With the year coming to an end, we want provide insight that may be useful to either you, your family members and friends for 2020 retirement and financial planning.
If you’re still employed, a great place to start your planning is with your employer benefits. Reassessing your retirement programs for 2020 makes perfect sense. Many universities offer three types of tax-sheltered programs – 403(b) Traditional, 403(b) Roth and a 457 Deferred Compensation program.
The 403(b) Traditional program is a supplemental tax shelter that allows you to shelter a portion of your gross pay reducing both Federal and State taxes. The Roth 403(b) is also available as a payroll deduction and there is no income limit in order to participate when it’s done through your employer’s plan. This is key as many individuals can’t make Roth IRA contributions due to income limits. You may split your contributions between both the traditional 403(b) which is tax-deductible and the Roth 403(b) which is not tax-deductible, but rather you avoid paying taxes on the growth. Roth’s can also be used for estate planning purposes with tax-favored treatment for beneficiaries. The 457 deferred compensation program is similar to the 403(b) in that it’s a tax-deductible program and allows for additional tax sheltering above and beyond what you put into the 403(b).
The amounts that you may contribute to these programs for 2020 is $19,500 for those under 50 years of age and $26,000 for individuals over age 50 by utilizing a catch-up provision of $6,500. A strategy that we often suggest for our clients who wish to maximize their overall contribution limits is to contribute the maximum amount into the deferred compensation 457 program which is fully deductible and tax-deferred and use the 403(b) Roth for tax-free growth. If you cannot afford to contribute the maximum amount in both programs, then you can split your contributions between the 403(b) traditional and 403(b) Roth. The overall maximum contributions to these programs annually is either $39,000($19,5000 for the 403(b), $19,500 for the 457 Deferred Compensation) for individuals under age 50 or $52,000 for those over age 50(a catch-up option in the amount of $6,500 for the 403(b) and 457 Deferred Compensation program).
Another investment strategy we recommend depending on your circumstance is to consolidate your outside IRA accounts back into your employer 403(b). Many individuals did not know they can do this. However, it’s important to understand the differences between your IRA and your 403(b) – namely your investment options. However, we have found that some of our new clients have IRA’s scattered about with different financial firms without regard to their overall risk profile or whether they are providing the diversity that one should seek in their retirement accounts. If you plan to work beyond age 70 ½, pushing your IRA accounts back into your employer 403(b) will avoid the requirement of taking an RMD.
There are some social security benefit planning strategies one may want to utilize if you or your spouse have decided to take social security at your full social security age. If you were born before 1954 and your spouse is taking their social security benefit, you may take ½ of your spouse’s benefit and defer taking your social security allowing it to increase by 8% annually until age 70. This increase of 8% doesn’t start until you reach your full social security benefit age.
Lastly, many of our clients who have retired have lost the ability to itemize their deductions due to the increase in the standard deduction and decrease in some of the tax deductions still would like to continue to make a charitable donation. If you are subject to the Required Minimum Distribution because you are age 70 ½, you may redirect your RMD to your favorite charities and this allows you to avoid paying taxes on the RMD amount up to $100,000. This is a great way to maintain the tax preference on charitable donations.
We welcome you to contact The Legacy Foundation to learn more about how you can take advantage of these strategies and other important financial considerations.
We want to extend our well wishes for a safe and wonderful holiday season along with good health and much happiness for the new year!
Investment Advice offered through Private Advisor Group, LLC, a Registered Investment Advisor.
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