15 Minutes to More Savings in 2019: Review Your Retirement Plan Contributions

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Key takeaway: Spend 15 minutes at the beginning of the year increasing your savings across all your retirement accounts and health care plans so that you can maximize your net worth.

One way to continually improve your nest egg is to always spend 15 minutes at the beginning of each year to verify that you are maximizing your savings based on any new rules. For 2019, several changes to maximum savings rates took effect January 1. You might need to check with your human resources department (and for business owners, yourself) on the following:

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With these changes, it is also important to keep in mind a few planning issues within each type of account listed above.

401(k), 403(b), 457, and TSP

Maxing out your company’s retirement plan makes sense for many reasons. But if you are constrained in any way, at least contribute to the level where your company provides a match. Never leave that free money on the table.

The second consideration in many company retirement plans now is whether to use the Roth feature in the plan (if you are not sure if you have this, call human resources). While the Roth feature (like Roth IRAs) makes you put the money in after-tax, the money then grows tax-free. That sounds like a great deal for many, but the reality is that everyone should talk to their financial planner/CPA first.

Roth versus normal deductible contributions is a question of tax brackets. The reason to make Roth contributions is if you think your tax bracket today is lower than what your tax bracket will be in retirement. The reality for many is that tax brackets drop in retirement (aided hopefully by good tax planning), which means it would be better to contribute a normal, deductible, contribution to your retirement plan while working (taking the deduction at a higher tax bracket) and then spending the money in retirement at the lower tax bracket.

HSAs

Health savings accounts can be a great tool for those who are generally healthy and can save. Ideally, you pull as little money out of these plans as possible before retirement and invest the money for longer-term growth (don’t leave in cash if you have more than $10,000). Then, in retirement, you will have dollars that you can use tax-free for qualified medical expenses.

While saving HSA money for retirement is the ideal, sometimes emergencies come up; HSAs can be there for emergencies. Save your receipts from all your medical bills each year since you can pull money out of the HSA if you have the receipts (no time limit on this).

IRAs

IRAs have some income limitations if you want the contribution to be tax-deductible (note, you can always make a non-deductible IRA contribution with no income restrictions). These limitations are based on whether you or your spouse (assuming married filing jointly on your tax return) have access to a retirement plan at work.

If you (nor your spouse if you are married) do not have a retirement plan through work, you can make a deductible contribution to an IRA with no income limitations.

If you are single and have a workplace retirement plan, even if you are not using it, the income limit for a tax-deductible contribution phases out between $64,000 and $74,000.  For married couples, if the person making the IRA contribution has a workplace retirement plan, then the tax deductibility phases out between $103,000 and $123,000.

For married couples where the person making the IRA contribution does not have a workplace retirement plan but their spouse does, the income limit for a tax-deductible contribution phases out between $193,000 and $203,000.

Non-Deductible IRAs

As noted above, anyone can make a non-deductible IRA contribution, no matter how much income they make. The planning issue that arises is that when you do this, you must keep track of these contributions for the rest of your life since they are not taxable upon withdrawal in retirement (although the growth on them is). The way you keep track of them is by filing Form 8606 with your tax return each year.

What I have seen is that people forget (or if they change accountants, this gets dropped accidentally) to file it each year. Then, when they get to retirement, they have no way of tracing what happened, and so they pull the contributions out and pay tax on them.

If you make non-deductible contributions, make sure you, your accountant, and your financial advisor double-check the tax return each year for Form 8606.

Roth IRAs

Roth IRAs also have income limitations, although they have nothing to do with whether you have a workplace retirement plan.

If you are single, the income phaseout for making a Roth contribution is $122,000–$137,000. For married couples that phaseout is $193,000–$203,000. Above those, you cannot contribute to a Roth.

Of course, there is always the ability to convert a regular IRA to a Roth IRA, with no income limitations, but that is a whole new blog.

Seek Help

Whether you work with a financial advisor/CPA in Minneapolis or anywhere across the country, the beginning of the year is the time to set your strategy for the year. Waiting until November or December to find out you could have saved more will only cause angst. Check with your human resources department today, and spend 15 minutes getting things in order.

Jon Meyer, CFP®, is Chief Operating Officer and Investment Manager for BGM Wealth Partners. Outside of work, he is busy raising his four children and training for his next marathon.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.