By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
Now that we’ve had a chance to ring in the beginning of a new year, and new decade, many are starting to turn their attention to important new year resolutions, such as focusing on approaches for managing your money more responsibly and effectively. Although this may sound simplistic, for many, the ability to commit to a disciplined savings plan can be a challenge requiring both commitment and a clear strategy.
And for those who are beginning to think about retirement, it’s important to remember that the decisions you make today could have a significant impact on your financial security as you near and transition into retirement. As it becomes increasingly apparent that relying on Social Security alone for a secure retirement could be problematic, it becomes imperative to create a sound savings and investment strategy that ‘pays you first’ and prioritizes your financial future. Look for opportunities to make subtle changes such as creating (or sticking to) a budget or finding ways to reduce expenses (i.e. such as eating out less frequently, etc.), and using that extra money to increase your savings rate.
Individuals fortunate enough to have access to an employer-sponsored retirement plan (i.e. 401k, 403b, SIMPLE, etc.) can participate in a great savings tool as money automatically comes out of their paycheck through pretax (or possibly Roth) deferrals before they have a chance to miss it. And as an added incentive, many retirement plans offer to match a percentage of your contributions, increasing your overall savings rate. To help maximize your savings rate with employer-sponsored retirement plans, make sure that your pretax salary deferrals are at a level that fully takes advantage of any employer matching contributions.
Due to cost of living adjustments, many contribution limits for retirement accounts received a boost in 2020. Employee deferral limits for 401k, 403(b) and some 457 plans increased from $19,000 in 2019 to $19,500 in 2020, while catch-up contributions for these plans (for participants age 50 and over) increased from $6,000 in 2019 to $6,500 in 2020. Employee deferrals for SIMPLE plans increased from $13,000 in 2019 to $13,500 in 2020; but the SIMPLE plan catch-up remains at $3,000. And although IRA contribution limits did not receive cost of living increases for 2020, the recently enacted Secure Act delivered some good news for retirement savers by permitting individuals over the age of 70 ½ to contribute to and possibly receive a tax deduction for a traditional IRA (if the individual or his/her spouse has earned income).
Taking full advantage of an employer sponsored retirement plan that allows you to defer income, or regularly contributing to an IRA, can put your savings on auto-pilot and help execute on a ‘pay yourself first’ strategy. Please consult with your tax advisor before implementing any retirement savings strategy to fully understand the ramifications to your personal tax situation.