The calendar year is almost over, and if you’re saving for retirement with an IRA, there are several smart moves you can make before the end of 2019.
Contribute the maximum amount
For the first time since 2013, the cap on the annual contribution to a traditional IRA has been increased $500 to a maximum of $6,000 for contributors younger than 50. Those age 50 and older are allowed to contribute an additional $1,000 as a “catch up,” bringing their total allowable IRA contribution to $7,000.
To contribute to an IRA, you must have earned income from work, and you cannot contribute more to an IRA than you earned. IRA contributions in 2019 are tax-deductible, and if you or your spouse do not have a 401(k) or other work retirement account, you can deduct your entire 2019 IRA contribution on your tax return. Make your 2019 contribution before the next tax filing deadline passes on April 15, 2020.
If required, take your minimum distribution
If you are age 70 ½ or older, you typically are required to take a minimum distribution, or RMD, from your IRA. Figuring out the amount of your RMD, however, can be difficult, and it’s best to go over your retirement account with a financial expert before taking any distributions (errors can be expensive). The amount of your distribution depends on your life expectancy and how much your IRA is worth – the IRS calculates it by dividing your IRA balance on the last day of 2018 by your life expectancy or the applicable distribution period.
You’ll be penalized 50 percent if you miss your RMD, a significant penalty for a retirement account. If you don’t need the money from an RMD but have to take it, you can donate the disbursement to a charitable cause through a qualified charitable distribution (QCD). In this case, the donation will go straight from your IRA to a qualified charity of your choice, and it will not be counted as personal income. QCDs are limited to $100,000 each year.
Review your assets
December is a great time for a year-end review of your investment policy statement (IPS). This document lays out how much of your money should be in cash, bonds, and stock, and when each category will rebalance. At the end of the year, you can evaluate whether your investments match the allocations on your IPS. If they don’t, which is likely, you may want to rebalance your account.
Financial experts recommend creating an IPS before the end of the year if you don’t have one. While it’s ideal to create your IPS in a calm market, if that’s not possible, make one right away, no matter the market conditions.
Avoid taxes on distributions
One significant downside of a traditional IRA is that distributions can be taxed and converting to a Roth account can eliminate some of these potential losses. Also, investors who donate their RMD to a qualifying charity or use the disbursement to buy a qualifying longevity annuity contract also can avoid disbursement taxes.
Converting to a Roth IRA may be an especially wise choice in years when your taxable income is low. The taxes you pay in a slow year will set a baseline for you to make good choices when your taxes could be higher. Investors between ages 59 ½ and 70 ½ likely won’t benefit from a Roth IRA conversion, however, as they aren’t required to take RMDs.
If you inherited a traditional IRA in 2019, you must take the RMD by the end of 2019 and pay the taxes on it – even if you are younger than 70 ½.
Don’t overdo it
While saving for retirement is generally encouraged, can you contribute too much to an IRA? Yes, and there are consequences. For example, if your income is better than usual for one year, and you make a large contribution to your IRA, you may have to pay a 6 percent penalty on your extra contributions until you fix the error. If you have over-contributed, there are remedies:
- Withdraw the excess contributions before April 15, 2020.
- If your tax return already is on its way to the IRS, you can remove the extra contribution and send in an amended tax return by the deadline in October.
- If you apply the extra contribution amount to 2020, you will still have to pay the 6 percent penalty on it for 2019, but you’ll get a “head start” on next year’s contribution.
While these are fixes, the best approach is to not make excess contributions at all.
Looking forward, IRA contribution rules will not change in 2020 – the maximums will remain at $6,000 and $7,000, depending on your age, for combined contributions to Roth and traditional IRAs. The window for 2020 contributions begins Jan. 1 and ends April 15, 2021.