In our previous two posts, we discussed year-end planning for both IRAs and 401(k) plans. Here’s the last in our series with some general tips on what to look at concerning your retirement plan options.
Below are some simple, but potentially financially rewarding retirement planning ideas to think about:
For 2018, the maximum IRA contribution is $5,500 or $6,500 if over the age of fifty. This will increase to $6,000/$7,000 for 2019. The deadline is April 15, 2019 for making 2018 IRA or Roth IRA contributions. You can make contributions in pre-tax, after-tax or Roth, if applicable.
When saving for retirement, it pays to be consistent. Saving even a few dollars a day can lead to retirement wealth in the future. For example, if an individual makes IRA contributions of $4 a day at the age of 25 and continues until the age of 70, earning 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 will 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 $55,000 or $61,000 if over the age of 50. The maximum contribution amounts will increase in 2019 to $56,000 or $62,000.
There is also a loan feature that allows for a maximum tax-free loan of $50,000. You must adopt the Solo 401(k) in 2018 to make contributions for the year. Make employee deferral contributions 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 must withdraw money from their traditional IRAs and pay income tax. However, if you’re a retiree in the fortunate position of not needing the money you stashed away in your IRA, you can avoid paying income tax on the required withdrawals. You’ll have to donate up to $100,000 of your distributions to charity.
To qualify for the tax break, you must pay charitable distributions for 2018 directly from the IRA to a qualified charity by the end of the calendar year.
Low- and moderate-income people who save for retirement in a 401(k) or IRA are eligible to claim the saver’s credit. It 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 $63,000 (for couples) or $32,000 (for single filers) in 2018.
Your asset allocation tends to change based on your performance. End of year is a good time to make sure you make investments in exactly what you want. For example, your 401(k) started with a 50/50 mix of stocks and bonds, but may have adjusted to 60/40. You can re-balance if you want to maintain a 50/50 split moving forward. The younger you are, the more you should have invested in stocks.
Roth IRA Conversion
Another tip for year-end-retirement-planning is to convert a pre-tax IRA to Roth. This offers many 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, i.e. 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
What if I Am Too Late?
If you are reading this article, and 2018 has turned to 2019, you still have some good year-end-retirement-planning options:
- 2018 IRA and Roth IRA contributions can be made up until Tax Day.
- 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 2019 in order to make 2018 contributions. SEP IRA contributions can then be rolled tax-free into a Solo 401(k) plan.
- Unfortunately, a SIMPLE IRA must be established by October 1 (without extensions) for the tax year in which your qualifying contribution(s) will apply.
Remember Required Minimum Distributions (“RMDs”)
If you are age 70½ and older, you must take a required minimum distribution from your traditional 401(k) plans and traditional IRAs by Dec. 31, 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 70½, 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.
Year-end-retirement-planning, or retirement planning in general, 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 when the time comes to leave your work life behind.