End-Of-The-Year Plan For Retirement Savings

The end of the year will be here before you know it. For now, there’s still time to make some important deadlines for retirement savings that will also save you money on your taxes next year. Check out these deadlines to find out how much money you can save.

401(k) and IRA contributions

Most people are aware that saving money in their 401(k) and IRA will save them money on their taxes. The deadline for 401(k) contributions to save you money on your 2020 taxes is the end of the year. If you contribute via payroll, you will have to make adjustments as soon as possible because it can take one or two pay periods for those adjustments to be made via payroll withholding. The maximum you can contribute to a 401(k) this year is $19,500 unless you’re 50 or older, and then you can contribute an extra $6,500 in catch-up contributions.

The deadline to contribute to IRAs is April 15, 2021, so there is plenty of time to plan for that. Any contributions up until that date will save you money on your 2020 tax return. However, when you contribute, it’s important to specify that it’s for 2020, or the contribution won’t count until your 2021 tax return.

The Saver’s Credit

A related way to save money on your 2020 tax return is with the Saver’s Credit. Individuals with an adjusted gross income of less than $32,500, heads of household with income less than $48,750, and couples with less than $65,000 in adjusted gross income may qualify for the Saver’s Credit.

The main thing you have to do to qualify for this credit, aside from having income within the guidelines, is contributing to a retirement account. The tax credit amounts to 10%, 20%, or 50% of the amount of the contributions that were made, up to $2,000 for individuals and $4,000 for couples. The percentage of the credit depends on the amount of your income.

The benefit of a tax credit is that it’s an amount that comes directly off your tax liability, rather than a deduction, which reduces the amount of money you are taxed on.

Altered rules for required minimum distributions

If you’re at least 72 years or older, normally, you would have to take the required minimum distributions for your 401(k) or traditional IRA by the end of the year. The penalty for not taking those distributions is usually half of the amount that should have been withdrawn and income tax on the distribution.

However, the CARES Act that was passed in March allows those who don’t need these distributions to skip them this year. Required minimum distributions are taxable income, so if you don’t need the money, you will save money on your taxes by skipping them this year.

Tax-loss harvesting and capital gains

If you know you’re going to have capital gains this year, you might look for ways to offset those gains with realized capital losses, either incurred this year or carried over from a previous tax return. There’s still time to look at your capital gains for this year and prepare to balance them out with your capital losses in time for tax time next year. Even if you aren’t ready to sell any of your investments and lock in losses, you can always buy them back later, especially if the price doesn’t go up.

You should also consider looking at the mutual funds you hold in taxable accounts to see whether they will pay any capital gain distributions this year. In some cases, you might have a loss with a particular mutual fund, but they might still distribute gains because of internal activity. In this situation, you might think about selling the fund, so you don’t receive those distributions, especially in the case of short-term gains.

Rebalance your debt with coronavirus distributions if necessary

This year has also brought the ability to pay for certain expenses with distributions from retirement accounts if those expenses are related to the coronavirus pandemic. It’s almost never a good idea to take distributions from your retirement accounts early, but if you have accumulated a lot of debt this year because you’ve been out of work due to the coronavirus, it might be worthwhile to consider tapping those funds.

You can withdraw up to $100,000 from a 401(k) or IRA to pay for coronavirus-related expenses before the end of the year without having to pay the 10% penalty for early withdrawals. However, this money is still taxable. Emergency withdrawals are allowed for those who have been diagnosed with COVID-19, have a dependent or spouse who tests positive or have financial problems due to quarantines, being laid off, working fewer hours, or not having child care because of the pandemic.

It’s important to think carefully before doing any withdrawals, though, because interest rates on debt are extremely low right now. However, if taking a withdrawal means the difference between losing your house and being able to keep it, then it might be worthwhile to tap your retirement savings. Just remember that whatever you do now will impact your retirement later.

These are just a few of the things you should think about doing as the end of the year approaches. It’s always a good idea to speak with an accountant to make sure you are getting the most savings on your taxes that you can. A financial planner or advisor can also help you maximize your retirement savings as the end of the year approaches.