Tag Archives: 401(k)

Plan Your Retirement Savings Goals for 2022

There’s good news for your retirement accounts in 2022! The IRS recently announced that you can contribute more pre-tax money to several retirement plans in 2022. Take a look at the following contribution limits for several of the more popular retirement plans:

What You Can Do

Look for your retirement savings plan from the table and note the annual savings limit of the plan. If you are 50 years or older, add the catch-up amount to your potential savings total.
Make adjustments to your employer provided retirement savings plan as soon as possible in 2022 to adjust your contribution amount.
Double check to ensure you are taking full advantage of any employee matching contributions into your account.
Use this time to review and re-balance your investment choices as appropriate for your situation.
Set up new accounts for a spouse and/or dependents. Enable them to take advantage of the higher limits, too.
Consider IRAs. Many employees maintain employer-provided plans without realizing they could also establish a traditional or Roth IRA. Use this time to review your situation and see if these additional accounts might benefit you or someone else in your family.
Review contributions to other tax-advantaged plans, including flexible spending accounts (FSAs) and health savings accounts (HSAs).

Now is a great time to make 2022 a year to remember for retirement savings!

2021 Retirement Limits

As part of your 2021 tax planning, now is the time to review funding your retirement accounts. By establishing your contribution goals at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits for 2021:

Take action

If you have not already done so, please consider:

Reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
Setting up new accounts for a spouse or dependent(s)
Using this time to review the status of your retirement plan
Reviewing contributions to other tax-advantaged plans including flexible spending accounts and health savings accounts

Switching Jobs? Here’s What to Do With Your 401(k)

Suppose you’re switching jobs if you were furloughed because of the pandemic or you’re simply searching for greener pastures. If you have a 401(k) from your soon-to-be former employer, you must decide what to do with your retirement account when you leave. Here are your four options:

Leave the money in your previous employer’s pension plan.
Roll over the money to your new employer’s pension plan.
Roll over the money into an IRA.
Take the money and run.

So, which of these options should you choose? Here are some things to consider as you think about what to do with your 401(k) account:

Keep the borrowing option open. If you want to borrow money from your employer-sponsored 401(k) account in the future, consider rolling the money into your new employer’s 401(k) plan. While you can borrow money out of your 401(k), that option is not allowed with an IRA. And if you leave your 401(k) at a former employer, they often will not let you borrow funds if you are not currently employed.

Take the money. This year may be the best time to make a withdrawal from a retirement account. In a normal year, when you make an early withdrawal from a retirement account, you owe income taxes on the amount of the distribution plus a 10% early withdrawal penalty. In 2020, this 10% penalty has been suspended. So while you’ll still pay taxes on the distribution, you may be able to avoid the early withdrawal penalty.

Invest the money. While it might be tempting to borrow or take an early distribution from your retirement account, you’ll also be depleting future earnings intended for your retirement years. So, consider whether you truly need the money now to pay for an emergency or if you’re ok leaving it in your 401(k).

Whatever you decide, it is always best to transfer the funds directly from one retirement account to another. This direct transfer eliminates the possibility of your fund movement being characterized as a distribution subject to income tax. If in doubt, ask your financial advisor for help.

Think Before Tapping 401(k) as Emergency Fund

Do you need a quick infusion of cash?

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you may be able to take money out of a qualified plan, like a 401(k), or an IRA, with favorable tax consequences. But should you do it? You might view withdrawing money from a retirement account as a last resort.

Background

Among other changes in the CARES Act relating to qualified plans and IRAs, a participant can withdraw up to $100,000 of funds without paying the usual 10% tax penalty on distributions before age 59½. Plus, you can take as long as three years to pay the resulting tax bill, spread out evenly over the three years. If you repay the full amount within three years, you owe no tax.

To qualify for this program, you or your spouse must be diagnosed with COVID-19 or experience adverse financial consequences due to the virus such as being laid off, having work hours reduced or being quarantined or furloughed.

What are the pitfalls?

There are several reasons why you may want to avoid taking money out of your retirement accounts unless it’s an absolute emergency:

You’re diluting your retirement savings. Although the money comes in handy now, you’re chipping away at your nest egg and forfeiting growth. For example, if you withdraw the maximum amount of $100,000 that would have earned 6% annually tax-deferred for ten years, the value would have been $179,000.

It may be bad timing. Experts say it is difficult to time the markets in the current volatile environment. If you sell some holdings right now, you may be locking in losses that would miss the recovery in the next few months or years.

You still owe income tax. Income tax is due unless you replace the full amount within three years. Also, depending on your situation, you could end up paying tax at higher rates than you would in your retirement years.

Better options might exist. Arranging a hardship loan from your 401(k) might be a better alternative for your situation. You avoid the taxable event of the withdrawal and you pay back yourself with interest. Other options include refinancing a mortgage with lower interest rates, taking advantage of payment relief from mortgage, rent or student loan payments or deferred credit card billing.

While it is an option, retirement plan withdrawals are not always the best choice. Think through all scenarios before withdrawing from retirement funds to cover emergency expenses.

There’s Still Time to Fund Your IRA

There is still time to make a contribution to a traditional IRA or Roth IRA for the 2019 tax year. The annual contribution limit is $6,000 or $7,000 if you are age 50 or over.

Prior to making a contribution, if you (or your spouse) are an active participant in an employer’s qualified retirement plan (a 401(k), for example), you will need to make sure your modified adjusted gross income (MAGI) does not exceed certain thresholds. There are also income limits to qualify to make Roth IRA contributions.

Maximum 2019 IRA Contribution amounts: $6,000 or $7,000 (with age 50+ catch-up provision)

Note: Married traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer-provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phaseout to contribute is $0-10,000.

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

Multiple Retirement Accounts? Considerations Before Consolidating

Is your retirement portfolio a mess? Sometimes a natural result of changing jobs several times over your lifetime can be an accumulation of several retirement accounts. For example, you may have three 401(k) accounts, a Roth IRA and a couple of traditional IRAs.

Is it best to leave everything as is, keeping a mishmash of accounts, or is consolidation worth considering?

If you are contemplating consolidation, here are some factors you need to take into account:

Roth IRAs – If you are in a consolidation mood, one thing to remember is you don’t want to mix the money in a Roth IRA with the money in a traditional IRA or a 401(k) account. The reason: Contributions to a Roth IRA have already been taxed, so you don’t pay tax on them when you reach retirement and begin withdrawing money. But with traditional IRAs and 401(k) accounts, the taxes were deferred so they are subject to tax when you begin withdrawals.

Nondeductible IRAs – Money placed in a nondeductible IRA, as the name implies, isn’t a deduction on your income taxes. That means you won’t pay any taxes on the money you contributed when the time comes to withdraw it either. Just as with a Roth IRA, you don’t want this money mixed with retirement money that is taxed when it is withdrawn.

Merging 401(k) accounts – Often you can merge a 401(k) from a previous employer into a 401(k) at your new employer. That kind of consolidation can be convenient because you just have one account to monitor. But it’s not always the best strategy because some 401(k) plans are better than others. Fees with the old plan might be lower than the new plan, or the investment options might be more varied. You also have the option to roll the old 401(k) into an IRA, which could be worth considering depending on your circumstances.

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