4 year-end strategies that can pump up your retirement fund
Thursday, 17 December 2020
You'll likely remember 2020 for negative reasons—the cancellations, the shutdowns, the sickness. The year has been full of downers, so why not salvage something positive by doing what you can to boost your retirement savings?
Even the grayest clouds usually have a silver lining, and 2020 oﬀers some unique opportunities to set yourself up for a more proﬁtable retirement. These four money moves can parlay a bit of sacriﬁce now into substantial earnings later.
1. Prepare for upcoming tax changes
If you expect your income taxes to increase, you might want to make year-end plans with that in mind.
For instance, typical year-end tax planning often involves harvesting investment losses or deferring a bonus until January in order to lower the current year's tax bill. But if you expect to be in a tax bracket with a higher rate in 2021, it may be wise to wait and take those losses next year. If you have an option to take a bonus this year, go ahead and take it to avoid paying a higher tax rate on it in 2021. If you don't need the money now, invest it in your retirement fund.
2. Max out your 401(k) or IRA
If at all possible, try to contribute more—or max out contributions—to your 401(k), 403(b) or other deﬁned contribution retirement plan before the end of the year. In 2020, you can contribute up to $19,500 to a 401(k) if you're under age 50, or up to $6,000 to an IRA. If you're 50 or older, your contribution limits increase to $26,000 for a 401(k) and $7,000 for an IRA.
Unless your retirement account is a Roth account, these contributions are made with pre-tax dollars, so they lower your total earned income for this year. As a result, you won't just be setting yourself up for a more secure retirement, you'll also lower your taxes for this year.
3. Consider a Roth conversion
If you're nearing retirement and wish to lower your tax liability during your retirement, you might consider converting a traditional IRA or 401(k) to a Roth IRA or 401(k).
Withdrawals from a Roth account are tax free, so a Roth conversion can be a good way to lower tax liability in retirement. Taxes are paid on the funds before they go into the Roth, so if you make withdrawals in retirement, you'll owe no taxes on them—as long as you have held the Roth IRA for at least ﬁve years.
When you convert a traditional account to a Roth account, you must pay the taxes on the earnings in the traditional account at the time of the conversion. Then all withdrawals from the Roth account will be tax-free after ﬁve years. If your traditional IRA or 401(k) has lost value this year, it could be an ideal time to do a Roth conversion: Lower earnings mean lower taxes, and future growth in the Roth account will not be taxed.
4. Rethink RMDs
Until last year, people with traditional IRAs and 401(k) plans were required to start taking minimum distributions starting at age 70. However, at the end of 2019, the federal government passed the SECURE Act, which says you don't have to take required minimum distributions (RMDs) until you reach age 72.
If you're 70 or 71, there's no need to start taking distributions from your retirement accounts unless you need the income, because when you start taking distributions, you'll have to pay taxes on them. (If you have reached the age of 72, you do have to take RMDs even if you don't need the income, but if that's the case, you can donate up to $100,000 of your RMDs to charity without recognizing it as income.)
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