It's year-end, and retirement savers of all ages need to
check their to-do lists. Here are some suggestions for current retirees,
near-retirees and younger savers just getting started.
ALREADY RETIRED: TAKE
YOUR DISTRIBUTION
Unfortunately, the “deferred” part of tax-deferred retirement
accounts doesn’t last forever. Required minimum distributions (RMDs) must be
taken from individual retirement accounts (IRAs) starting in the year you turn
70 1/2 and from 401(k)s at the same age, unless you’re still working for the
employer that sponsors the plan.
Fidelity Investments reports that nearly 68 percent of the
company's IRA account holders who needed to take RMDs for tax year 2014 hadn’t
done it as of late October.
Failure to take the correct distribution results in an
onerous 50 percent tax – plus interest – on any required withdrawals you fail
to take.
RMDs must be calculated for each account you own by dividing
the prior Dec. 31 balance with a life expectancy factor (found in IRS
Publication 590). Your account provider may calculate RMDs for you, but the
final responsibility is yours. FINRA, the financial services self-regulatory
agency, offers a calculator, and the IRS has worksheets to help calculate RMDs.
NEAR-RETIRED:
CONSIDER THE ROTH
Vanguard reports that 20 percent of its investors who take
an RMD reinvest the funds in a taxable account - in other words, they didn’t
need the money. If you fall into this category, consider converting some of
your tax-deferred assets to a Roth IRA. No RMDs are required on Roth accounts,
which can be beneficial in managing your tax liability in retirement.
You’ll owe income tax on converted funds in the year of
conversion. That runs against conventional planning wisdom, which calls for
deferring taxes as long as possible. But it’s a strategy that can make sense in
certain situations, says Maria Bruno, senior investment analyst in Vanguard’s
Investment Counseling & Research group.
Bruno suggests a series of partial conversions over time
that don’t bump you into a higher marginal bracket. Also, if you’re not
retired, check to see if your workplace 401(k) plan offers a Roth option, and
consider moving part of your annual contribution there.
YOUNG: START EARLY,
BUMP IT UP ANNUALLY
Getting an early start is the single best thing you can do
for yourself, even if you can’t contribute much right now.
Let the magic of compound returns help you over the years. A
study done by Vanguard a couple years ago found that an investor who starts at
age 25 with a moderate investment allocation and contributes 6 percent of
salary will finish with 34 percent more in her account than the same investor
who starts at 35 - and 64 percent more than an investor who starts at 45.
Try to increase the amount every year. A recent Charles
Schwab survey found that 43 percent of plan participants haven’t increased
their 401(k) contributions in the past two years.
If you’re a mega-saver already, note that the limit on
employee contributions for 401(k) accounts rises to $18,000 next year from $17,500;
the catch-up contribution for people age 50 and over rises to $6,000 from
$5,500. The IRA limit is unchanged at $5,500, and catch-up contributions stay
at $1,000.
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