Some folks have been tapping or suspending their retirement savings to make ends meet during this COVID-19 pandemic, and although understandable, it is important that they continue making contributions to their savings as quickly as financially possible.
Still other people have simply been ignoring the need to save for their retirement, which can have an unpleasant result when it comes time to retire. That tends to be the case with younger individuals who perceive retirement to be far in the future and therefore believe they have plenty of time to save for it. Some will postpone the issue until late in life and then must scramble during their last few working years to fund their retirement. Other people ignore the issue altogether, thinking their Social Security income (assuming they qualify for it) will take care of their retirement needs.
By current government standards, a single individual with $12,490 or a married couple with $16,910 of annual household income is at the 100% poverty level. If you compare those levels with potential Social Security benefits, you may find that expecting to retire with solely Social Security income may result in a bleak retirement.
You can predict your future Social Security income by visiting the Social Security Administration’s Retirement Estimator. With the Retirement Estimator, you can plug in some basic information to get an instant, personalized estimate of your future benefits. Different life choices can alter the course of your future, so try out different scenarios – such as higher and lower future earnings amounts and various retirement dates – to get a good idea of how these scenarios can change your future benefit amounts. Once you’ve done this, consider what your retirement would be like with only Social Security income.
If you are fortunate enough to have an employer-, union-, or government-funded retirement plan, determine how much you can expect to receive when you retire. Add that amount to any Social Security benefits you are entitled to and then consider what retirement would be like with that combined income. If this result portrays an ideal retirement, know that you will be better off the sooner you start saving for retirement.
With today’s low interest rates and up-and-down stock market, it is much more difficult to grow a retirement plan with earnings than it was 10 or 20 years ago. With current interest rates not even, or just barely, covering inflation rates, there is little or no effective growth. That means one must set aside more of one’s current earnings to prepare for a comfortable retirement.
Because the government wants you to save and prepare for your own retirement, tax laws offer a variety of tax incentives for retirement savings plans, both for wage earners and for self-employed individuals and their employees. These plans includethe following:
Multiple Plan Limitations – If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. This is where some overall limitations apply and where individuals can unknowingly make excess contributions, resulting in penalties and requirements to make corrective distributions.
However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations
Saver’s Credit – To help lower-income taxpayers save for retirement, Congress several years ago included a provision in the tax law that allows a 10%, 20%, or 50% tax credit on up to $2,000 of retirement plan and IRA contributions per year. The percentage of the credit depends on the taxpayer’s filing status and income (when the income is lower, the percentage is higher). For 2020, the maximum AGI at which a credit can be claimed is $64,000 for taxpayers filing a joint return, $48,000 for head-of-household filers, and $32,000 for all other filing statuses. For example, a single individual with an income of $30,000, who made an IRA contribution of $2,000 in 2020, would be eligible for a Saver’s Credit of $400 ($2,000 x 20%). Thus, their $2,000 IRA contribution would actually cost them only $1,600.
Qualified 2020 Distributions – For 2020, the Congress did provide relief from the early 10% distribution penalty on up to $100,000 for distributions from IRAs and qualified retirement plans. Individuals who qualify for these distributions include the following:
If you were eligible and took a distribution, you can either include the income all in 2020 or include one-third in each of the years 2020, 2021, and 2022. You also have the option to return the distribution to your retirement plan or IRA and restore your retirement savings. The recontribution would need to be made within three years of the date of the distribution. You don’t have to return all of the distribution, but what you can return will certainly help your retirement savings. Plus, the IRS will refund the taxes you paid on the amount you returned to your retirement plan.
Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are exemplary events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.
If you have questions about any of the retirement vehicles discussed above, please call Heintzelman Accounting Services at (616) 957- 2055.