As the end of the year approaches, it’s time to get strategic about saving for and spending in retirement. By using a few simple tricks, you can save up to $61,000 (on a $1 million nest egg) in taxes and fees and put that money back where it belongs — in your retirement account.
Below are some tips for avoiding 2019 penalties and tax bills on your retirement savings, as well as some easy ways to get ahead in early 2020.
To wrap up 2019, let’s start with RMDs
Did you know that required minimum distributions (RMDs) aren’t the same for all retirement accounts? Starting at age 701/2, Boomers must start withdrawing from some retirement accounts, but not all. IRAs, 401(k)s, Roth 401(k)s? Yes. But if you have a Roth IRA? This rule doesn’t apply.
And the nuances don’t end there:
— Every year your withdrawal requirement changes and can be found on this IRS actuarial table.
— And if your spouse is more than 10 years younger than you, there is a different table.
— Inherit an IRA this year? Use this table!
Forget to take your RMD in time or calculate it incorrectly and you could find yourself paying a 50% penalty on the amount you failed to withdraw. For a 75-year-old with a $200,000 IRA, that penalty could be as much as $4,366! While the rules may be tricky, taking your RMDs before year’s end 2019 is a simple way to hold onto more of your savings, rather than losing that money to penalties.
And look out for changes in 2020 (see below), which look like they may reduce or delay your RMDs.
What about state income tax?
Did you remember to withhold state taxes this year? Good on you if you did, but unfortunately it’s not so cut and dried. Below are some catches and conditions that could impact your state income taxes:
— It’s pretty common knowledge that states like Florida and Texas have no state taxes (for a full list, see 9 States with No Income Tax), but that’s just scratching the surface.
— Forty states actively tax retirees’ withdrawals from an IRA, including RMDs. (For more, see a State-by-State Guide to Taxes on Retirees.)
— Fourteen states have mandatory tax withholding requirements for those who draw down on their IRAs. And 27 states have voluntary IRA tax withholding.
— Elected to take Social Security this year? Or building your retirement income plan? Keep in mind that if you live in Colorado, Connecticut, Kansas or 10 other states, your Social Security may be subject to state taxes as well as possibly federal taxes. (For a full list, see 13 States That Tax Social Security Benefits.)
Our expert advice? If you haven’t done it already, consider filing the SSA FW-4V if you like the simplicity of monthly withholdings on Social Security over a surprise tax bill in April. And don’t forget — if you are a resident of Arizona or Ohio, the maximum withholding rates for IRA withdrawals dropped this year.
Getting ahead of 2020 (and beyond)
Washington is finally coming around to the fact that retirement in America has changed. People are living longer and need to make their savings last. To help account for these challenges, the IRS is considering some changes:
— In early November the IRS announced new retirement account contribution limits for 2020, with most limits going up.
— The IRS also proposed revised life expectancy tables for RMDs, which could go into effect in 2021. The new tables will reduce the amount of money retirees are required to take from retirement accounts, allowing for savings to compound for longer. And with a bit of luck the Senate will get past politics and finally pass the SECURE Act. If the act becomes law, retirees would benefit from being able to further delay RMDs, but they would have to watch out for the estate planning catch that would come from the reduced time to withdraw from inherited IRAs. (For more, see 10 Ways the SECURE Act Could Impact Your Retirement Savings.)
What can do you as the new year kicks off? First check to see if you can contribute more to an employer savings plan in 2020. If you are enrolled in a 401(k), 403(b) or a 457 plan, contribution limits for 2020 have increased from $19,000 to $19,500. Catch-up contributions for individuals 50 and older will increase from $6,000 to $6,500. While both traditional IRA and Roth contribution limits didn’t change, the income thresholds did rise. Keep an eye on the phase-outs for traditional IRAs and Roths. (See the specifics provided by the IRS.)
Finally, don’t forget the hidden savings in account sequencing in 2020. All these years you have been putting your savings into retirement accounts, and as you start taking funds out, you might wonder whether you should start taking funds from your taxable, tax-exempt or tax-deferred account first. Turns out, it all depends. Retirees need to take into consideration their personal fact pattern (state/federal tax rates, their mix of stocks and bonds, their other income, for example) and their savings goals. Are they trying to optimize their retirement savings for their own use during their lifetime? Or to leave as an inheritance?
This is where some of the biggest retirement tax savings can be found. For a couple living in Florida with $1 million in retirement savings, being smart about account sequencing can add $61,000 to their retirement nest egg.
You’ve worked hard to get to retirement. As we wrap up 2019 and kick off 2020 it’s time to make sure your money works smarter for you, not for Uncle Sam.
(Article written by Rhian Horgan)