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Retirement Contribution Limits Are Increasing in 2020

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Retirement Contribution Limits

The Internal Revenue Service (IRS) released updates for 2020 earlier this week. Amongst those updates, the agency announced changes to the retirement contribution limits that will take effect during the 2020 tax year.

Changes to the Retirement Contribution Limits

And, for once, the IRS is giving people a break. Starting in 2020, the IRS has increased the retirement plan contribution limit to $19,500 (up from $19,000). This includes 401(k), 403(b), and 457 plans. Catch up contributions will also be increased from $6,000 to $6,500.

That’s just the basics though. If you’d like to learn more about the ins-and-outs of the changes recently announced, head over to the IRS website. You can also read a quick summary of the changes taking effect in 2020 in the IRS news bulletin.

The best part of the IRS announcing the increase in limits is contributing more to your retirement accounts will help you build wealth. Not to mention, retirement contributions are not typically taxed. Your money will be put to work in the stock market while you effortlessly get ready to retire.

Readers, what do you think about the latest changes to the retirement contribution limits?

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What You Need to Know About Trump’s Proposed Changes to Required Minimum Distributions

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Required Minimum Distributions

Early retirement planning is the smart way to make your retired life better. Retirement savings are extremely important. Millions of Americans use IRAs and 401(k)s to save up for their golden years. These tax-deferred accounts provide a tax break now.  The agreement is that they’ll pay taxes on it in retirement. Once you begin to withdraw from your IRA or 401(k), there is a required minimum distribution.  You must adhere to the distribution to avoid paying a hefty penalty.

For years, people have looked at these laws as unfair. After all, many people save their entire lives to be able to retire comfortably just to be hit with fines. However, President Trump has signed an executive order that will lead to a change in these rules. The new change is mainly loosening the requirements for minimum distributions.

About Required Minimum Distributions

Required minimum distributions (RMD) are put into place to limit the tax benefits retirement savers are able to receive. RMD rules state you must begin taking withdrawals from retirement account the year you turn 70 1/2. Account holders must calculate the amount they have to take out each year, regardless of whether they need it or not. For many people, this has increased the likelihood of running out of money during retirement.

President Trump Calls for Changes

Last week the president signed an executive order calling for the Department of Labor and Department of Treasury to consider two things. First, he wants to raise the age when people are required to start taking the RMD. Second, Trump would like to find a way to make it easier for small businesses to offer retirement plans for employees.

He has given the Department of Treasury six months to consider pushing back the age because many Americans are outliving their retirement. The current average life expectancy in the U.S. is 78 1/2. Additionally, he has given the Labor Department six months to consider easing regulations that would allow small businesses to offer retirement plans. This would give the opportunity to save for retirement to more than 42 million employees in the U.S.

Financial advisors helping retirees are hopeful that the order will lead to more relaxed RMD rules or, even better, the removal of the rules altogether. However, even if the executive order pans out, it could take years for the rules to change. It also isn’t clear whether a simple rule change can be done without congressional approval.

Either way, if you have an IRA or 401(k) that you don’t need to tap into right away, these changes could make a huge difference in your financial plan for retirement. For many, it would mean having more security than ever.

Readers, what do you think about President Trump’s proposal?

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5 Challenges Women Face in Retirement

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Challenges women face in retirement can be grouped in five categories.
How’s your retirement plan holding up? If you are a woman, you’re probably having more difficulty with retirement plans than your male counterparts.

Despite advances, women still face lower average salaries – 82 percent of the average man’s salary, according to the Pew Research Center.

Fewer working years on average, often due to time off for child care or family responsibilities, adds to the difficulty of earning sufficient income for retirement savings.

Here are five areas that seem to be most challenging for women approaching retirement, according to the recent edition of the Transamerica Retirement Survey of American Workers.

1. Lack of Confidence

Only 12 percent of women reported being “very confident” that a comfortable retirement is in their future.

Perhaps that’s because more than four out of five women don’t expect Social Security benefits to be available for them when they decide to retire.

2. Working Beyond Retirement

Over half of the women surveyed by Transamerica expect to be working beyond age 65.

While 53 percent of women say they intend to retire beyond age 65 or never retire at all, 54 percent expect to work after retirement.

Most of those women (43 percent) plan to work part time, while the remaining 11 percent plan to work full time.

The reason for working into retirement or never retiring at all may be financial, since 64 percent of women surveyed have no alternative plan for income if they have to retire sooner than expected.

Are women taking the proper steps to make a longer career feasible? Job-related factors are not promising.

Only 46 percent of women stay current with their job skills, and only 57 percent are focused on doing a good job in their current role – effectively reducing their value as retirement nears.

3. Savings Concerns

More women place a priority on paying down debt (68 percent) than on retirement savings (51 percent) – but at least they are saving.

Seventy-three percent of women contribute to a retirement program, and started saving for retirement at a median age of 27.

The median retirement account balance is estimated at $42,000 – not as grim as it sounds since this is averaged across age groups.

While 30 percent of women expect to depend on Social Security, 45% will be drawing from traditional retirement programs (401(k), IRA, etc.) or other separate savings accounts.

The good news – almost two-thirds of working women are offered employee-funded retirement plans, and 77 percent of those women participate in the programs.

The median contribution is 7 percent of their salary. The bad news – 28 percent of women work in part-time positions where employee-funded retirement plans are less likely to be offered.

Women’s emergency savings accounts contain a median of $2,000 – which doesn’t cover much of an emergency these days.

4. Health

While 63% of women report keeping healthy, only 26 percent of women consider their long-term health when making lifestyle choices.

Are women expecting their good health to continue into their retirement years?

5. Financial Knowledge and Education

Women expect to need $500,000 in retirement – but 55 percent admit that’s a guess.

Less than half (47 percent) of female baby boomers know “a great deal” or “quite a bit” about Social Security benefits – a low percentage given that boomer women are at or near retirement now.

Only 28 percent of women know about the Saver’s Tax Credit, a useful tool for lower-income women.

Professionals can fill the education gap – but only one-third of women use professional financial assistance in their retirement plans.

America’s women must be proactive with retirement plans. You’ve spent a lot of time taking care of others. Now it’s time to take care of yourself.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/PeopleImages

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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1 In 5 Americans with Matching 401(k) Plans Are Leaving Money on the Table

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Matching 401(k) plans are one of the coolest types of employee benefits out there.
Who would turn down free money? Apparently, plenty of Americans are doing exactly that: 20 percent of them underfund matching 401(k) plans, according to the Motley Fool. This significant mistake effectively dismisses free money.

Approximately three-quarters of companies with 401(k) plans offer a matching program where the employer contributes an equal amount to the employee’s contribution up to a certain limit.

The employer’s matching contribution is extra money that you receive simply by contributing to your retirement account – in essence, free money.

Bypassing Free Money

If you don’t contribute to the matching limit, you are bypassing the opportunity to add this free money to your tax-deferred retirement funds.

Matching programs may offer dollar-to-dollar matches or percentage matches. According to 2015 data from the Deloitte Annual Defined Contribution Benchmarking Survey, the most common matching amount is a 50% match up to 6% of employee contributions (used by 18% of plan sponsors), followed by a 100% match up to 6% (used by 12%).

Under these programs, if you made $40,000 and contributed 6% of your salary ($2,400) to your retirement plan, your employer would contribute an extra $2,400 under a 100% match and $1,200 under a 50% match.

Unclaimed Money

Now, assume that you only contribute 3% of your $40,000 salary into your 401(k) plan. Your employer would then contribute $1,200 under a 100% match and $600 under a 50% match – and you would leave an equivalent amount on the table, unclaimed.

Failing to take full advantage of an employer-matching program applies a double hit to your retirement funds. Not only are you turning down money that you could have claimed, you are also losing out on the compounding of those funds over time.

The Motley Fool provides an example of an employee making $100,000 per year at an employer offering a 50% match in contributions up to a 5% limit. If you contribute up to the 5% limit, you will be adding $5,000 annually and your employer will kick in another $2,500. Assuming a 7% annual return on your investments, your nest egg will reach $708,000 in thirty years.

Another Scenario

Contrast that with a 3% contribution. You will be contributing $3,000 each year and your employer will be contributing $1,500. You’ve refused an extra $1,000 annually and contributed less to your own retirement.

Using the same growth assumptions as above, your nest egg will be approximately $425,000 in thirty years. That’s a potential drop of $283,000. How would your plans for retirement change with a $283,000 drop in funds?

Does your employer do automatic enrollment on a 401(k) program? Check the program rules. The default contribution level for automatic enrollment is usually different from the matching contribution limit. (Typical automatic enrollment levels are 3% of salary.)

You must request that your employer raise your contribution to the required matching limit – and if you can afford it, there’s nothing wrong with maxing out your 401(k) to the total dollar contribution limit ($18,500 for 2018 with an additional $6,000 catch-up contribution if you are over age fifty).

Okay in the Short Term

In some cases, it may be reasonable for a short time not to contribute to the matching limit of a 401(k) program. If you are paying down excessive debt, especially high-interest debt such as credit cards, the benefits may be worth missing out on an employer match – for a while. Those exceptions are few.

Take full advantage of any 401(k) matching program, at least up to the matching limit. Adjust your budget if necessary to devote the sufficient amount of your pay to the 401(k). When retirement arrives, you’ll be very glad that you did.

Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k). Make sure that your 401(k) is maximizing its potential with this free analysis that checks your fees, fund mix, and other factors to help you hit your retirement goals.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/AnthonyRosenberg

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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What Are The Best 401K Alternatives?

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401k alternatives
More employers are ending 401K benefits for their employees. Saving and planning for retirement can be difficult without a program, like 401K, being set up.

What if your employer doesn’t offer a 401K plan? What are 401K alternatives? Here are a few of the best:

The Best 401K Alternatives

Variable Annuities

A variable annuity is one of the best 401K alternatives. Essentially a variable annuity is a contract between an investor and insurance company. You can purchase a variable annuity by making one payment or multiple payments. The insurance company then agrees to make payments to you (immediately or at a future date and time). If you are looking at a variable annuity as a 401K alternative you would want to postpone payment until retirement.

There are high penalty fees associated with variable annuities. Be sure to clarify the terms of the annuity before investing.

Traditional or Roth IRAs

Another great alternative for a 401K is an IRA or “individual retirement account.” You can get a traditional or Roth IRA. If you’re under the age of 50 you can contribute up to $5,000 per year. Traditional IRAs are tax deductible now, however, you will have to pay taxes on the money when you pull it from the account later (during retirement). A Roth IRA, on the other hand, offers no immediate tax deduction but the money in the account is not taxed when you withdraw it.

Be sure to make sure you can qualify for the IRA before setting one up. You can get an IRA through most banks and investment companies.

SEP IRAs

SEP IRAs (Simplified Employee Pension Individual Retirement Account) are great 401K alternatives if you freelance or own your own business. These types of IRAs are similar to traditional IRAs. You see an immediate tax benefit and it is good for a business of any size (including if you are your own boss).

Just like with traditional and Roth IRAs you will want to be sure you qualify for a SEP IRA before investing. You can check with your bank or financial advisor for more information.

Index Funds

Index funds are another great way to supplement or replace your 401K. It is a type of investment fund that is based on an index of stocks (like S&P). Your investment will reflect the performance of the index.

Prior to investing in index funds you’ll want to do some research and get professional financial advice.

Don’t Like These 401K Alternatives?

If you don’t like the 401K alternatives you can always encourage your company to adopt a 401K plan for its employees. You can also get a 401K through a private company as well. Many companies that offer the 401K alternatives mentioned above also offer 401K plans that you can take advantage of.

No matter how you do it, planning ahead for retirement and trying to obtain a secure financial future is important. A 401K plan or any of these 401K alternatives are great ways to do just that!

Photo: Ron Reiring

FAFSA: What You Need to Know

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What You Need to Know About the FAFSA
Financing a college education can be difficult and it is oftentimes something parents are concerned about for years. However, the Free Application for Federal Student Aid (FAFSA) is designed to make paying for a higher education a little bit easier. The FAFSA takes a look at a family’s total income and determines how much money the child should need to pay for school. While it seems pretty easy, there may be a few things you’re missing out on when it comes to getting the most out of the FAFSA.

Here are a few things you may want to consider when you fill out the FAFSA:

Retirement Accounts

Retirements accounts (IRAs, 401ks) are not considered when you or your child fills out the FAFSA. Actually, during high school and while your children are in college is the best time to stock money away for retirement. The FAFSA only takes capital gains (income) into consideration when deciding how much student aid you can receive.

Different Financial Aid Packages

Sometimes, financial aid packages can vary greatly. It may be the decision between the number one school and the second choice when you see the financial aid reward packages. Even two institutions that are very similar in academic standing may provide you with two completely different packages. When it comes down to it, after filling out the FAFSA, you may have to make a decision based on money and not necessarily preference. You can also use better packages to negotiate terms with other institutions.

Negotiating Aid Packages

This point especially appeals to college athletes. Oftentimes, if you (or your child) receives a financial aid reward package that doesn’t cover everything or doesn’t cover enough, you may be able to negotiate your package. You don’t do this through the FAFSA website though, you would do this through the school itself. To do this, contact the financial aid office at the university that your family is taking a good look at and try and negotiate better financial aid. There’s an art to this, so be sure to put on your stern face when you go in for the meeting.

Savings Accounts

If you have a substantial amount in your savings accounts, you may want to start spending it down. This number (the number of dollars in the account) can significantly impact the amount of money you or your child will receive for student aid. You don’t have to spend it like crazy. Do things like pay down credit cards and other debt, prepaying your mortgage or even make a big purchase (car, new appliance, etc). If you do this at the beginning of the year before you file the FAFSA, it will greatly help the amount of student aid that can be received. The FAFSA generally only awards aid to families with $50,000 or less in assets.

Don’t Lie on Your FAFSA

The FAFSA is a government document so lying on the application can be considered a felony. Lying about any of your income or assets on the FAFSA can be punished to the fullest extent of the law. It is a form of fraud and is punishable with up to $20,000 in fines. You will also forfeit any of the financial aid received and could even receive jail time. Just don’t do it. Be honest about what you have and work with what aid you receive.

Photo: Flickr: Pictures of Money