Tag: Retirement

What’s Different In 2021 About Saving For Retirement

2020 was a challenging year for everyone, but the retirement changes that occurred because of coronavirus legislation did offer some advantages to retirees and retirement savers.

The CARES Act (Coronavirus Aid, Relief and Economic Security Act) was a $2.2 trillion economic stimulus package that sent stimulus checks to many Americans and boosted unemployment benefits. Here’s a summary of the CARES Act “silver lining” for retirees:

Required Minimum Distributions (RMD)

The CARES Act gave retirees a pass on the required minimum distribution, which would normally require them to withdraw money from an IRA and pay income tax on it. The free pass ended in 2020 however, and retirees will have to resume taking their RMDs in 2021.

Retirement Plan Withdraws

Another positive outcome of the CARES Act is it allowed up to $100,000 of retirement account withdrawals with no penalty as long as the person was younger than 59½. It also gave permission to spread out the tax on any retirement plan withdrawals over three years, and replace the money if they wanted to as long as the withdrawal was related to COVID. The early withdrawal penalty is reinstated for 2021, and any income on withdrawals will have to be counted as income unless the person qualifies for the COVID-Related Tax Relief Act (COVIDTRA) of 2020.

Retirement Loan Plans

In 2020, savers could borrow up to $100,000 from their 401(k) accounts without making payments on those loans for 12 months. In 2019 they could only borrow $50,000. This change could continue into 2021 if the retirees qualify for the COVIDTRA.

IRA Limits for Deductible Contributions

There is no change in the amount you can contribute to an IRA in 2021, but the income limits on contributing to a Roth IRA or deducting a traditional IRA are slightly higher.

Social Security COLA

The Social Security Administration instituted a 1.3 percent cost of living adjustment (COLS) for most beneficiaries that took effect January 2021. There is a $20 average monthly increase in Social Security retirement payment this year to $1,543. For a worker at full retirement age, the maximum monthly Social Security benefit is now $3,148, up $137 from 2020. Full retirement age for those people born in 1955 is 66 years and 2 months. That number rises gradually to 67 for anyone born in 1960 or later.

Do you have questions about saving for retirement during a pandemic and beyond? Or are you unsure about how or if last year’s changes in legislation affect your personal retirement plans? You can trust experienced accounting professionals like Donohoo Accounting Services to answer your questions. We’ve been assisting individuals and businesses with their tax preparation and retirement planning for more than two decades, and we would be happy to help you, too. If you are interested in learning more or scheduling a retirement savings consultation, please call 513-528-3982. For more tips and our latest updates, check us out on Facebook, Twitter or LinkedIn!

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Four Smart Tips for Building Retirement Savings

Tips for Building Retirement Savings

Saving for retirement is one of those topics many people shy away from. Do any of these reasons/excuses sound familiar? “It seems so far away … It’s overwhelming to think about … I don’t make enough money to save … I’m too young … I’m too old.”

Despite the length of your countdown to retirement, there is always time to add to your savings. After all, more is better, right? To capitalize on the time you have left before retiring, consider these four tips to enlarge your nest egg, decrease some of your worries about retirement income and perhaps even improve the quality of your life during retirement.

Set a Goal

Like any other life event that requires saving money, you need to know how much you’ll need. In other words, establish a goal. Investment advisors, friends, relatives, and even some websites will offer their advice on setting your retirement savings goal. However, only you know what kind of lifestyle you would like to maintain in retirement. And living a particular lifestyle requires an individualized budget. For example, those who wish to travel in retirement will require more savings compared to those who plan to grow backyard gardens and spend time with grandchildren. Whatever you choose, begin with the end in mind and set a realistic goal based on your individual retirement needs.

Start Saving Soon

The earlier you can begin saving, the better off you’ll be now and when it’s time to retire. The reason is that by starting early (age 18 -22), you can save a smaller amount of money each month over a longer period of time as compared to someone starting later (say, in their 40s) who has fewer years before retiring. There are plenty of examples of people beginning their retirement savings as early as age 14 while working their first job. To keep the savings hill from becoming too steep, begin as early as possible – today if possible!

Find the Money

For those wondering where to find the money to save for retirement, look around you! If you currently work for a large or mid-sized company and you’re not already participating in your employer’s 401k or other retirement savings plan, sign up right away. Many employers offer matching contributions, which is free retirement money. Additionally, consider automatically depositing 10 percent of your pay – or even better, 15 percent – each payday to a retirement savings account. Other sources for filling your retirement coffers include your annual tax refunds and money earned from a second job. Some companies now offer part-time employees ways to save for retirement including IRAs, money market accounts and stock purchase plans. So, consider a second job to build up your retirement savings.

Just Do It

With a goal, timeline and funding sources lined up, you can begin paving the way to retirement with more savings than you had at the start. Nevertheless, remember that wise counsel from experienced professionals can help uncover possible bumps in your road to retirement. If you could use some assistance mapping out your retirement savings plan, an excellent resource is an experienced accountant like those at Donohoo Accounting. Schedule your retirement savings consultation with Donohoo by calling 513-528-3982 or email us today.

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Tax Planning for Major Life Transitions

When Benjamin Franklin famously wrote about the certainty of death and taxes, he may not have realized that that these two aspects of American life would later become important elements of financial planning.

Estate and tax planning are not the most enjoyable topics of conversation. However, they are essential in terms of anticipating certain situations that could become costly. Estate planning is related to the efficiently managing money for individuals who are approaching retirement and want a smart way to distribute their assets to loved ones when they pass away. Tax planning involves various methods to reduce tax burdens, particularly in relation to major life events like marriage, divorce, childbirth and going to college.

Many taxpayers are not aware of the potential deductions, deferments and credits that they can take advantage of at certain points in their lives. Here are some examples:

 

Walking Down the Aisle

Most couples believe that getting married means a lower tax liability, and this is true to a certain extent. However, couples who earn incomes that are higher than the national average may end up paying more taxes when their status is “married filing jointly” than other couples who could actually benefit if they file separately. There may be other reasons when filing separately makes sense, such as when one spouse faces tax or child support arrears.

 

Childbirth

The joy of welcoming a baby into the family is shared by the IRS in the form of certain tax deductions and credits. Unfortunately, many taxpayers who are not aware of these benefits forego claiming them.

 

Going to College

Taxpayers who seek higher education are rewarded by the IRS in the form of educational tax credits, as well as tax-free investment and savings accounts. There are certain income limitations that may preclude educational tax credits, and thus it makes sense to conduct tax planning in advance.

 

Dissolution of Marriage

Aside from the obvious change in filing status, getting divorced may bring about certain tax implications related to child support payments and alimony. Individuals who retain child custody could face greater economic burdens even as they receive financial support from their former spouses. For this reason, it is important to investigate potential tax liabilities before the divorce decree is entered.

 

Retirement

When American taxpayers retire, holding on to every income dollar becomes a serious economic priority. Personal savings, retirement accounts and Social Security income can be taxed under certain circumstances. Even moving to a more affordable Latin American or Caribbean nation for retirement does not leave U.S. taxpayers off the hook. The best way to approach retirement taxation is to start planning now.

In the end, tax planning is something that more people should look into before any of the aforementioned events take place. If you would like to learn more about how tax planning can help you save money and take greater advantage of available tax credits, contact the tax professionals at Donohoo Accounting Services in Cincinnati by calling 513-528-3982.

Using Retirement Plan Contributions to Reduce Your AGI

AGI stands for adjusted gross income. This number sets the threshold for certain deductions such as medical expenses. It also determines eligibility for tax credits like the retirement savings credit and American opportunity credit. As its name implies, AGI is something that can change based on certain factors. That’s why we want to cover the effect that contributing to your IRA can have on it, along with another aspect of a retirement plan contribution that can reduce tax liability.

 

How Traditional IRA Contributions Adjust Income

When you make a contribution to a traditional IRA, it receives classification as an adjustment to income. The impact this will have on adjusted gross income is reducing it on a dollar-for-dollar basis. So if you make a fully qualified contribution of $3,000, that’s the exact amount your AGI will be reduced.

While that’s the basic overview of how this type of contribution affects AGI, as with many aspects of the tax code, there are some important considerations to take into account. One is how much of a traditional IRA contribution is deductible. For an unmarried individual who isn’t covered by an employer plan like a 401(k), the amount contributed will be fully deductible.

For people who are married, this type of contribution is only guaranteed to be deductible when neither spouse is part of an employer-sponsored retirement plan. If that criteria is met, contributions made will reduce adjusted gross income. It’s worth noting that while contributing to a Roth IRA can be a smart financial decision, this specific contribution won’t reduce AGI due to it involving after-tax dollars.

 

other Important Notes About Contributions and Retirement Plans

Even for people who are single, if they are covered by an employer plan and their AGI exceeds a certain threshold, their traditional IRA contribution won’t be deducted. Another thing to keep in mind about both traditional and Roth IRA contributions is they can qualify you for the retirement savings credit. If you’re eligible for this credit and claim it, you’ll be able to directly reduce your tax liability.

What’s interesting about the retirement savings credit is even though it lowers tax liability, it does not reduce AGI. That’s because it’s classified as a credit and not a deduction. The main criteria for claiming this credit are being over 18, having a modified AGI that falls below a specified level and not being a full-time student.

As this issue demonstrates, optimizing your tax situation can be quite a challenge. If this is something you want to do but are feeling overwhelmed by the number of questions you have, the best way to get answers and guidance is by enlisting the help of our professional tax services.