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Why you should boost your 401(k) contribution rate between now and year end

Posted by Ryan Posted on Sept 23 2017




One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step. 

If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement. 

Traditional 401(k)

A traditional 401(k) offers many benefits:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax. 
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions. 
  • Your employer may match some or all of your contributions pretax. 

For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld.

If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding. 

Roth 401(k)

Employers can include a Roth option in their 401(k) plans. If your plan offers this, you can designate some or all of your contribution as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free. 

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. On the other hand, if you expect your tax rate to be lower in retirement, you may be better off sticking with traditional 401(k) contributions.

Finally, keep in mind that any employer matches to Roth 401(k) contributions will be pretax and go into your traditional 401(k) account.

How much and which type

Have questions about how much to contribute or the best mix between traditional and Roth contributions? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.

© 2017

Are your retirement savings secure from creditors?

Posted by Ryan Posted on June 05 2017




A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family. 
If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection.

Employer plans

Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans. 

IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy.

IRAs

The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million. 

The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy.

To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected. 

Outside bankruptcy, the protection afforded an IRA depends on state law. 

What about inherited IRAs?

In 2014, the U.S. Supreme Court held that inherited IRAs don’t qualify as retirement accounts under bankruptcy law. The Court reasoned that money in an IRA retirement account was set aside “at some prior date by an entirely different person.” But after an inheritance, it no longer bears the legal characteristics of retirement funds because the heir can withdraw funds at any time without a tax penalty and take other steps not required with noninherited IRAs. Therefore, they’re not protected in bankruptcy. (Clark v. Rameker)

Consult with your attorney about protection for retirement accounts in a nonbankruptcy context.

Protect yourself

If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.

© 2017

 

Few changes to retirement plan contribution limits for 2017

Posted by Ryan Posted on Dec 28 2016

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Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.

Type of limit
2017 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
$18,000
Contributions to defined contribution plans
$54,000
Contributions to SIMPLEs
$12,500
Contributions to IRAs
$5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
$6,000
Catch-up contributions to SIMPLEs
$3,000
Catch-up contributions to IRAs
$1,000

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.

© 2016

Workers age 50 and up: Boost retirement savings before year end with catch-up contributions

Posted by Ryan Posted on Dec 20 2016

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Whether you didn’t save as much for retirement as you would have wished earlier in your career or you’d simply like to make the most of tax-advantaged savings opportunities, if you’ll be age 50 or older on December 31, consider making “catch-up” contributions to your employer-sponsored retirement plan by that date. These are additional contributions beyond the regular annual limits that can be made to certain retirement accounts.

401(k)s and SIMPLEs

Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

Self-employed plans

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution.

Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2016 tax liability. And keep in mind that catch-up contributions are available for IRAs, too, but the deadline for 2016 contributions is later: April 18, 2017. If you have questions about catch-up contributions or other retirement saving strategies, please contact us.

© 2016

Roth 401(k) conversions may suit your Millennial employees

Posted by Ryan Posted on Dec 01 2016

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Could your company’s benefits package use a bit of an upgrade? If so, one idea to consider is adding an option for employees to convert their regular 401(k)s to Roth 401(k)s.

Under a Roth 401(k), participants make after-tax contributions to a qualified plan and receive tax-free distributions, provided the funds are in the plan for at least five years from the date of the initial Roth contribution. Thus, while participants pay a tax on the income that was the source of the contribution, the earnings on the contributions are tax-free.

Penalties to consider

The ability to convert existing pretax balances within a 401(k) to Roth status was expanded by the American Taxpayer Relief Act of 2012. It’s generally easier for participants to start making after-tax contributions to Roth accounts within their 401(k) plans than it is to convert a significant existing pretax amount to the plan’s Roth component.

Why? Because, as with an IRA conversion, a Roth 401(k) conversion triggers tax liability that participants must pay on the conversion. If they need to raise the cash from retirement funds and they’re younger than age 59½, they get to keep only 90% of the amount after the 10% premature withdrawal penalty, less whatever amount regular income taxes take.

Millennial matters

The initial financial hit of a Roth 401(k) conversion might appear to be a deal-breaker. Yet more and more plan sponsors are offering the option. One possible explanation for this is the rising number of working Millennials (roughly defined as those born between the 1980s and 2000s).

Converting to a Roth 401(k) makes sense for these younger participants because they have a longer period to build tax-free earnings on their contributions — despite the initial penalty. They’re also less likely to face the prospect of a big tax hit by converting an existing pretax 401(k) plan balance to a Roth account, because their existing balances are generally lower.

An intriguing option

Giving employees the opportunity to participate in a Roth 401(k) plan may help them hedge their bets about the income tax environment they’ll face in retirement. And, as Millennials continue to hit the job market, you might draw better candidates when hiring. Please contact our firm for more information.

© 2016