The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

Why Retirement and Year-End Tax Planning Should Be Done Simultaneously

By JOHN BLAKE, CPA

December 23, 2019

A thorough year-end tax plan should always address retirement because retirement contributions and distributions can significantly impact your tax return. This year, reviewing your retirement plan is especially important in light of the passage of the SECURE Act. The changes in this landmark retirement plan bill may require you to shift your strategy to accommodate or take advantage of the new laws. We can help walk you through the tax-planning process so you are prepared for what the New Year will bring.

About the SECURE Act 
The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, passed the House with flying colors this summer but was stalled in the Senate for months. The SECURE Act was tacked onto Congress’s new spending package that passed and was signed into law by the President on December 20, 2019. Most of the SECURE Act’s changes will go into effect on January 1, 2020. The SECURE Act will impact retirement planning for millions of Americans. Here are a few things that will change:

  • Small employers will have better access to 401(k) plans thanks to lower start-up fees and reduced fiduciary responsibilities.
  • Retirees will be able to delay required minimum distributions (RMDs) from their retirement accounts until age 72, up from age 70 ½
  • Active employees will be able to contribute to their ROTH and traditional IRAs for as long as they remain employed, even past age 70 ½.
  • Employers providing 401(k) benefits to their employees will be able to offer in-plan annuities, which they are currently unable to do.
  • Beneficiaries of large inherited IRAs will no longer be able to spread those distributions over their life expectancy. To avoid taxes, inherited IRAs must be drawn down over 10 years.
  • Defined contribution plans like a 401(k) will be required to submit a report to each participant detailing the income their plan balance could generate over their lifetime.
  • Up to $5,000 will be able to be withdrawn early from a retirement account penalty-free if funds are used to support a birth or adoption.
  • There will be a new $500 tax credit for small employers who institute automatic enrollment into their retirement plan.

Come January, you may have new retirement plan options available to you, so talk to your tax advisor to determine your next steps.

Other Retirement Plan Considerations
The SECURE Act should be an essential part of year-end discussions. If it doesn’t, there will be plenty of other retirement plan strategies for you to discuss with your tax advisor.

Converting a 401(k) (or a Traditional IRA) to a ROTH IRA
ROTH IRA conversions are common, but almost all will come with a tax bill. The amount you convert from pre-tax accounts like traditional IRAs or 401(k)s will be taxed as ordinary income. This bump in income may push you into a higher tax bracket, prevent you from taking certain deductions, or disqualify you from tax credits. Even with these potential downsides, you may benefit from converting to a ROTH if one or more of these statements are true:

  • You have the cash to pay the additional tax bill.
  • You expect to be in a higher tax bracket in retirement than you are currently.
  • You are moving to a state that has a higher income tax rate.

It’s not a simple decision to make, and you must rely on assumptions and estimates, so talk it through with your advisor before moving forward.

Maxing Out Your 401(k)
In 2019, you can contribute up to $19,000 to your 401(k), or $25,000 if you’re 50 years or older. Maxing out your contributions may be a good idea if you failed to contribute adequately in the past and are making up for the lost time. We always recommend you contribute enough to qualify for your employer’s full match, but contributions beyond that may not serve you. You may benefit more by adding to your HSA, purchasing long-term care insurance, or paying off debt. If necessities are covered, and you still have extra cash, maxing out your 401(k) isn’t your only savings option. If your employer’s investment options are limited, you may get a better return by investing in an outside retirement plan like an IRA, where you have better control over the investments.

Contributing Your Required Minimum Distributions to Charity
If you are retired and pulling from your 401(k), SEP, or SIMPLE IRA, consider directing some of your distributions to charity. These contributions can count toward your minimum distribution retirements, and the income will be non-reportable to you, thus lowering your taxable income and taxes owed. Charitable distributions can be a great tool to get you to just the right taxable income value to optimize your return.

Taking Social Security Early or Late
Collecting social security before you need to will reduce your benefits in the long run. If you begin collecting at age 62, the minimum age permitted to take social security, you will permanently reduce your monthly payments. Conversely, if you start receiving benefits after the retirement age of 65, you will accrue additional benefits each month. The Social Security Administration has a calculator that can help determine your payments at any age. If your income is high enough, 85% of your social security payments will be taxable, so be prepared for the additional tax bill when you do begin collecting.

The decisions you make about retirement will impact your current year tax return and your future tax position. If you want to discuss your retirement plan, especially in light of the SECURE Act, Klatzkin can help. For additional information, call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.

About the Author

John focuses on helping with the tax needs of real estate, technology and manufacturing, distribution, and wholesale companies. He works with management and business owners to review their business plan, tax planning process, identify additional saving opportunities, and ensure compliance and reporting deadlines are met. Also, John helps educate clients about the new opportunities available...

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