December is a time for reflection and to plan for the year ahead. It’s also a good time to evaluate your retirement savings and ensure you’re getting the most out of your investments.
If you participate in a traditional 401(k), IRA, or another qualified plan and haven’t met the maximum contribution limits established by the IRS, the end of the year is a good time to make a last-minute contribution.
Shahar Plinner, CEO and senior tax and business consultant for Kirkland-based GPL Tax & Accounting, encourages his clients to get as close to the maximum contribution as possible, which is $18,000 for a 401(k) for individuals under 50 and $24,000 for individuals 50 or older. “Our agenda is always to participate as close to the $18,000 as possible, regardless if the employer is matching or not,” Plinner said. “If the employer is matching half, it’s still better to participate in full, because every dollar that you set aside — even without the match — saves you the tax today.”
Because 401(k) and IRA contributions are made with pre-tax dollars, you don’t pay tax on the funds until you are ready to pull them out during retirement. Furthermore, the pre-tax funds you invest in a given year also are deducted from your earnings for that same year, which — depending how much you contribute — can provide huge tax savings when you go to file your taxes in April.
“If you make $50,000 a year and you put $10,000 as a traditional contribution, you’re putting in pre-tax money,” explained Gary Russell, co-founder of Bellevue-based Helium Advisors. “So, from the IRS’ perspective, you didn’t make $50,000 that year, you made $40,000.”
At the end of the year, if you find that you have some additional cash you’d like to add to your 401(k), Russell said it’s important to talk to your employer about increasing your contribution limit. Because every company has its own payroll structure, it is important that you communicate with your employer early to find out when you can make changes to your plan.
“Employees can basically do an acceleration of their contribution in the last pay stub and ask the employer to take more of their pay stub toward the (retirement plan) to get as close as possible to the (limit),” Plinner said.
Those who contribute to a traditional IRA have until the filing deadline in April to make their final contribution. But — just as with a 401(k) — Plinner recommends examining those contributions with a tax specialist or financial advisor in advance of the deadline.
High-wage earners, business owners, and self-employed individuals with multiple or larger retirement investments should consult with a tax specialist, financial advisor, and actuary — what Plinner calls the “dream team” — to maximize investments and identify potential tax savings.
Another end-of-year consideration for older individuals is Required Minimum Distribution, or the minimum amount required by the IRS that an individual must withdraw from a traditional, qualified plan annually, beginning at age 70.5. In the year that you turn 70.5, you have until April to withdraw the Required Minimum Distribution. Each year following, however, the Required Minimum Distribution must be withdrawn by Dec. 31. The amount an individual must withdraw in a given year is calculated based on the age of the account holder and the value of the account. Failure to withdraw the Required Minimum Distribution by the deadline results in a fine equal to 50 percent of the Required Minimum Distribution for that year.
Plinner and Russell also recommend using December to do things like adjusting allowances on your W-4 to prevent huge refunds, and consider the benefits of a backdoor IRA account, also known as a post-tax Roth.
“Life’s all about balance and understanding the long-term effect of putting something off for something much more later,” Russell said. “As long as you know what your options are and what you’re giving up later for what you’re spending now, then at least you’re more informed than most people.”
Dec. 31, 2017
Under 50: $18,000
50 and older: $24,000
April 17, 2018
Under 50: $5,500
50 and older: $6,500
Required Minimum DistributionWithdrawal deadline:
Dec. 31, 2017
Note: Individuals who turn 70.5 within the tax year have until the tax filing deadline of April 17, 2018.