9 Tips to Maximize Retirement Contributions

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Retirement is one of the biggest, most common and most talked about goals that people have. After all, your retirement savings determine how comfortably you’ll live in retirement and whether your money will outlast you.

It is imperative that you try and maximize retirement contributions right from the very outset of your career. This will help in building a large enough nest egg that will be able to handle inflation and market volatility not to mention growing life expectancy.

Here are our 9 tips to maximize retirement contributions.

1. Start As Early As You Can

No one can deny the power of compounding. The earlier you start saving for retirement the more time you give your money to grow through compounding. For example – if you were to start saving for your retirement at 22 and contributed just the allowed $19,500 towards a 401K every year or $1625 a month until you turn 62. Assuming 10% interest annually, you would end up with $10,276,628 ($10.3 Million) dollars in your nest egg and (wait for this – drumroll please!!) of which $9,496,628 ($9.5 Million) would be earned as interest.

If you give your money enough time to grow even a small amount can make a huge difference. Begin today with as much as you can, and then increase your retirement account contributions as your finances improve. The longer your money has to grow, the bigger your nest egg will be.

2. Contribute Regularly

Set up automatic contributions through your paycheck so that your contributions are taken care of in the background. If you don’t see it you won’t spend it. If you have a 401K or a SEP IRA through your company more likely than not there would be tools to setup automatic contributions.

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3. Maximize Employer Match

If your company offers a match to your retirement contributions make sure you at least contribute up to the match amount to take full advantage of the company match. This is free money that you don’t want to pass up.

Read about 401k limits for 2020.

4. Contribute to an IRA

If you max out your 401K contributions and have the capacity to contribute more towards retirement then by all means do so by contributing to an IRA. There are certain limitations on deductions you can take for an IRA in 2020 if you are already covered by a retirement plan at work. If you are single you can take a full deduction if your salary is $65k or less, partial deduction between $65k-75K and no deduction above $75k. For married filing joint the limits are full deduction below $104k, partial between $104k-$124k and no deduction over $124k.

5. Contribute to a Roth IRA

If you are single and your income is below $124k you can contribute the maximum $6k ($7k for 50 or older) to a Roth IRA. Between income of $124k-139K contributions are reduced and no contributions are allowed if income is above $139k. For married filing jointly the corresponding limits are $196k, $196k-206k and 206k and above.

6. Backdoor IRA to Circumvent Income Limits

Here’s a step-by-step guide on how to make a backdoor Roth IRA conversion:

Put money after-tax in a traditional IRA account

We would recommend opening up a new IRA account just for conversion purposes if you don’t already have one. You can contribute up to $6000 (2020 limit) after-tax into this account.

Convert the account to a Roth IRA

Convert the above account to a Roth IRA account which basically means that you are transferring the contributions made into the Traditional IRA account to a ROTH IRA account. If you don’t already have a Roth IRA account then you can create one during the transfer process. Your IRA administrator will give you the instructions and paperwork.

Be aware of the pro-rata rule

The pro-rata rule: The IRS requires rollovers from traditional IRAs to Roth IRAs to be done pro-rata. Here’s how it works: When determining your tax bill on a conversion from a traditional IRA to a Roth IRA, the IRS is going to look at all of your traditional IRA accounts combined. If all of your traditional IRAs combined consist of let’s say, 70% pre-tax and 30% after-tax, that ratio determines what percentage of the account would convert to a Roth. In this example, no matter how much money you convert or which IRA account you pull the money from, 70% of the amount you convert to the Roth will be taxable. You can’t choose to convert only after-tax money; the IRS won’t allow it. And a word about timing: the IRS applies the pro-rata rule to your total IRA balance at year-end, not at the time of conversion.

7. Take Advantage of Catch-Up Contributions

For those who are at least 50, it’s possible to contribute additional sums to a tax-advantaged retirement account. Being able to put more money into a 401(k) or IRA can make a big difference, especially as you approach retirement. You can make catch-up contributions to your traditional or Roth IRA up to $7000 ($1000 extra) for 2020. For your 401k you can make a catch-up contribution of $6000 if you are 50 or older.

8. Maximize your HSA Contributions

According to a study by Fidelity, the average couple retiring today at age 65 will need close to a whopping $300,000 to cover health care and medical expenses in retirement.

A Health Savings Account, or HSA, is a unique, tax-advantaged account that can be used to pay for current or future healthcare expenses.

If you are enrolled in a high-deductible health insurance plan (HDHP), you can qualify for an HSA. These plans are re-defined each year by the IRS, which determines the minimum deductible they must have and the maximum amount a plan-holder can spend out-of-pocket.

You will be able to set aside a bit for money for future medical expenses in 2020. The new limits for health savings accounts (HSA) for 2020 are going up $50 for individual coverage and $100 for family coverage. The catch-up contribution limit for those over age 55 will remain at $1,000.

Read more about HSA contribution limits for 2020.

Annual contribution limits: For calendar year 2020, the annual limit for HSA savings for an individual with self coverage is $3,550 and for an individual with family coverage it is $7,100.

While its intended to accumulate savings for medical expenses it can actually turn out to be an even better savings account than an IRA or a 401K.

9. Allocate Wisely

It’s important to realize that, due to increased longevity, there’s a high likelihood of keeping a meaningful percentage of your assets in equities even during retirement. We would suggest a dividend portfolio or a growth equity portfolio with an equity mix percentage based on a glide path. That’s, however, a topic for another day.

Maximizing your retirement savings is about viewing your retirement holistically from the beginning. The earlier you start, and the more consistent your planning, the more likely you are to build lasting wealth. Hopefully, our 9 tips for maximizing your retirement savings will give you a head start.

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