If your financial situation has hit a rough spot, there are several things you can do to get your retirement plan moving in the right direction again.
Does it feel like the coronavirus pandemic has pushed all your retirement plans by the wayside? If you recently lost your job or had a reduction in income, you may not be thinking about your long-term future and retirement plans. You may only be focused on surviving from one day to the next.
Regardless of your current situation, all is lost when it comes to retirement planning.
You can get things moving in the right direction again. While there are no easy answers or quick fixes in these uncertain times, there are a few ways you can shore up your retirement plan and get it back on track. Here are some things to consider.
Bob Michaels is extremely passionate about providing the best possible legal experience for his clients, and focuses his practice on elder law, estate planning, business, and real estate matters. Bob has been able to provide piece of mind and a solid foundation to many folks in the Puget Sound area over the years and wants to provide resources and relevant information whenever he can. For more information on how Bob can help you and your loved ones through these troubling times, contact Bob to schedule a FREE consultation.
Make Catch-Up Contributions If You Can
Thanks to the demise of traditional pension plans, most people are responsible for accumulating the bulk of their own retirement savings. One way to optimize your savings is to make catch-up contributions in addition to your regular 401(k) or IRA contributions. Basically, if you're age 50 or older, you can contribute more than younger people to your retirement accounts so that you can "catch-up" on retirement savings before you reach retirement age.
For 2020, 401(k) contributions are limited to $19,500 for most people, but if you're 50 and older, you can make an additional catch-up contribution of $6,500 this year. That means older savers can contribute up to $26,000 in a 401(k) plan in 2020.
With an IRA, the maximum amount you can contribute for 2020 is $6,000 if you're younger than age 50. However, people age 50 and older can add an extra $1,000 per year as a catch-up contribution, bringing the maximum IRA contribution to $7,000.
Maximizing your retirement contributions with catch-up contributions will help grow your nest egg consistently and let your funds get the most from compounding returns.
Put Your Stimulus Check in an IRA
The federal government may be sending out more stimulus checks to Americans. Depending on your income, your check could be for as much as $1,200, with an extra $500 for each child under 17 years old. If you receive a payment, investing the money in an IRA is a smart move if you have your basic needs covered. If you already funded your IRAs for 2019, you have until April 15, 2021, to put money into them for 2020.
Your IRA contributions might be tax-deductible, too. If you and your spouse, if married, don't have a 401(k) or other retirement plan at work, you can deduct the full amount of contributions to a traditional IRA. If you do have a retirement plan at work, you still might be able to deduct some or all your contribution. Singles with modified adjusted gross income of $65,000 or less and joint filers with income of up to $104,000 can deduct their full contribution for the 2020 tax year. Deductions decrease and phase out completely once income reaches $75,000 for singles and $124,000 for joint filers.
If you're already retired, don't forget that you can keep contributing to an IRA as you grow older.
Before this year, contributions to a traditional IRA were not allowed by anyone age 70½ and older. However, that restriction was lifted by the SECURE Act, which was enacted in December 2019.
Now might be a good time to convert a traditional IRA into a Roth IRA. With a traditional IRA, you pay tax when you withdraw funds from the account in retirement. With a Roth IRA, you pay tax now, but withdrawals in retirement are tax free. It is basically a, ‘pay me now or pay me later’ situation.
If you do convert a traditional IRA to a Roth IRA, you pay tax on the transferred funds in the year of conversion. However, doing it in 2020 might be a good move in the long run if you can handle the additional tax this year.
First, tax rates are relatively low right now. And, depending on the November elections and how the government decides to pay for all the recent coronavirus relief measures, rates may go up after 2020. If your income is lower this year, you might be in a lower tax bracket for that reason. So, if you wait, a conversion could cost more in taxes next year or further down the road.
Tax Changes and Key Amounts for the 2020 Tax Year
The sagging stock market also makes it a good time to do a Roth conversion. You tax bill will be lower since the value of your converted investments will be lower. Once funds are shifted into a Roth IRA, they will continue to grow in the new account, and you can take tax-free distributions from the account when you retire.
If you have a 401(k) loan, pay it off as soon as possible. Otherwise, you'll be putting your short-term needs ahead of your long-term goals. The purpose of a 401(k) is to save for your retirement, and if you borrow from this account, it may lead to your retirement being inadequately funded. Also, the money you borrow is no longer being invested, so you will miss out on any potential growth for the duration of your loan.
In addition, most plans require that a 401(k) loan be repaid within 60 to 90 days if you leave your job. This can keep you tied to your job, forcing you to pass on better opportunities that may come your way. If you're unable or unwilling to pay within the time allotted in your plan, the full amount will be treated like a distribution, subject to income tax and a 10% early-withdrawal penalty if you're under 59½ years old. Also keep in mind that many employers won't allow you to contribute to your 401(k) plan until the loan is paid off.
You will also lose the tax advantage of a 401(k) plan because, when you repay the loan, you'll be paying it back with money that has already been taxed. You also pay taxes when the money is eventually withdrawn from the account, so you'll end up paying taxes on the money twice.
Rather than borrow from your 401(k) at the first sign of trouble, work on saving at least three to six months' worth of living expenses in a no-fee, high-yield savings account for unexpected situations that may arise. This will give you the cushion you need and keep your retirement money safely invested in your 401(k) plan.
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