For people over the age of 50, reaching this milestone has one advantage that is often overlooked. It is a tax incentive plan that suits you. Now you can put more into your retirement plans than when you were younger. For example, Roth or a traditional personal annuity account (IRA), will allow you to invest more. Also, your Health Savings Account (HSA) or your employer-provided plan would be on this list as well. And you can exclude other income from your tax calculation. Congress has included some of these provisions in the Economic Growth and Tax Relief Settlement Act. This act came into effect in 2002. The reason it passed congress was because of concerns that the baby boomers were not saving enough for retirement.
Congress has added other tax-saving provisions, such as larger standard deductions as well. For example, the 2017 Tax Reduction and Employment Act will allow you to catch up on savings. If you’re behind on your retirement saving, this plan allows you to add money to it. In addition, if you’re nearing or in retirement, the tax legislation permits you to pay somewhat lower taxes. You should not pass up this opportunity to enhance your retirement dollars.
Increase Your Retirement Savings Contributions
Employees who contribute to 401(k), 403(b), most 457 savings plans, and Thrift Savings Plans can now contribute more. The amount per year is up to $20,500 in 2022, from $19,500 in 2021. Employees over the age of 50 can earn an extra $6,500, bringing their total to $27,000. How do you earn extra? Both Traditional and Roth IRA contribution limits remain at $6,000 each. The catch-up payment is $1,000, which is the same as in 2021. A Savings Incentive Match Scheme for Employees (SIMPLE) plan costs $3,000 to participate in. Many people are squandering this chance, despite the fact that there are extensive catch-up provisions for individuals 55 and older. Only 15% of those people who are eligible use these great savings plans.
Boston College Center for Retirement Research’s National Retirement Risk Index, states that half of the retirees will lose their current lifestyle. Half of all American households will be unable to maintain their present quality of life once they retire. As of June 2020, half of all married and 70% of single retirees relied on Social Security benefits. Their benefits made up half of their income in retirement. The average monthly Social Security retirement payout for 2022 is anticipated to be $1,657.
Your Tax Burden Might be Reduced by Retirement Contributions
Contributing to a tax-deferred retirement plan, such as an IRA or 401(k) lowers your yearly income. It not only makes your retirement more pleasant but also lowers your income yearly taxes. Increased contributions won’t take as big a bite out of your income as you would expect. This is thanks to the tax cut. For example, if you have a 25% tax rate, and contribute to your 401K, your taxes go down. For instance, if you make $5000 a year, and contribute 5% to your 401(k), $144 would be sent to your 401(k). However, just $108 will be deducted from your biweekly income. Traditional IRA contributions are tax-deductible as long as you adhere to IRS guidelines, which include income restrictions.
MAGI Deduction Explained
Another tax qualifier is Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items — like exempt or excluded income and certain deductions. The IRS uses your MAGI to determine your eligibility for certain deductions, credits, and retirement plans. MAGI can vary depending on the tax benefit. For example, for single and married couples, the adjustment changes. If you (or your spouse) aren’t protected by a workplace retirement plan, your IRA contributions are completely deductible. Based on MAGI, retirement plans, and yearly income determine your deductions. If you make more than $78,000, IRA deductions for individuals insured by a workplace retirement plan are no longer available. For married couples filing jointly, the deduction is no longer available after MAGI reaches $109,000.
Contributions to a Roth IRA or Roth 401(k) are made after-tax, which means you don’t get a tax advantage upfront. However, when you withdraw the funds, they are tax-free. Traditional IRAs and 401(k) s grow tax-free. Except when you start withdrawing money in retirement, you’ll have to pay taxes.
Contributing Additional Funds
Because contributing an extra $6,500 to a 401(k) may be difficult for some, Nicole Gopoian Wirick, has a suggestion. As a certified financial planner (CFP) of Prosperity Wealth Strategies, she encourages her clients to save catch-up money. To catch up, automatic payment to 401(k) is set up for each month, divided evenly over each paycheck. She claims that contributing $250 over 26 pay periods may appear more feasible to people. Clark Randall, a CFP at Financial Enlightenment advises his customers to reassess their budgets. This helps to boost their monthly retirement payments throughout the year. These 401(k) payments are budgeted in the same way as any other.
Discipline and compromise are required. If you still want to catch up with your traditional IRA or Roth IRA payments, you have time. The deadline is April 15th, unless you request an extension. However, most investment plans are by calendar year, so you should invest by the end of the year.
You can Start Your RMDs at 72
A required minimum distribution (RMD) is a specific amount of money a retiree must withdraw from a tax-deferred account. The RMD is a yearly amount that must be withdrawn each year after age 72. While the owner is still living, Roth IRAs do not demand distributions. Consider giving the RMD to a charity if you don’t need it. You won’t have to pay income tax on your RMD if given to a charity. You must give it straight from your retirement account to an eligible charity for up to $100,000.
Keep Your HSA in Mind
If your company provides a health savings account (HSA), take advantage of it. Even if you don’t itemize, the IRS permits you to deduct contributions to your retirement account. The contributions must come from your gross income, and employer contributions are also exempt. There is no tax on any earnings. Taxpayers will not be taxed on their distributions if they use them for eligible medical costs. These costs include everything from ambulance trips to X-rays. You can even take the account with you to new employment and spend the money in retirement. You can contribute up to $3,650 if you have individual coverage. And up to $7,300 if you have family coverage in 2022. If you turn 55 during the year, you will be eligible for a $1,000 bonus. However, any money given by your company that is not included in your income reduces your contribution limit.
When You Reach the Age of 65, You Earn a Larger Standard Deduction
With age, the standard deduction improves, lowering your taxable income. Married couples will receive a standard deduction of $25,100 in 2022. This deduction is an increase of $300 from the 2020 tax year. The standard deduction for single and married persons filing separately has increased by $150 to $12,550. If you are 65 or older and a single taxpayer in 2021 and 2022, you will receive an additional deduction. This deduction will be $1,700 (single) or $1750 (married) standard deduction.
File jointly if you’re married. If only one individual is 65 or older, the additional standard deduction is $1,350 for the year. The standard deduction rises by $2,700 if both spouses are 65 or older. The additional deduction is doubled for taxpayers who are both 65 and blind. The larger standard deduction has only one disadvantage for some taxpayers: it raises the threshold for itemizing deductions.
If your deductions aren’t greater than the standard deduction, itemizing doesn’t make sense. Regardless, a deduction is a deduction, and earning a higher standard deduction is a reason to rejoice. Bonus: If you’re 65 or older with a simple return, the new simplified Form 1040-SR for seniors is available. There are spaces to input items like Social Security income and retirement payouts. In addition, there’s a useful chart that illustrates basic deductions for people who still do their taxes on paper. Take advantage of your charitable deduction before it expires.
Itemization vs. Deductions
Many people can no longer itemize their deductions because the standard deduction is so large. Itemizing makes little sense if the standard deduction gives you more bang for your buck. However, for 2021, a person filing a single return can deduct $300 in cash gifts to qualifying charities. The cost of filing jointly is $600. This deduction is available if you use the standard deduction rather than itemizing. You might want to wipe your eyes when making this deduction: It will be phased out in the future.