It’s hard to believe that we are at the start of a new year again. Last year the financial markets had its share of challenges. Hopefully, this year will be better in the stock and bond markets for everyone. For people living on social security and government pensions, there is a substantial cost of living increase in your monthly income for this year. For social security the increase is 8.7% and for the government people on CSRS and their COLA will also be 8.7%.
For people on FERS, their COLA increase will be 7.7% this year. That is a significant increase, one of the benefits of higher inflation.
The amount that you can put away in a 401K is also going up substantially this year. You can put away up to $22,500 this year if you are under age 50. If you are over age 50 you can contribute an additional $7,500 for a total amount of $30,000 plus any matching contributions. If you can afford to put the maximum amount into a 401K plan that will help get you closer to funding your retirement.
If you want to fund an IRA, you can put away up to $6500 this year. If you are over age 50 you can put in an additional $1,000 for a total of $7500 this year. This amount is for all eligible IRAscombined. That includes, pretax IRA, Roth IRA’s and nondeductible IRAs.
Health Savings Accounts increased their maximum for this year to $3,850 for individuals and $7,750 for families. If you are over age 55 you can contribute an extra $1,000 for individuals and $1,000 for families. The maximum out of pocket amounts for qualified HSA eligible plans is $7500 for individuals and $15,000 for families.
The amount that you can gift without filing a gift tax return is $17,000 per recipient. That’s up from $16,000 per recipient last year. For a married couple you can give $34,000 combined per person.
With these limits increasing, the first thing to do is to put away as much as possible in your retirement plan at work or a Roth, an after-tax option. You should discuss this with your tax advisor and your financial advisor and see what is in your long-term best interest. It could be that using a Roth option is better if you don’t need the tax deferral this year; you want to have tax free funds available in retirement; and you won’t be forced to take required minimum distributions from a Roth (pre-tax plans require minimum distributions from once you turn 72 years old). As we speak there is a proposal to change the minimum age to 75. We shall see if that gets any traction in Congress.
The key is to build up as much as possible for future use without hurting your current cash flow and not having any impact on your current lifestyle. The more funds that you can build up the more income potential you will have in retirement. One of the things to look at is to set up a strategy on how to pull funds out of your retirement plan and not pay a fortune in income taxes.If most of your IRA and 401K funds are pretax, you will pay taxes on everything that comes out of these plans as you withdraw the funds. If you die with these plans, your heirs other than a spouse and certain other exempt people, will have to pull the funds out within 10 years of your passing, usually a required minimum amount each year. You should discuss options with your tax and financial advisors to see what the best option for you is to minimize tax and maximize return on your retirement plans. If you want a second opinion on how to possibly maximize your assets for yourself and for your heirs, feel free to email me at marcs@equityplanning.com and I would be happy to look over your plans and help develop a plan for what is best for your retirement strategy. Until next time, Happy New Year!!
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