market capitalization, was 11.60 percent), the individual would have Approximately $329,242.
- Consider Going Solo: If you are self-employed or have a small business with no full-time employees, a solo 401(k) plan will allow an individual to defer up to $53,000 or $59,000 if over the age of 50. The maximum contributions amounts will increase in 2017 to $54,000 or $60,000. There is also a loan feature that allows for a maximum tax-free loan of $50,000. The Solo 401(k) plan must be adopted in 2016 to make contributions for 2016 and employee deferral contributions should be made to the plan by December 31, whereas, employer profit sharing contributions can be made up to the business’s tax return deadline.
- IRA Charity Contributions: Individuals age 70½ and older are generally required to withdraw money from their traditional IRAs and pay income tax on each distribution. But retirees in the fortunate position of not needing the money they have stashed away in their IRA can avoid paying income tax on their required withdrawals by donating up to $100,000 of their distributions to charity. To qualify for the tax break, charitable distributions for 2016 must be paid directly from the IRA to a qualified charity by the end of the calendar year. The IRS has recently made the Qualified Charitable Distribution permanent.
- Saver’s Credit: Low- and moderate-income people who save for retirement in a 401(k) or IRA are eligible to claim the saver’s credit, which can be worth up to $2,000 for individuals and $4,000 for couples. People age 18 and older who are not full-time students or dependents on someone else’s tax return can claim this tax credit until their income exceeds $62,000 for couples in 2016.
- Trump Effect: We should generally expect that a Trump Presidency will usher in lower personal and business taxes for most Americans. What does that mean for retirement planning? Lower tax rates could make the Roth IRA more attractive since the financial benefit of a tax deduction would generally have less financial impact. Also, lower tax rates could make 2017 the year of the Roth IRA conversion as the conversion amount would be treated as taxable income to the recipient.
- To do or not to do – Roth IRA Conversion: Converting a pre-tax IRA to Roth offers some attractive tax planning opportunities that must be weighed against the immediate impact of a tax. The following are some items to consider when contemplating a Roth IRA conversion:
- Your age: the younger you are more tax free growth available
- Type of investments to be made with Roth IRA funds (memories of Enron – pay tax on the conversion and end up with a worthless retirement account)
- Tax-free income to supplement other sources of income
- Estate planning opportunities – but what if President-elect Trump abolishes the estate tax?
- Spouse can live off Roth IRA funds tax-free acquired from deceased spouse or can have the Roth IRA grow for children tax-free
- Should I wait to 2017 when tax rates should be lower?
- What if I am too late? If you are reading this article and 2016 has turned to 2017 or beyond, you still have some good retirement planning options:
- 2016 IRA and Roth IRA contributions can be made up to April 15, 2017.
- A SEP IRA, which is a retirement plan for the self-employed or small business owner can be made up to the tax return filing of the business. A SEP IRA can be established in 2017 in order to make 2016 contributions. For 2016, the maximum SEP IRA maximum contribution amount is $53,000 for 2016 and will increase to $54,000 in 2017. SEP IRA contributions can then be rolled tax-free into a solo 401(k) plan. Unfortunately, a SIMPLE IRA must be established by 1 (without extensions) for the tax year in which your qualifying contribution(s) will apply.
- Remember Required Minimum Distributions (“RMDs”). If you are age 70 1/2 and older, you must take a required minimum distribution from your traditional 401(k) plans and traditional IRAs by Dec. 31, 2016, and income tax is due on each withdrawal. The penalty for missing a required minimum distribution is 50 percent of the amount that should have been withdrawn, and that’s in addition to the income tax due.
- No RMDs For Roth IRA Distribution. Roth IRAs are not subject to RMDs, but a Roth 401(k) account is. However, for individuals with a Roth 401(k) account and are at the RMD age of 701/2, rolling all Roth 401(k) funds tax-free to a Roth IRA prior to December 31 so that the Roth 401(k) plan has a zero balance as of December 31 will allow the individual to escape RMD requirements on the Roth 401(k) assets.
Retirement planning does not have to be difficult or demanding. In fact, spending just a little time reviewing some year-end retirement planning opportunities can potentially be very financially rewarding at retirement.