These days, we hear increasingly about centenarians—people living to 100 years or more. The added longevity makes saving for post-working years, even more, important. There are three vehicles to consider when planning for these years:
1. Retirement Savings via Deductible or Nontaxable Contributions
Traditional retirement accounts allow a taxpayer to make deductible contributions from current taxable earnings at current tax rates. Traditional retirement plans also allow employers to contribute to the plans (instead of directly to the employee as additional wages), again allowing today’s “earnings” to go untaxed, at least until they are eventually distributed. All of this is good tax planning when you believe that your current tax rate is higher than the anticipated tax rate in retirement years.
Although we are relying even more on our own savings to take us through retirement, there are imposed limits to the amount of money that can be put into a retirement account each tax year. These limits currently increase with inflation. As we near the end of the current year, it is important to look at year-to-date contributions and see if you can add more dollars to maximize the amount the government will allow you to contribute.
This is especially true in years with low inflation. In 2016, there will be no changes from 2015 as to the amount you can put into a retirement plan. For example, you can put up to $18,000 into a 401k (or a 403b or 457 plan if you’re a government worker) in 2015, and this is not increasing for 2016.
If you’re 55 or older, you have the ability to add an extra $6,000 to your 401k, giving you a combined total of $24,000. Keep in mind, these limits are only for your own contribution, excluding any matching done by your employer.
An IRA contribution is limited to $5,500 for those under age 50 and $6,500 for those age 50 over older in 2015. The same limit applies for 2016. Making the most of your contributions in the year, they’re available may be the only way to save sufficiently for your post-working years.
ROTHs are income-limited. A married couple, for example, is limited to a combined adjusted gross income (AGI) of $193,000. An ROTH IRA is an excellent way to save for the future, especially if you have reached your limit on your 401k. If your AGI keeps you from being eligible to contribute, there are ways to get monies into a Roth, either through a 401k plan, when available, or by doing a “conversion.”
3. NON-Retirement Savings
Savings accumulated in non-retirement plans will give you options in both managing tax rates and managing the timing and amounts of distributions. We have historically low tax rates right now. The probability of lower tax rates when your monies are withdrawn is not as great as was once thought. Also, capital gains tax rates have been favorable. The highest capital gains rate at this time is 20% and could be as low as 0% or 15%. Compared to the ordinary tax rate of 39.6%, there can be considerable savings when income is subject to capital gains tax vs. ordinary income tax.
Also, unless you continue to work beyond age 70 ½, current rules require that one start taking monies out of retirement plans upon reaching age 70 1/2. Not so with Roths or with non-retirement savings.
How well are you saving for your post-working years? Are there ways you could be saving more?
Please share your questions or comments with me at firstname.lastname@example.org
Susan A. Moussi, CPA, CFP®, CDFA, CFT SMD Tax & Divorce Financial Planning Consultants, Inc.
This entry was posted in Blog, Financial Planning Services and tagged 401k Plan, 403b Plan, 457 Plan, Individual Retirement Account (IRA), NON-Retirement Savings, Retirement Planning, Retirement Plans, Retirement Savings, ROTH IRA, SMD Tax & Divorce Planning Financial Consultants, Susan Moussi by Susan Moussi.