Now’s the time to re-examine your 401(k) and IRA contribution preparing for retirement.
We’re all getting ready for the holiday season with parties and shopping for last-minute presents, but there’s something we shouldn’t leave off our list
Financial advisors urge those earnest in setting aside money for their retirement to use December to reset their goals and take advantages of changes in federal regulations.
January kicks off new limits for 401(k) contribution plans that increases the amount to $18,000, a $500 jump over 2014. Those 50 and older also have an extra $500 a year to give, meaning they can give an additional $6,000 compared to those under 50.
That means those 50 and older can set aside $24,000 a year in 401(k) contributions from their paycheck, up from $23,000. That’s not counting whatever your employer matches.
While you’re still working make sure that you contact your human resources department in December to make changes for January, says Eric Brotman, a Baltimore financial planner and owner of the Brotman Financial Group.
“If you are maxing it out and want to take advantage of the new limits and if you’re not maxing it out, this tends to correspond when you get a pay raise of some kind, even if it’s just a cost-of-living adjustment,” says Brotman, author of the book Retire Wealthy. “Now is the time to bump up your 401(k) contributions by 1 or 2 percent. If you that every year, that allows you to catch up.”
For those who haven’t saved enough for retirement, the ability to set aside $24,000 a year in a 401(k) can make a difference, says Glenn Wiggle, a partner with Independent Solutions Wealth Management in Buffalo.
“You may only have five or ten years before you retire, but at least you are able to take the deduction and get more money pre-tax into an investment portfolio that can grow between now and the time you retire,” Wiggle says. “It’s not going to be as effective as if you are 40, but it’s still worth doing.”
While the 401(k) limits have increased, there are no changes in the contribution limits to IRAs. Those 50 and older can still contribute up to $6,500.
“Most of the time people are hesitant to make those contributions through the year because they don’t know what they’re expenses are going to be,” Brotman says. “If you made $4,000 in contributions and you can make another $2,500, make it out of your last two checks of the year. It doesn’t have to be steady. As long as you notify HR you want it to come out of your check, it will come out of your check. “
While the regular IRA limits aren’t changing for next year, one of the things folks 60-plus have to think about is IRA conversions, Brotman says. When that makes sense to do the Roth because in any low-income year that’s a time you can do a partial conversion and take some money out of your IRA and put it into a Roth IRA, he says.
“If you’re 62, and you’re going to start working part time as a glide path to retirement and you are used to making $140,000 a year and now you’re making $70,000,” Brotman says. “That could be a really good time, depending on your wherewithal and what you expect your tax bracket to be in retirement, to do Roth conversions and Roth 401(k) contributions because you are in an abnormally low tax scenario for yourself.”
Stephen Wright, a financial planner with The Enrichment Group in Miami says those who don’t have a lot of income to show at this time should convert to a Roth IRA.
“If you are in low tax bracket and just retired and you can convert pay taxes on right away not be all that much and taxed and grows and tax free for rest of life,” Wright says.
What else should people be aware of, advisors ask?
In a 457(b) deferred compensation plan for those who have them, you are only allowed to participate in the catch-up contributions in the five years preceding your retirement, Brotman says.
“It’s not based on your age. It’s when you plan to retire,” Brotman says. “If you are retiring at 66, you start that at 61. That can be a big deal to for folks at their highest income point and trying to put away every dollar they can.
December is also time for reviewing options with Health Savings Accounts, Brotman says. For those with high-deductible health plans with access to Health Savings Accounts, those accounts can roll over from year to year, he says.
What a lot of people do is they will take a health plan with a $4,000 deductible and put money in their HSA and use it that year as part of their medical costs,
Brotman says. If you can avoid doing that, pay the deductible out of your taxable income and let your HSA create a pot of money, he says.
“Not only can you invest that money in the HSA and hold mutual funds instead of cash and get some return, it’s never taxed again as long as it’s used for medical care,” Brotman says. “Part of that medical care might be long-term care insurance or it might be care later in life. If you don’t need it for medical care, it can roll into your IRA and be part of your retirement income. But most people one their later years spend half of their lifetime spending on medical care during the last six months on earth. If that’s true, we’re all going to use it. It’s like getting a tax deduction to pre-pay something you know you’re going to pay. In the worse-case scenario where you don’t have those bills, it’s treated like an IRA to your beneficiaries.”