Now that the New Year is here, it is time to make (and keep) a few financial resolutions, particularly as it pertains to your retirement planning! See the eleven tips below to help get 2019 off to a financially rewarding start!
- The New Year is a great time to boost your retirement contributions and you can contribute more now than ever before! In 2019, the maximum annual 401(k) contribution limit is increasing by $500 to $19,000, or $25,000 for those 50 or older. So if you’re one of the many who has contributions set on a fixed-dollar sum, remember to switch it off of autopilot as we begin 2019, especially if you’re expecting a raise or sizable bonus. Adjust your contributions to a level that reaches the maximum. If that’s not something you can afford, try to increase contributions, even if just a little and make sure you at least qualify for the company match if it is available. Small increases can compound to provide a benefit in the long term.
- Are you 50 or older? Then remember to make those catch-up contributions! If your age is 50 or above (or will be) in 2019, you’re allowed to contribute $6,000 extra to your 401(k), bringing the maximum to $25,000, compared to the normal limit of $19,000. So even if your 50th birthday isn’t until later in the year, start making catch-up contributions anytime in 2019. Think of it as a birthday present to yourself, because later on you’ll be glad you had such foresight.
- Consider the benefits of making Roth 401(k) contributions instead of Traditional 401(k) contributions. Traditional 401(k) contributions are pre-tax and grow tax-deferred until retirement, where they are then subject to taxation. Roth 401(k) contributions, on the other hand, give no immediate tax break but you wont pay any taxes on distributions after it is rolled into a Roth IRA when you’re in retirement. In addition, there are no Required Minimum Distributions connected with Roth IRA’s, which will be a huge benefit when you are age 70 ½. Whereas a Roth IRA sets income limits to making contributions, a Roth 401(k) sets no such income limit. And, if the bulk of your retirement savings are currently in Traditional 401(k) or Traditional IRA accounts that will be taxed upon withdrawal, consider diversifying the tax treatment of your retirement funds, and making 2019 contributions to a Roth 401(k) account. Check with your employer to see whether they offer any easy avenues to switching contributions, as about 50% of employers offer Roth 401(k) plans.
- Don’t forget the possibility of making after tax contributions to your 401(k) plan. In addition to making your regular 401(k) contributions (whether Traditional or Roth), many plans allow for you to make additional after tax contributions to bring the total annual contribution amount to $62,000. Many Human Resource Departments do not discuss these options as they assume that the employees wouldn’t be interested, but you could be! If you received a large bonus, or commission check, or you are simply living well within your means, consider using the after tax contributions to get you to the $62,000 maximum. When you retire or separate from service, you will be able to rollover most of the monies to a Roth IRA, which may be a great benefit to you at the time.
- Review your 401(k) investments. It’s good practice to review your investment mix at least once (but ideally more often) every year, to make sure that what’s being allocated is still in line with your needs. Is your portfolio weighted too heavily in favor of stocks (or bonds)? Is your portfolio too risky? Do you have lots of money sitting in cash? These are good questions to ask.
Even if your portfolio has an automatic rebalancing feature that takes care of rebalancing assets so that they stay in line with your original goals without your interference, it never hurts to double check! Or, there’s always the option of investing in a target-date fund so are not required to monitor the investments yourself. With a target-date fund, investment professionals create a diversified portfolio based on your preferences for investing time frame, and also rebalance the portfolio when and if necessary. They can also provide the service of gradually shifting to safer investments as your ideal retirement age comes closer, meaning you have less to worry about and risk is minimized. But, make sure you check your target date fund to confirm that the allocations are consistent with your plan and risk tolerance, as sometimes they are too aggressive and sometimes they may skew too conservative for your liking.
- Do you have a part time job or a side hustle? If you have several sources of income, then consider the various retirement plans that can be connected to those jobs, whether it is a SEP plan or a cash balance profit sharing plan. The latter (which is a defined benefit plan) could allow you to contribute up to about $225,000 in a year, depending on your age and income. Obviously there are lots of options here, and the rules can be quite technical, so contact us so that we can discuss how to defer the maximum amount of money towards retirement based on your various sources of income.
- Don’t forget your annual IRA contributions. As long as you or your spouse have earned income, you can contribute $6000 to your Traditional or Roth IRA, and if you are age 50 or over, then you can contribute another $1000 for a total annual contribution of $7000. And consider building your Roth IRA, whether you meet the income limitations or whether you make a “back door” Roth conversion, which is allowed for everyone, regardless of income level.
- Include a Health Savings Accounts (HSA) as part of your retirement plan. HSA’s aren’t as well known and utilized as they should be, given their amazing triple tax free benefits. Essentially, you can take a tax deduction when funding the plan, the money grows tax free, and your withdrawals are tax free at the back end when used for health care expenses. In 2019, a family can contribute $7,000 towards an HSA, and an individual can contribute $3,500 per year.
The HSA acts as a Roth IRA for health care accounts, as the money comes out tax free after age 65 when used for medical care. If not used for medical care, then the money is taxed like a Traditional IRA, which is still beneficial, but you will likely have plenty of medical expenses so this should not be a concern. Just remember that you cannot contribute to an HSA unless you have a high deductible medical plan, and that you cannot contribute after age 65. And once you are contributing to your HSA, make sure you use investments that match your time horizon and that you focus on the growth of the account if you plan to use it for medical expenses in retirement (which you should).
- Consider a Roth conversion, particularly on market drops or in low income years. Lower tax rates and a slumping stock market offer a great opportunity to perform Roth conversions. For example, the 2017 Tax Act reduced tax brackets for many investors, where a couple making between $165,000 to $315,000 will be taxed at the 24% bracket (and formerly would have been taxed at 28% and 33% under the old rules). Add that to the recent drop in market values, and it can make it financial rewarding to perform conversions in 2019, particularly if income is low. Roth conversions allow clients to convert all or a portion of their Traditional IRA into a Roth IRA, which will allow for tax free growth in the future and no Required Minimum Distributions (RMD’s). However, remember that the new tax law eliminated the ability to “recharacterize” a Roth IRA conversion, thus there are no do-overs and you can’t change your mind. Typically, the Roth conversion is best left to the end of the year when you have a better sense of your income, but there is a lot to be said for taking advantage of the recent market dip, so perhaps consider a partial Roth conversion earlier in the year.
- Are your old 401(k)s consolidated and rolled over to an IRA? If, like many, you have old 401(k)s from former employers, look at rolling them into an IRA. This makes it easier to track overall performance as, instead of checking multiple accounts, you only have to manage and keep track of one. There’s also the added benefit of potentially more investment options and avoiding fees, if consolidating accounts means that the new, larger balance exceeds a certain threshold. In addition, rolling over your 401(k) into an IRA provides more flexibility regarding Roth conversions, which is a critical wealth building tool.
- Stay grounded and make sure you have a plan. Are you on track to reach retirement goals? Do you need to make changes to your plan? It is a lot easier to manage through the ups and downs of the markets if you have a solid and thoughtful plan. Let us know if you want us to review your plan with you or update the plan to reflect any changes.
By following the eleven steps listed above, you will be able to contribute up to $69,000 (and a possible $7000 to an HSA) to some form of retirement plans in 2019. And if you have additional sources of income, you could create a defined benefit plan so the maximum amount can be much higher! With the uncertainty of the markets to start the year, one of the best ways to get ahead is to contribute as much as possible to these tax advantaged accounts. So, if you have any questions, make sure you reach out to use and we will walk you through the best approaches and the nuances of how to handle the many options we discuss above.
Disclosure: The target date of a target date fund may be a useful starting point in selecting a fund, but investors should not rely solely on the date when choosing a fund or deciding to remain invested in one. Investors should consider funds’ asset allocation over the whole life of the fund. Often target date funds invest in other mutual fund and fees may be charged by both the target date fund and the underlying mutual funds.
This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.