Make Your Money Work Harder

Post Written by: Richard P. Ellenberger, AIF®

Have you taken your savings to the next level and made your money work harder for you?

This week is America Saves Week, a week dedicated to encouraging us all to commit to saving successfully and being fiscally responsible. It’s also an opportune time for us all to analyze our existing savings strategy to ensure it still aligns with our long-term goals.

As we progress through our financial lives, we inevitably graduate from the most basic financial knowledge: investing in stocks and bonds, starting to save early, making sure you contribute enough to get your employer match for your retirement account, and so on.

Eventually, you’re looking for that next step, that next piece of advice to make your money work that much harder for you in 2020.

Below are 5 ways to take your savings to the next level as we start the next decade!

  1. Don’t limit yourself!

Each fall, the IRS updates its limits in regard to the maximum amount you can contribute to a given retirement account in any one tax year. Contribution amounts vary by type of account and individual’s age. If you’re intending to maximize your annual contribution and make your money work harder, ensure that you update your deferral amounts accordingly to reflect the new changes for 2020 below:

  • Employee 401(k) contributions for 2020 increased by $500 to $19,500. For participants ages 50 and over, the additional “catch-up” contribution limit rose to $6,500, up by $500, for a $26,000 maximum contribution.
  • Employee SIMPLE IRA contributions for 2020 increased by $500 to $13,500. For participants ages 50 and over, the additional “catch-up” contribution remained at $3,000, for a $16,500 maximum contribution.
  • Roth and Traditional IRA maximum contributions for 2020 are $6,000 ($7,000 if you’re age 50 or older)—unchanged from 2019.

In addition to contribution limits, you may be subject to certain IRS imposed income limits that may restrict your ability to contribute to and/or deduct contributions to an IRA. Consult with your tax preparer regarding your specific financial situation.

  1. It’s not too late! Looking to lower your 2019 tax liability while saving for retirement?

While we have officially turned the page on the new year (and decade), you can still make both pre-tax and Roth IRA contributions to an IRA for tax year 2019 up until you file your tax return, or April 15, 2020, at the latest.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax-deferred. Note that the IRS does have income restrictions that dictate whether you qualify to make these deductible contributions. For example, for tax year 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI.

Discuss with your advisor and tax preparer on whether you may qualify for deductible contributions.

  1. Why contribute to an IRA if my contributions aren’t deductible? Go through the back door!

There is a strategy commonly referred to as a “Back-Door Roth IRA,” which opens up the opportunity for Roth after-tax savings to those who ordinarily were phased out from making such contributions due to their high income.

With a conversion, individuals are able to move money out of a traditional IRA, pay taxes on the funds at ordinary federal and state rates, and move it into the Roth where it will be invested and grow tax-free.

Savings: The Importance of Starting EarlyThe main restriction with Roth conversions relates to the “Aggregation Rule,” which the IRS uses to calculate the taxable amount of the conversion. The rule stipulates that when a Roth conversion occurs, the taxpayer must calculate the income tax consequences of a Roth conversion by aggregating together all of the taxpayer’s IRAs. Meaning having large pre-tax IRA funds (not in a retirement plan) can diminish the tax benefits of this contribute-then-convert strategy.

For example, assume you rolled $50,000 from a previous retirement account into an IRA rollover. Now you want to take advantage of a backdoor Roth IRA and contribute $7,000 (2020 limit) into a non-deductible IRA with the intention of converting it to a Roth. When the conversion takes place, the IRS considers it a distribution from the non-deductible IRA, and the IRA aggregation rules must be applied. To determine what amount is return of principal versus what amount is taxable, you must look at the aggregate value of all non-Roth IRA accounts.

In this example, you would divide $7,000 by $57,000 ($50,000 + $7,000), which is approximately .1228. This means that $859.60 ($7,000 x .1228) is considered return of principal and can be transferred into the Roth IRA tax free; the remaining $6,140.40 ($7,000 – $859.60) is subject to taxes. The taxable amount is taxed at your top marginal tax rate. If we assume a top marginal tax rate of 35 percent, then the tax due on the transfer is $2,149.03 ($6,140.40 x 35 percent).

Of course, there are many variables to consider when implementing this strategy. You must consider your age/years until retirement, whether you have sufficient cash to pay the tax, and whether the transaction works in your long-term favor from a tax perspective.

Consult with your advisor and tax preparer to determine if this strategy makes sense for your long-term goals and helps your money work harder.

  1. Already maximizing your 401(k) or other retirement plan?

What if I told you there was a way to defer even more pre-tax dollars each year and maybe even get an employer contribution? Enter the Health Savings Account, or HSA.

Health Savings Accounts are separate accounts that employees who are enrolled in a high-deductible health plan may have access to through their employer. Employees contribute to the account on a pre-tax basis, up to the IRS limits below:

IRS HSA limits chartAdditionally, many employers that offer HSAs will “seed” the account with some company contributions each year, further incentivizing your participation. Plan provisions vary from employer to employer, but generally, a portion or all of the HSA contributions is allowed to be invested into a diversified portfolio of equities and fixed income.

Unlike Flexible Spending Accounts (FSAs), the money you contribute to an HSA does not expire at year-end. If you don’t use it during the year you contributed, you can keep rolling it over. This makes HSAs particularly valuable as a secondary retirement savings vehicle.

For more information on HSAs and whether it makes sense for you, check out our blog on the rise of HSAs.

  1. Have a Plan!

Are you saving enough for your retirement? If you’re like the majority of Americans, you’re not sure. Clearly identifying your retirement goals and constructing a detailed plan retirement needs calculation stateto achieve those goals helps you stay on track long-term and can also highlight deficiencies within the plan that can be corrected now to better help achieve these goals long-term.

stat about retirement savings confidence

To determine what you need to be saving to fund your ideal retirement lifestyle, consider engaging an independent advisor to help you develop a realistic, comprehensive financial strategy that analyzes the following:

To determine what you need to be saving to fund your ideal retirement lifestyle, consider engaging an independent advisor to help you develop a

  • Current assets and liabilities
  • Current and projected savings
  • Anticipated cash flow needs
  • Tax implications
  • Forecasted investment returns, risk factors, and inflation

Consider reaching out to a Domani Wealth advisor who can lead you through the planning process.

 

Following these steps with the help of someone well-versed in financial planning can help you make your money work harder this year, maximize your savings, and protect your retirement.

If you’d like to discuss any of these tips in further detail, get in touch with us today! We have a passion for financial planning and listening to your thoughts and goals to give you the opportunity for a brighter tomorrow!

 

1 2018 RPAG Retirement Confidence Survey

 

 Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.

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