For women who expect to lean heavily on their investment accounts in retirement, market volatility isn’t the only concern. It’s also important to help minimize the impact taxes can have on income in retirement. That means managing the funds in various types of investments and accounts — taxable, tax-deferred and tax-free — as efficiently as possible, now and in the future.
After all, if you’re going to put the effort into growing your money, shouldn’t it also be a priority to keep as much of it as possible, especially if you find yourself alone in retirement because of divorce or the death of a spouse?
One way to potentially keep more money in your pockets — and put less into Uncle Sam’s — is to consider the benefits you can get from tax-advantaged retirement accounts, such as employer-sponsored 401(k)s, traditional IRAs and Roth IRAs. And, thanks to changes to contribution caps and other limits, you can sock away more money than ever in those accounts this year and next year. That’s a good thing for anyone, of course, but it may be especially fortuitous for women, who live longer and therefore need every extra dollar saved they can get.
Some of the new limits that could affect your retirement savings include:
The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the Thrift Savings Plan used by federal government employees increased in 2019 to $19,000 (and those limits will be going up another $500 in 2020). If you’re 50 or older, you also can take advantage of a catch-up provision of $6,000 (a figure that is also rising by $500 in 2020). That means all together you could put away $25,000 in your employer-sponsored plan in 2019 — and that total rises to $26,000 in 2020. And in case you were wondering, your employer’s matching contribution, if there is one, doesn’t count toward your limit.
Roth IRA contributions
If you’re worried about the consequences of building up too much money in a tax-deferred retirement account — considering you will have to pay taxes on every dollar that you withdraw — you may want to add a Roth IRA to your plan. For example, you could contribute up to the company match in your employer-sponsored 401(k), then, if you’re eligible, put any additional savings into an after-tax Roth account.
Once again, Roths could be worth looking into for anyone, but they could be an especially good idea for women for a number of reasons. Of course, longevity is a significant one. All those extra years you may live are also years in which the IRS is going to want to collect taxes from you, but you can withdraw money from a Roth IRA tax free.
The contribution limits for traditional and Roth IRAs also went up in 2019 — to $6,000, or $7,000 for those who are 50 and older. So if you’re a 50-plus individual focused on growing your savings account, you could put away as much as $32,000 between your 401(k) and your Roth in 2019.
Note: Contribution limits for Roth IRAs and traditional IRAs won’t be going up in 2020. They’ll stay the same as in 2019.
Roth IRA phase-out range
A Roth IRA isn’t an option for everyone; contributions may be limited or unavailable based on your modified adjusted gross income. But the Roth IRA “phase-out” range did go up in 2019 and will rise even further in 2020, making it an option for more savers.
It’s now $193,000 to $203,000 for married couples filing jointly (rising to $196,000-$206,000 in 2020). That means that the amount you can contribute to a Roth IRA in 2019 begins phasing out at $193,000, and at $203,000 you can’t contribute to one at all. For singles and heads of households, the phase-out range begins at $122,000 and ends at $137,000 (rising to $124,000-$139,000 in 2020).
If your employer offers a Roth 401(k) plan, there are no income limits, so you may want to check into that option as well. And even if you earn too much to contribute directly to a Roth IRA, you can still get the benefits by converting a traditional IRA to a Roth. (Congress eliminated the $100,000 income limit on Roth IRA conversions back in 2010.) Yes, you’ll have to pay taxes on the amounts you withdraw and convert. But because we’re currently in a lower tax environment, thanks to the 2017 tax reforms, this may be a good time to do a gradual conversion, perhaps by moving some money every year for the next few years. Discuss with your financial adviser and tax professional to see if this is an appropriate strategy for your situation.
Traditional IRA phase-out range
Individuals and couples can earn more this year and still be eligible to make tax-deductible contributions to a traditional IRA, and that figure will rise in 2020 as well. The amounts allowed are based on your modified adjusted gross income, similar to the Roth phase-out ranges, but also on whether you (or your spouse) are covered by a workplace retirement plan — which can make things a bit more complex. So be sure you’re clear on who has what before you make decisions on how much to contribute (for details, see the IRS announcement).
If you earn too much to make deductible IRA contributions, you may still be able to make nondeductible contributions — and you can potentially convert that money to a Roth IRA, if you wish. You should speak to a tax adviser to understand the conversion rules and potential tax consequences.
It’s important to note that being smart about tax-efficient strategies isn’t just for those who are close to retirement. You can get in on the benefits that tax-advantaged accounts have to offer at any age — whether you’re just starting your career or close to wrapping things up. Tax efficiency should be a goal for every saver.
Now is a good time to assess your retirement accounts to make the most of your savings for next year. Your financial adviser or tax professional can help you understand any deadlines and how to get the changes made.
Putting as much money into a retirement account as early as possible is a particularly valuable strategy for women. One analysis by NerdWallet showed that a woman must save $1.25 for every $1 a man does to build an equivalent retirement nest egg.
Clearly, there’s little time to waste.
(Article written by Dina Siracusa)
(Kim Franke-Folstad contributed to this article)