Here are five common retirement planning ideas and what you can do to take advantage of them. The key is retirement planning starts now, not decades from now when you are reaching retirement age.
1. Having a plan
Surprisingly, most do not know how much money is needed for retirement. This is being made much more difficult with inflation playing a major role in finding the right answer. A retirement plan should consider how long you expect to live, an estimate of the amount of money you will need, and a description of your desired lifestyle during retirement. Your plan should have measurable goals that you aim to achieve.
Action item: If you have a plan, review it for possible revisions. If you do not, consider getting one put together as soon as possible.
2. Start early enough
One of the most powerful tools for a well-funded retirement is to start saving for your retirement at an early age. The sooner you start saving, the better off you will be.
Action item: Open a retirement account and start saving now. Increase the percent of your pay that you place in tax-advantaged retirement saving accounts. This includes IRAs, 401(k)s, and other plans.
3. Maximize employer contributions
Many employers have plans available to help their employees save for retirement. If your company has a pension plan, understand how it works and how much you can expect to receive upon retirement. If your company has a retirement plan contribution-matching program, take full advantage of this free money by making minimum contributions required to receive this employer match.
Action item: Review your employer-provided retirement saving options. Maximize the benefits they are providing.
4. Consider working after retiring
Do you plan on working during retirement or avoiding work at all costs? Do you plan on having a pension or Social Security covering all your retirement needs or none of it? Too often retirees plan the extremes, but reality is something in between. For example, if you are someone who plans to have your pension plan fail and Social Security go broke, you may be taking too conservative an approach.
Action item: Create a range of retirement funding scenarios, not just the worst-case or best-case scenario. Consider no work or part-time work. Think about some contribution from Social Security and potential pension income if your employer has a program.
5. Understand the true nature of your retirement
Are you being realistic in your future retirement plans? Have you correctly estimated the cost of health insurance? Have you really thought about the impact of relocating to a warmer climate? How important is living close to family and friends? Will you really downsize your home after the kids leave?
Action item: If you have a retirement plan that includes relocating or traveling to far-off places, consider test-driving this idea before you implement it. You may be surprised at the result.
Retirement should be something to look forward to, especially with a little planning.
The Roth IRA has been widely discussed and analyzed. One of the most challenging questions this retirement vehicle brings up is whether or not you should convert your existing IRA to a Roth IRA.
How the Roth IRA works:
You’re allowed to contribute up to $5,500 to a Roth IRA in 2018 ($6,000 in 2019) plus an additional $1,000 if you are 50 or older, the same as any other IRA, but your contributions aren’t tax-deductible. However, there’s an important, offsetting benefit: Principal and earnings in a Roth IRA may never again be subject to federal income tax, and a Roth IRA isn’t subject to mandatory distribution requirements.
Example: Barbara contributes $5,500 to a Roth IRA. Although Barbara receives no tax deduction, this IRA can grow to any amount and it could never again be subject to tax. And for the rest of Barbara’s life, withdrawals may be as large or small as desired, provided Barbara is at least 59 1/2 years old and she’s had the IRA for at least five years.
What about a conversion?
The law also allows you to convert an existing IRA to a Roth IRA. If you convert to a Roth IRA, you’ll have to pay regular income tax on your existing IRA. But once you pay the tax, your rollover Roth IRA will offer the benefits of a Roth IRA.
Fortunately, the conversion lends itself to a checklist approach. The checklist below is designed to give you a start in dealing with the conversion question, but it’s not intended to be the last word.
| Do you currently have an IRA? | Yes______ No______ |
| Use this checklist to help you decide if you should convert to a Roth: | |
| Do you expect to be in a higher tax bracket when you retire? | Yes______ No______ If you expect to be in the same or lower tax bracket when you retire, it may not make sense to pay the conversion tax today. |
| Will you be able to pay the resulting income tax with cash from outside your IRA? | Yes______ No______ If you must tap into your IRA to pay the tax, conversion to a Roth IRA is unlikely to pencil out. But remember: you can reduce the potential tax bill by making a partial conversion. |
| Will you be able to leave the money in the rollover Roth IRA for at least five years? | Yes______ No______ You could incur tax and a penalty if you tap your Roth IRA in less than five years. |
If you checked “Yes” to all questions, you might be a good candidate for a rollover Roth IRA. However, even if the checklist indicates that you should convert to a Roth IRA, your personal situation may still point in the opposite direction.
Before you make a final decision – yes or no – be sure to contact an expert for investment and tax advise. Should you wish additional information please call Loeffler Financial Group at 717-393-7366.
Tax season is about to begin across the country. If you’re like us, you probably never want to think about 2020 again, however you do need to file your 2020 taxes.
Thanks to the coronavirus, a lot has changed for the 2021 tax season. That’s why you need to start thinking about your tax situation
Loeffler Financial Group recommends scheduling an appointment with a tax professional to ensure taxes are accurate, especially with some people having major income changes due to unemployment, and pandemic relief programs and tax credits, including additional allowances for charitable donations and the Recovery Rebate Credit.
First, here are the main things you need to know right off the bat for the 2021 tax season:
- Tax Day is Thursday, April 15, 2021. You must file your 2020 tax returns by this date!
- The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly.
- Income tax brackets increased in 2020 to account for inflation.
Tax Deductions and Credits to Consider for Tax Season 2021
When it comes to filing taxes there are 2 things to pay attention to: deductions and credits. Both help you keep more money in your pocket in different ways!
Tax deductions help lower how much of your income is subject to federal income taxes while tax credits lower your actual tax bill dollar for dollar.
Here are some deductions and credits you might be able to claim on your 2020 tax return:
Charitable Deductions
NEW this tax filing year, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations.
Medical Deductions
If you spent a lot of time in the hospital or have large medical bills, you might be able to find at least some tax relief.
You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken.
Business Deductions
If you’re self-employed, there are a bunch of deductions you can claim on your tax return—including travel expenses and the home office deduction if you use a part of your home to conduct business.
TAKE NOTE: If you’re one of the millions of workers who were sent home to work remotely through the pandemic, you won’t be able to claim the home office deduction since it’s reserved for self-employed individuals only.
Earned Income Tax Credit
The EITC is a refundable credit designed to help out lower-income workers. Depending on your income, your filing status and how many children you have, the credit could save you anywhere from a few hundred to a few thousand dollars on your taxes.
Child Tax Credit
Families can claim up to $2,000 per qualified child with this tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples).
You should work with a tax advisor who can make sure you’re not leaving any deductions or credits on the table. Depending on your situation there are other tax deductions and tax credits to take!
The Coronavirus and Your Taxes
Here are some things to keep in mind when you file your 2020 taxes:
Stimulus Checks
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s $2 trillion relief package, the government sent out a stimulus check to millions of Americans.
This stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. In layman’s terms, the stimulus check is like an advance on money you would have received as part of your tax refund in 2021.
Paycheck Protection Program (PPP) Loans
The CARES Act also tried to help struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on certain business expenses—payroll, rent or interest on mortgage payments, and utilities, to name a few—these loans were designed to be “forgiven.”
Unemployment Benefits
Many Americans found themselves out of work after the pandemic shut down turning to unemployment for assistance. Those who received unemployment benefits will need to pay income taxes on that money.
Retirement Plans: 401(k)s, IRAs and More
There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. Let’s tackle each of those major changes:
- The CARES Act allows folks under age 59 and 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty.
- Taking money out of your retirement accounts before retirement is a terrible idea—penalty or not.
- The money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income.
- If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs).
- The SECURE Act pushed back the age for RMDs from traditional IRAs from 70 and 1/2 to 72 (if your 70th birthday was July 1, 2019 or later).
- The CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. This could lead to significant tax savings for retirees with those accounts since the money that’s taken out of a traditional IRA counts as taxable income.
- The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 and 1/2 starting in 2020. Since the money you put into a traditional IRA is tax deductible, you could lower how much of your income is taxed this year.
One last thing—It’s probably a good idea to reach out to a tax advisor who can assist you and review all the new tax laws and changes for the upcoming tax season.
With the coronavirus still spiking, Loeffler Financial Group will continue their virtual tax appointments and consultations, along with their easy and stream-lined drop off tax services. Book your virtual appointment today, or call us to learn more about our drop off program.