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Retirement

Changes in Law During the Coronavirus to Help People Nearing Retirement

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Changes in law during the coronavirus

The outbreak of COVID-19 across the globe has impacted the stock market, employment rates, and people’s everyday lives in a huge way. Millions of Americans watched their nest eggs disappear. For those nearing retirement, it is enough to send you into a panic. Thankfully, government officials are proposing changes in law during the coronavirus outbreak to help.

Changes in Law During the Coronavirus to Help People

As the virus swept across the world, the stock market collapsed. Because many retirement accounts rely on investments, people watched their savings for their golden years dwindle down to nothing.

Additionally, individuals who have been laid off during this time no longer have an income to contribute to their retirement. There is good news though. Officials are putting some changes in law into place to help.

1. RMDs Will Be Put on Hold

Required minimum distribution (RMD) refers to the minimum amount an investor must withdraw from their account after reaching age 72. This is common with many 401(k) and IRA plans. If you do not take the minimum, a fine will be placed on your account. However, during the coronavirus outbreak, the government has put a hold on minimum required withdrawals.

This will be the case for the entire year. Ed Slott, a certified public accountant, said: “Now, clients can sit out a year and avoid the tax bill on their 2020 RMDs if they wish.”

2. Penalties Are Being Eased

Individuals with IRAs and 401(k) accounts that have been financially impacted by the virus are also able to withdraw up to $100,000 from their retirement account without penalty. Typically if an accountholder withdraws early, they are required to pay a 10% early withdrawal fee.

It is important to note that this only applies to people who have been diagnosed with the coronavirus, been laid off due to the virus, had reduced work hours, or have otherwise been impacted.

3. You Can Get Larger 401(K) Loans

As mentioned in the point above, people with 401(k) accounts are able to take $100,000 out without a penalty. This is more than the typical $50,000 limit for 401(k) loans.

Other retirement plans will only allow you to take out up to a percentage of your balance. These limits will also be lifted for the rest of 2020.

Other Changes in Law and Policy

Policymakers are also pushing to make other changes to help Americans get through this time financially. For instance, Navient, a major federal student loan lender, has waived all interest and allowed borrowers to be granted forbearance until September. This means no payments will be required during this time.

On top of that, many mortgage companies and other businesses are offering payment relief at this time to assist people through the coronavirus outbreak. If you need assistance or are unable to make a payment at this time, the best thing to do is give the company a call and ask what your options are.

Readers, what do you think about the changes in law during the coronavirus outbreak? Are they helping you in any way?

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Checkout The Taxation of These 4 Retirement Vehicles

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taxation of retirement vehicles

Many people want to make sure that they are financially secure during their golden years. As a result, they stash money away in various retirement savings vehicles. Thus, allowing them to have a nest egg for when they leave the workforce. However, many savers accidentally overlook a critical part of the equation: taxation of retirement vehicles. This can lead to trouble. Particularly if you aren’t prepared for what you’ll owe.

The Taxation of Retirement Vehicles

Taxation levels for retirement accounts vary. Not all sources of retirement income are subject to the same rules. It isn’t uncommon for that to lead to some confusion. Causing some to make unwise choices as they try to plan for retirement.

If you want to plan for retirement successfully. You should understand how various post-retirement income sources can be taxed is critical. Otherwise, you may find yourself with an unexpected federal tax bill at the end of the year that you’ll struggle to pay. Alternatively, you could overestimate your tax burden. This could cause you to make withdrawals or spend differently than you otherwise would. If you want to make sure that you are ready to handle retirement. Here’s a look at how four different retirement vehicles are typically taxed.

1. Social Security

Before 1983, Social Security benefits were universally tax-free. However, that isn’t the case today. While many who receive Social Security income don’t pay taxes on it, others do. If the person’s “provisional income” is high enough. They could owe federal taxes on as much as 85 percent of their Social Security benefits.

According to the IRS, a beneficiary’s provisional income has to be below $25,000 ($32,000 for married couples who file jointly) for their Social Security to go fully untaxed. From $25,000 to $34,000 (or $32,000 to $40,000 for married filing jointly), up to 50 percent of the Social Security benefit is taxable. Once you cross $34,000 ($44,000 for married filing jointly), up to 85 percent is subject to taxation.

2. 401(k)s and Traditional IRAs

Both 401(k) plans and traditional IRAs are tax-deferred. Contributions are potentially deductible the year they are made. Therefore, allowing a person to lower their taxable income by increasing their retirement savings.

However, once it comes time to make withdrawals, it’s tax time. Every withdrawal is taxed based on the person’s ordinary tax rate. This happens regardless of whether the money is from your original contributions, employer-matching funds, or gains.

3. Pensions

In many cases, a pension is funded with pre-tax income, so you don’t pay taxes on the contributions. However, like a 401(k) or traditional IRA. You’ll have to pay taxes once you start making withdrawals. In most cases, pensions are taxed by the federal government at your ordinary tax rate.

The only time that may not occur is if there are after-tax pension contributions. When that happens, the pension withdrawals that connect to that money can be tax-free. However, relatively speaking, this is a rare scenario.

4. Roth IRAs

When it comes to long-term tax advantages, Roth IRAs offer a big benefit. The contributions themselves aren’t deductible when they are made, so taxes are paid when during the year that money is earned. However, when it’s time to make qualifying withdrawals during retirement, that cash is probably going to be tax-free, including the value of your account gains.

There are some instances where a person might have to pay taxes on Roth IRA gains withdrawals. First, if you make a withdrawal of any gains before you are 59 ½ years old, you’ll be subject to taxation and early-withdrawal penalties. Second, if your account isn’t at least five years old, you aren’t eligible for tax-free withdrawals until you hit the five-year mark.

Otherwise, once you hit 59 ½ and the account is old enough, you don’t have to worry about taxes on that money. It’s that simple.

Did you consider taxation of retirement vehicles when planning to retire? Why or why not? Share your thoughts in the comments below.

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How Much Retirement Income Will You Need to Replace Your Current Income

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Retirement Income

One of the biggest challenges of being in retirement is the income. Many Americans rely on social security, and this end up not being enough. Even if it is enough to live, it tends not to be enough to be as comfortable as you were pre-retirement. It takes a lot of preparation to set up a truly cushy situation after you stop working, but we at Saving Advice are here to help. Not enough people worry about their income post-employment, they just care about the savings. Savings are great, but these tips on growing your retirement income will help you figure out the magic question: how much will you need?

Retirement Savings

Saving is one of the focal points for retirement planning. The amount you save, as well as what you do with it, will have a huge effect on your quality of life as a retiree. One of the best ways to plan this value out is to use the “interest-as-income” model. This method relies on only interest for income, and it avoids touching any of your savings. The calculation is easy: Take seven percent (the average yield of a solid index fund) of your savings, and that is your retirement income. So, if you make $70k at work, you’ll need $1 million in retirement savings to replace that with you interest. this allows you to pull out any excess interest the moment it hits, and never have less than that million in your savings. We use indexes because they are pretty reliable. The S&P Index, for example, takes the 500 best performing stocks and indexes them to help track growth.

What if I Don’t Have Enough?

No need to fear! There are many different ways to make up for a gap in income. Say you can only make $40k a year with your retirement and social security accounted for. There are to routes to take here:

  • Downsize: The first, and less attractive, option is to downsize your life. Move into a smaller place, get a car with no payment, etc. These are things that matter a lot less when you are retired, and you can find a ton of room in the budget. The average new car payment in America is $550 (used being $393); You can save thousands by foregoing the fancy car. You can also cut costs by eating out less, spending more date nights in the house, etc.
  • Side Hustle: There are many fun skills and hobbies you have probably mastered over the years. don’t be afraid to use the things you enjoy to make a little money. Do you know how to knit or woodwork? Sell some little trade goods on a site like Etsy. Do you enjoy keeping a tidy home? Work as a cleaner on the weekends for $25/hr. All of these can keep you from getting another full-time gig, and make up for lost cash along the way!

In Summary

Retirement takes a ton of planning, and retirement income isn’t easy to come by. Make sure you start prepping early, and go hard as long as you can in order to set yourself up for the best life possible. Invest wisely, hustle a little on the side, and live frugally when you can to make sure that you can truly stop working when you are done.

How Much Should You Contribute To Your 401(k) in 2020?

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2020 401(k) contribution limits

The employer-sponsored 401(k) account is one of the most tax-friendly and best ways to build your retirement savings. Saving for retirement is something that everyone should do. That’s why if your employer has this offering, you should never miss this opportunity.

The Internal Revenue Service (IRS) handles the 401(k) accounts all over the US, and they’ve got some good news for everyone who plans to grow their retirement accounts faster by putting in the maximum amount of money every year. For this year, both profit-sharing plans and contribution limits for 401(k) have increased. That said, employees can now contribute up to $19,500 in 2020, which is $500 higher than the limit from last year.

Learn more about 401(k) and how much you should contribute in 2020.

What Makes Up Your 401(k) Contribution Limits?

Three factors combine to form your 401(k) contribution: the employer, catch-up, and salary deferral contributions.

The employer contributions, also known as company match, are what your company contributes to your account. The salary deferral contributions, on the other hand, are what you invest from your salary. While the catch-up contributions are applicable as additional payments to your plan when you’re going to be at the age of fifty after the current calendar year.

The 401(k) contribution limits could mean two things. First is the salary deferral contribution limit. Second is the limit for the combined amount of your contribution and that of your employer. And, it’s known as the total contributions limit.

Although the 401(k) has underperformed the S&P 500 in terms of the average rate of return in the market, it’s still ideal for employees and self-employed individuals to make the most out of it to prepare for their retirement.

What’s The 2020 401(k) Contribution Limits?

As already mentioned above, the 401(k) limit this year is five hundred dollars more than 2019. As an employee, you now have $19,500 as the maximum contribution amount.

It’s also possible to make catch-up contributions if you’re now fifty years and older. Like the employee contribution limit, the catch-up contribution for 2020 is also five hundred dollars more than that of last year, at $6,500. It means socking away up to $26,000 to your account for this year.

You’ll have a pre-tax contribution if you’ll go for the traditional options of 401(k). Cutting your overall bill for the next tax-filing season becomes possible with it since it would mean a lower taxable income.

Say, for example, you’re going to pay $19,500, which is the maximum contribution, and your total revenue for the year is $249,500, only $230,000 of it will get taxed.

The good thing about your payments is that once they successfully reach your account, you’re not going to pay taxes for them until you decide to make withdrawals since they automatically become tax-deferred.

uch to contribute to your 401(k)

How To Set Up A 401(k) Account As A Self-Employed Individual?

The solo 401(k) plan or the individual(k) is the most suitable setup for self-employed people. It allows you to make contributions for profit-sharing as an employer and pay salary deferral contributions, like a regular employee, at the same time.

The 401(k) works as both a savings and investment vehicle for self-employed individuals.

How Much Should You Save In Your 401(k) Account?

Now, that you’ve already gone through the changes of 401(k) this year, for both employees and self-employed people, it’s time to answer the central question of this post – how much should you contribute to your 401(k) in 2020?

Experts recommend that, including the employer match, employees should provide at least fifteen percent of their salary or income. What this means is that you have to contribute an additional thirteen percent if, say, you receive an employer match of two percent.

What happens if you’re not meeting the fifteen percent expert-recommended savings for your 401(k) retirement account? If that’s the case, then it’s best to increase your contributions by at least two percent every year until you hit the recommended level. Always remember that a 401(k) can help or hurt you during your retirement, depending on how you manage it. Thus, the need to make the right decisions along the way, especially when it comes to how much you should save.

Some Tips To Ponder When Saving For Your 401(k) Retirement Account

  1. Go For The Maximum Contributions – Always aim for the $19,500 limit each year as long as you’re capable of doing it.
  2. Go For The Maximum Catch Up Contributions Limit – Even if you’re still employed, it’s best to add another $6,500 to your savings as your catch up contributions once you reach the age of fifty.
  3. Match Your Employer’s Contribution – Don’t settle for a lesser amount than your employer’s match. Whatever the amount they’re going to offer, make sure to match it or go higher than it.

Final Thoughts

Speed up your journey to financial freedom by getting right back on track for this year’s 401(k) contributions. Max out your savings and capture or go higher than the employer match. Hit the 15% recommended total contribution to your account for 2020.

10 Retirement Options To Help Your Money Last Longer

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10 Retirement Options To Help Your Money Last Longer

For many, the idea of running out of money during retirement is terrifying. After all, a person’s golden years can be surprisingly expensive, and people are living longer today than they did in many generations before. Couple that with concerns about another recession, the rising cost of healthcare, inflation, and coming up financially short could easily become one of a person’s biggest fears. Luckily, there are retirement options that can help your money last as long as possible. Here are ten.

1. Maximize Social Security

While the idea of receiving Social Security benefits at age 62 might be appealing, waiting can pay off. If you start too early, your benefit is much smaller than if you delay a few years. Waiting until you reach full retirement age should be considered essential. That way, you don’t get a reduced benefit.

Your full retirement age depends on the year you were born. Here is an overview based on a person’s year of birth:

Year of Birth Full Retirement Age
1950 or before Already at full retirement age
1951-1954 66 (all will be at full retirement by the end of 2020)
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

However, if you can wait until age 70, that’s even better. You’ll earn delayed retirement credits that boost your Social Security payment. For every year between your full retirement age and 70, your payment rises by 8 percent. That means, if 67 is your full retirement age, by waiting until age 70, your payment is 24 percent higher than it would be if you didn’t wait.

2. Consider a Lifetime Annuity

Depending on your financial situation, a lifetime annuity might be a smart addition to your retirement planning. In exchange for a lump sum, you’ll receive a set amount every month for the remainder of your life, regardless of how long it is.

It’s important to take care when exploring annuity options. Some come with incredibly high fees, degrading the value of the product. However, if you are using one as a supplement and not a primary source of retirement income, annuities can be worth exploring.

3. Work Part-Time or Freelance

One of the easiest ways to make your retirement money last is to keep working, at least in some capacity. This could include a part-time job that provides you with some extra cash, using freelance work to bolster your bank account, starting a blog that generates income, or any other approach that works for you.

Retirement can actually be a great time to take on a job that you enjoy without having to consider the impact on your career or long-term earning potential. Plus, it can help you stay active and engaged in your community, and that is a great benefit.

4. Shift Your Savings to a High Yield Account

The average savings account interest rate, according to the FDIC, is a measly 0.09 percent. Some banks offer even less, coming in at just 0.01 percent interest.

If your money is sitting in an account like that, you are missing out on an earning opportunity. Just by moving your cash to a high-yield online savings account, you can earn more in interest with zero effort.

For example, $5,000 sitting in an account that earns only the average 0.09 percent brings in $4.50 in interest every year, suggesting the account compounds monthly. In comparison, with an interest rate of 1.5 percent, that money earns $75.52 in interest instead. That’s a difference of $71.02 every year. And it happens even without having to deposit any additional money.

Look for an option with an interest rate of 1 to 2 percent or more. That way, if you have money in savings for emergencies, it’s making you as much as possible.

5. Reexamine Your Portfolio

As you get closer to retirement, it’s normal to skew your portfolio toward the conservative end. That way, your odds of preserving your money go up, but you still have a chance of experiencing some decent gains.

However, if your portfolio has been adjusting automatically or without your direct input, you might want to see if the allocations are appropriate. It’s possible that your portfolio is more conservative than you’d like, particularly if you decide to retire later in life than you did when you first set up your allocations.

Similarly, many people could potentially live decades after retiring. That means you could have 20, 30, or 40 more years to live. That means you have some time to ride out a degree of market volatility, so keeping at least a portion of your retirement account in stocks could be a wiser choice.

If you are delaying your retirement by a few years or could potentially have a lengthy retirement, explore whether being more aggressive makes sense for you. It may let you earn more before you retire, so it is worth considering.

6. Factor in the Value of Downsizing in the Future

If you will pay off your house before you retire and are in a family-sized home, then you can factor in the value of your property when planning for your retirement. Once it’s paid off, if you choose to downsize, any excess value above the cost of your new housing arrangement could be an income boost.

Even if you wouldn’t plan on shifting to a smaller home, it’s wise to examine the value difference. That way, your property could function as a safety net, giving you a source of cash should your other retirement accounts dwindle down faster than you expected.

However, if you downsize when you retire, you are creating a way to stretch your retirement income. A smaller property is usually less expensive to maintain, operate, and insure. As a result, your monthly expenses could go down, allowing you to stretch your dollars further.

7. Take Advantage of an HSA

If you aren’t enrolled in Medicare yet and are eligible to open a Health Savings Account (HSA), consider doing it as part of your retirement planning. While you can’t contribute once you enroll in Medicare, you can add to the HSA until that day comes.

With an HSA, contributions are tax-deductible. Plus, it grows tax-deferred and, as long as you use the funds for qualifying healthcare expenses, you can withdraw it tax-free.

Even if you are no longer eligible to make contributions, you can keep using the saved money until it is gone. Since healthcare costs tend to rise as a person ages, this can be a great way to plan for managing retirement expenses. Then, your other retirement account funds don’t have to go to medical costs.

8. Readjust Your Life Insurance

While it might seem like adjusting your life insurance as you get closer to retirement isn’t a great idea, it might be. If your children no longer live at home and don’t depend on you financially, you might not need as much insurance as you did when they were younger.

If you haven’t examined your policy recently and your household’s situation looks different than it did when you signed up, see if reducing the size makes sense. In some cases, it may, allowing you to cut a monthly expense and still have a suitable amount of protection.

9. Make a Tax-Smart Withdrawal Plan

If you have more than one type of retirement account, then making a tax-smart withdrawal plan is a good idea. Certain kinds of accounts – like traditional IRAs and 401(k)s – have taxable withdrawals while others – like Roth IRAs – don’t. Aside from any mandatory withdrawals, make sure you consider the tax implications when you access the money. That way, you can choose an approach that may minimize your obligation, allowing you to keep more of your money.

10. Move to a State with Lower Taxes or Cost of Living

Some states have higher tax rates than others. Income, property, and sales tax rates can vary dramatically, so moving to one that has better options than where you live now can help you stretch your money.

Similarly, the cost of living isn’t the same in every state or city. Some are much more affordable than others, so you might be able to make your money last by opting for a change of scenery.

If you don’t have a reason to stay in your current area, compare how much you could save by heading elsewhere. Just make sure to factor in taxes and the cost of living. That way, you can genuinely find the most affordable option for you.

 

Do you know of any other retirement options that can help make the money last longer? Share your thoughts in the comments below.

 

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New Parents Can Take a Penalty-Free Early Withdrawal From Retirement Savings

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Penalty-free early withdrawal

It is the beginning of the year and many people have already started preparing their taxes for April. If you took money out of your 401(k) or other retirement savings, you likely have some penalties to pay on the amount you withdrew. However, new parents can take a penalty-free early withdrawal from retirement savings, but it will increase your taxable income.

Why New Parents Get This Break

Being a new parent can be extremely overwhelming and expensive. New parents get a small break if they need to withdraw funds from their retirement savings with the Secure Act, which was passed in December. If you are struggling for money, this can be a good source of emergency cash.

It is important to note that the penalty-free early withdrawal only applies to individuals with new children. There is also an exception for medical expenses, but you need to make sure that the year you withdraw the funds is also the year you needed medical assistance. You won’t be able to withdraw funds from your retirement savings in the event of financial hardship or any other reason without paying the 10 percent withdrawal fees.

While having that extra cash to fall back on is great, there are definitely a few things to be wary of. Even if you need the money for your child or a medical expense, it may not be the best financial decision.

Should You Consider a Penalty-Free Early Withdrawal?

The Secure Act will allow parents with a new child to deduct up to $5,000 from their retirement savings or individual retirement account (IRA) without having to pay the 10% penalty. The $5,000 limit applies to each parent, meaning the family can deduct up to $10,000 in total as long as they have separate retirement accounts.

Even though they won’t have to pay the 10% penalty, parents will still have to pay taxes on this money. Not to mention, you’ll be removing money from retirement savings that likely took years to accumulate and could take years to re-establish. Additionally, you are creating a habit of borrowing, which is never beneficial to your long-term finances.

Ed Slott, CPA and founder of Ed Slott and Co. said, “Retirement funds are for retirement. If you use them well before retirement, what are you going to have in retirement?” All in all, it is probably not the best idea to withdraw from your retirement savings early. Instead, look for other ways to fund your needs and focus on saving more so you don’t have to resort to deducting money from your 401(k) or IRA.

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