Put up to $19,500 in your workplace 401(k) plan, plus another $6,500 if you’re 50 and over in 2020. This also lowers your taxable income.
The standard deduction for single filers will be $12,400. It rises to $24,800 for married couples filing jointly.
Giving away wealthy? An individual can transfer up to $11.58 million free of estate and gift taxes in 2020.
Pay attention to your standard deduction for the 2020 tax year. The IRS has bumped it to $12,400 for singles, up from $12,200 in the prior year.
The standard deduction for married joint filers will be $24,800 up from $24,400 in 2019.
Workplace Retirement Savings
Resolve to save a few extra dollars in your retirement account at work.
The IRS has raised the employee contribution limit for 401(k), 403(b) and most 457 plans to $19,500, up from $19,000 in 2019.
If you’re 50 or older, you can save an additional $6,500. That’s up from $6,000 in 2019.
The contribution limit for individual retirement accounts, whether traditional or Roth, is holding steady at $6,000, plus another $1,000 for savers 50 and over.
One caveat: The IRS limits high-income earners’ ability to make direct contributions to Roth IRAS-accounts in which you can save after-tax dollars, have the money grow tax-free and use it in retirement free of taxes.
In 2020, if you adjusted gross income exceeds $124,000 and you are single ($196,000 for married couples filing jointly), you won’t be able to make a full contribution directly to a Roth IRA.
Instead, those savers might consider using a strategy known as the “backdoor Roth”, where they make a nondeductible contribution with after-tax dollars to a traditional IRA and then covert it to a Roth.
Health Saving Opportunities
Got a high deductible plan in 2020? You most likely have access to a health savings account.
These accounts allow you to put away pretax or tax-deductible money and have it grow free of taxes. You can take a tax-free withdrawal to cover qualified health expenses.
In 2020, you can save up to $3,550 if you’re an individual with self-only health coverage. That’s up from $3,500 in 2019. Account holders with family plans can save up to $7,100 in this account (up from $7,000 in 2019).
Gift and Estate Tax Savings
Good news for people sitting on millions of dollars: The Tax Cuts and Jobs Act nearly doubled the amount that decedents can bequeath in death-or gift over their lifetime-and shield it from federal estate and gift taxes, which are 40%.
Before the tax overhaul, the gift and estate tax exemption was $5.49 million per person.
For 2020, the lifetime gift and estate tax exemption will be $11.58 million per individual, up from $11.4 million in 2019.
Finally, the annual gift exclusion-the amount you can give to any other person without it counting against your lifetime exemption-will hold steady at $15,000 for 2020.
When it comes to retirement planning, many Americans find themselves underprepared. A majority of baby boomers (born between 1946 and 1964) and Generation X’ers (born between 1965 and 1978) often end up without retirement savings or don’t have realistic expectations about post-retirement costs. According to the Insured Retirement Institute, only 25 percent of boomers are confident of having sufficient savings in retirement. If you are in your 50s and nearing retirement without substantial savings or a plan, don’t despair -- it is never too late to start planning.
Although every working professional should contribute towards retirement from their early days, for various reasons they often delay the process. If you are nearing your 50s without a post-retirement plan and see yourself working for another 10 to 15 years, this is an opportunity to plan judiciously and save for your retirement right away.
Here are five strategic steps for achieving the best retirement plan:
1. Set Specific and Practical Goals
Proper retirement planning begins with setting specific goals. Calculate your current income, total savings, and ongoing investments to understand how much you could save, and be sure to set realistic goals.
While providing for emergency expenses and paying off a mortgage can be your short-term and intermediate goals, saving up for retirement should be your long-term goal. An annual financial review is helpful in evaluating your past goals and understanding your earnings as well as liabilities.
2. Plan a Realistic Budget Focusing on Retirement
Review your monthly and yearly expenses and list the factors that are likely to remain constant for the next few years. Now allocate funds to each category in a way that will allow you to save more for your retirement.
According to financial experts, if you are saving for retirement after 50, it is best to contribute 30 percent of your salary towards this end. If you find that goal difficult to meet, look at your budget list and reduce optional expenses.
3. Pay Off Debts
Paying off debts early will help you meet your retirement budgets and ease the financial burden. According to an AARP report, 44 percent of Americans continue to pay for their home after they retire.
Clearing off outstanding debts, credit card bills, loans, and mortgages will make it much easier to prioritize retirement funds.
4. Invest in Retirement Plans
401(k)s, 403(b)s and IRAs are some of the retirement plans available in the U.S. While 401(k)s are one of the most popular plans, not all companies offer them and those that do have their own, often restrictive, investment rules. Then there are two types of IRAs: traditional and Roth IRAs.
To make the best choice among the many retirement plan options, it is essential to have a thorough understanding of IRA vs 401(k), Roth IRA vs 401(k) and other investment alternatives, as well as contribution limits.
5. Diversify Your Investments
Investment diversification will help keep you on a firm financial footing. Do not stash all your money in banks; instead, create an investment portfolio and explore your options.
It is important to diversify and distribute your money among multiple sectors. Considering the volatility of markets, diversification of your investment portfolio safeguards your capital and helps it grow.
It’s Time to Step Up a Gear
A concrete retirement plan with emphasis on savings is essential to ensure a comfortable and healthy post-retirement life. Saving for your retirement is the first priority and the sooner you start, the better your chances of achieving your retirement goals.
“How much do you need to save? How much can you really afford to put away and still live the life you deserve today? How does anyone make it work?”
It can be very overwhelming to save for retirement. How are you expected to take care of your responsibilities to your family, enjoy life and put away enough to have an enjoyable retirement that might last 10, 20 or even 30 years? That’s the question posed in the Twin Cities Pioneer Press article,“Your Money: Helping you live in the moment and plan for the future.”
The question is asked frequently by people at all ages and stages of their lives. Here are some tips on how you can use comprehensive financial planning — by looking at a variety of retirement income savings methods and income strategies — to make the most of retirement savings. Some of them may not apply now, but you’ll need to know about them in the future, like Social Security.
Do you have a retirement savings strategy? Not everyone takes advantage of the 401(k)s, 403(b)s and IRAs that are available. Some of these retirement accounts come through an employer, and a traditional IRA can be set up on your own. If you work for a company that offers the option of having a Roth IRA and you’re just starting your career, it could be a great option. You pay taxes on contributions now, when your income may be lower, but when you take distributions, you won’t pay income tax on them. There are no required distributions for a Roth IRA — other retirement accounts require a certain amount of yearly withdrawals. If you are in a high-income tax bracket, the Roth IRA is not for you.
Social Security strategies make a big difference in retirement income. Deciding when to take benefits is complicated. However, it is well worth the effort. It could be a difference of thousands of dollars over time. Realize that the later you start taking benefits, up until your 70th birthday, the greater the benefits will be. Your Full Retirement Age or FRA is currently age 66 for Americans born between 1943–1954, and a few months older for those born later. You can apply for benefits as early as age 62, but you’ll get a reduced benefit — as much as 25%!
What about a Roth conversion? For some people, enhancing their retirement savings by moving existing savings into accounts that offer better tax advantages, adds up nicely for current and future tax brackets. A Roth conversion is when you pay the tax on all or a portion of a traditional IRA and move it into a Roth IRA, where it continues growing. If you have owned the account for at least five years, you can then take withdrawals out tax free, once you turn 59½. Note that this is a complicated decision that must be made in conjunction with all of your other retirement and investment funds.
Planning for retirement income is just that: planning. The alternative — winging it and hoping for the best — rarely works out. The earlier you begin planning for your retirement, the more likely it is that you’ll enjoy this phase of your life.
“A will directs how your probate assets will be distributed upon your passing, designates an executor to be in charge of your estate, and allows you to create trusts for minor grandchildren or disabled beneficiaries. However, having a will is just part of the story.”
A will is the cornerstone of an estate plan, but it is by no means the only document needed to distribute assets and prepare for both incapacity and death. The Island Now reviews a number of things that an estate plan should address in the article “Five things that will impact your will.”
How are your bank accounts structured? If you have a bank account set up as “joint with right of survivorship,” when one of the owners dies, the other owner automatically inherits the whole account. Remember that this will occur, no matter what is stated in the will. If you have added a child to that account for convenience, is it your wish that the child should inherit the entire account? That’s exactly what will happen. You may be better off letting a child help you, using Power of Attorney rather than structuring the account that way.
When was the last time you reviewed beneficiary designations? Like titling bank accounts, as explained above, the beneficiary designation takes precedence over anything in your will. If you opened an IRA at your first job and now two decades—and two marriages—have passed, that IRA will still be passed on to the person who you named two decades ago, unless you have updated the beneficiary name. Accounts that often pass directly to beneficiaries include life insurance, annuities, 401(k), 403(b), brokerage accounts and some bank accounts.
Each asset that has a beneficiary, should also have a contingency beneficiary in the chance that the primary predeceases you or does not wish to receive the asset.
Are you prepared for the cost of a health crisis? The cost of a health crisis can, and often does, wipe out a family’s years of retirement savings. There are several strategies that an estate planning attorney can help you with to plan in advance for this. Long-term care insurance may be an option and placing assets in an irrevocable trust may be another, depending on your situation. There is a five-year look-back for any Medicaid benefits, so planning in advance is critical.
For many families, placing their primary residence into a trust while retaining the right to live in the home, retaining any STAR or Veteran’s exemptions and possibly even securing capital gains advantages for heirs is a possibility but requires the help of a skilled estate planning attorney.
Is gifting part of your estate plan? Most people know about the annual exclusion gift, which allows anyone to make a gift in the amount of $15,000 per year to a beneficiary with no gift tax consequences. However, if you need to apply for Medicaid coverage within a five-year period, any gift will trigger a waiting period before you can be eligible for Medicaid. Therefore, you can make a gift for tax purposes but it’s not something you can do for Medicaid planning. This is an expensive mistake. Talk with an estate planning attorney to make sure you get this one right.
Who is your Power of Attorney? Everyone should have a Power of Attorney. This is a person who is your legal representative, if you become incapacitated. The durable power of attorney gives your agent the authority to handle banking matters, real estate transactions and other financial matters. You’ll also need a health care proxy and a living will.
All these issues are part of a comprehensive estate plan, which is best created with an experienced estate planning and elder law attorney.
“About one-third of Americans with children under 18 say they plan to use retirement savings or "could use if needed" to help pay for their children's education, according to a recent survey by Sallie Mae, one of the nation's largest student loan lenders.”
Here’s the biggest difference between retirement savings and college expenses: you can get a loan for college. No financial institution will give you a loan for retirement. Therefore, when it comes to finding money for college, financial planners and estate planning attorneys agree, as does this article from the Star Tribune: “Do your kids a favor: Pick retirement savings over tuition.”
The number of people who are making that decision are on the decline. The 2016 edition of that survey is down from 39%. It’s good that more parents are thinking twice about making this financial mistake.
Paying for college expenses from a tax-advantaged employer retirement account, like a 401(k), can become very costly. Here’s why:
How does a 10% tax penalty on early withdrawals, if you’re under 59½ sound? Not good.
The money you withdraw is taxed as income.
You’re losing the tax-free growth of your savings. Remember, these retirement accounts grow tax-free.
You lose the benefit of compounding, so your growth potential is losing ground.
The “least worst” option, say experts, is to fund a Roth IRA. Unlike qualifying contributions to a 401(k) or traditional IRA, the Roth IRA contributions are not tax-exempt. As a result, there are fewer restrictions on early withdrawals.
However, you’re still losing out in many ways. This includes when you get further along into your retirement years and you don’t have enough money to support yourself. Take a very long-term perspective on what will happen in the future.
Parents must understand that while it’s nice that they want to sacrifice to help their children through college, they may actually be generating far more stress for their children when the kids have to help Mom and Dad during retirement years. That’s likely when their kids are having children of their own, paying a mortgage and saving for their own children’s college expenses.
One last, major consideration is: college aid. Your withdrawals from retirement funds will be counted by financial aid offices as ordinary income. If it pushes your total wages up too high, your college-bound student may not qualify for assistance.
Retirement accounts are not counted, when considered if your student qualifies for financial aid. Therefore, your best bet is to continue funding retirement accounts. If you start cashing them out to pay for college expenses, everyone loses in the long run.
“From well-known options, like IRAs and 401(k)s, to more obscure ones, like Cash Balance Pension Plans or Rich people Roths, these accounts can help you to grow your savings.”
Most people work at a company that offers them a way to contribute to a retirement account, usually an IRA. However, there are more options available, according to a recent article from Forbes titled “10 Retirement Accounts You Should Know About.”
Few of us need less money in our retirement accounts. Most of us enjoy the tax benefits we get from retirement accounts. Americans, in general, do a terrible job of saving for retirement. Some say the IRA, Roth IRA and other similar accounts were created to give us an incentive to do a better job. The tax advantages of these accounts make it more attractive to sock away money every year. These accounts were also set up with deliberate penalties, so people wouldn’t raid their accounts every time they needed a few extra dollars.
If you are among those who work for companies that have a retirement savings plan match, make the most out of it. If you put in the annual percentage or amount your plan requires, your employer will match that contribution. Most workers walk away from this money. However, it’s free money!
Employees usually are offered a 401(k), 403(b) or 457 plan from their employer. The financial institution is already chosen, the money is automatically taken out of your paycheck and often you can only make decisions about what kind of funds you can select at certain times of the year. In 2018, you can contribute up to $18,500. If you’re 50+, you can make an additional $6,000 contribution, known as a catch-up contribution.
Self-employed? You need a retirement plan more than someone who works for a company. Self-employed people have many more options. If you need help, talk to your CPA. There may be some plans that are better suited or have more tax advantages than others.
For self-employed people, the basic choices are the solo 401(k) for a sole proprietor or someone working with their spouse. You can make contributions as both the employer and the employee. You could contribute as much as $55,000 in 2018 (or, if you are 50+, $61,000). Your total contributions are determined by your net business income.
Another choice for retirement savings for the self-employed is a SEP IRA, the Simplified Employee Pension. It’s easier to set up than a 401(k)and is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to a quarter of your income, or $55,000, or whichever is less. There are no catch-up contributions for a SEP IRA.
Self-employed or working for a company, your retirement plan needs to include an estate plan. Your estate planning attorney will be able to help you with a will, power of attorney and healthcare directive. She will also be able to give you valuable insights, as to how your retirement plan and your estate plan can work together to minimize taxes and maximize the estate you leave behind.