- \ Gerard Gruber
- April 6, 2021
!RETIREMENT PREPARATION
The COVID-19 pandemic may have thrown a wrench in your well-laid retirement plans, but as the world is coming back together and re-openings are happening in Westport, CT and around the country, the future of the economy is looking...
The COVID-19 pandemic may have thrown a wrench in your well-laid retirement plans, but as the world is coming back together and re-openings are happening in Westport, CT and around the country, the future of the economy is looking more hopeful. Now is the time to get your retirement ducks in a row and jumpstart your savings.
So how can you jumpstart your retirement plans to make up for any roadblocks the pandemic may have caused you?
There are a number of measures that can be taken to boost your savings and provide for the longevity of your resources. Of course, not every one will be appropriate for each individual. Always consult with your financial professional to choose the combination that will benefit you most. However, here is a rundown of some of the most popular options we utilize to give you an idea of how we help our clients in this focus area.
Taking Advantage of a Backdoor Roth at Tax Time
While strategic tax planning should be a year-round event, there are certain considerations to be made in regards to your IRAs as the tax deadline approaches—notably, whether or not to take advantage of a Roth Conversion.
A Roth IRA is a tax-advantaged savings vehicle that offers many benefits, including the ability to make contributions up until the April 15th tax deadline (for the previous year). They are also attractive because they have no RMDs and offer tax-free income in retirement.
But, only individuals earning under a certain income are eligible to open a Roth. Single filers must have a Modified Adjusted Gross Income (MAGI) under $139,000 for the tax year 2020 and under $140,000 for the tax year 2021 to contribute to a Roth IRA. Married couples filing jointly must have a modified gross adjusted income (MAGI) less than or equal to $206,000 to for 2020 and $208,000 for 2021.
However, high-income earners can still make contributions through what is called a backdoor Roth IRA. This is essentially converting funds from your traditional IRA to a Roth, on which there are no IRS income limits. While this does mean that you will foot a tax bill on converted funds now, it means you will have a place from which to pull tax-free monies in retirement.
Roth conversions help to avoid paying higher taxes in retirement, especially for those who plan to be in a higher tax bracket. They also help to avoid becoming what we call “tax-deferred rich,” meaning you think you have a ton of income to live on in retirement and put yourself in a higher tax bracket. Of course, at that point you have no option but to take the withdrawals to avoid RMD penalties and have income on which to live. It is for this reason that Roth conversions and investing outside traditional retirement plans is essential for the longevity of your income.
Save Outside Your Retirement Plans
To draw upon the previous strategy, we want to underscore just how important it is to save outside of your traditional retirement plans to avoid becoming too tax-deferred rich. You want to avoid having so much in your 401K that you are in the same or higher tax bracket in retirement. This scenario most often results in a diminished lifestyle or the need to work later in life.
Embrace that 72 is the New 70 ½
The SECURE Act of December 2019 raised the Required Minimum Distributions (RMDs) age from 70.5 to 72, giving individuals more time to prepare for retirement. While this increase likely won’t make or break your retirement, it does give your investments more time in the market to grow if you are not yet in need of the funds. Hopefully, you have also saved outside your retirement plan and have adequate liquidity for emergencies so that you can take advantage of this delay.
Take SSA at Full Retirement Age
While Social Security is scarcely enough for most individuals to live on in retirement, it does serve as a source of income not to be discounted. However, your benefit amount will be determined by a number of factors, including when you begin collecting benefits. Early withdrawals result in a reduced lifetime benefit while delayed withdrawals result in an increased lifetime benefit. The base benefit is awarded at Full Retirement Age.
It is almost always advisable for high-income individuals to wait to begin taking benefits until their Full Retirement Age to receive their full benefit amount. If you are worried about being able to afford this wait or want to retire before Full Retirement Age, it is best to use other resources to fund your income in the meantime.
Let’s Get Started
Planning for retirement is a lifelong process, and hindsight is 20/20. You don’t want to reach middle or late age and question if you have enough assets to last through your lifetime, or if there will be any inheritance for your heirs. However, it is never too late to modify or adjust your plan to provide for a sound financial future. If you’re ready to kick your retirement plan into full gear so you will be ready to retire on your own terms, let’s chat. We are retirement planning financial advisors based in Westport, CT, but serve clients all over the country. Schedule a call with us today to put your plan in the fast lane.