The holidays are just around the corner, and so is the deadline to make some smart moves to boost your retirement savings and maybe even retire early.
Before you get overwhelmed with meals, gifts, and seasonal get-togethers, here are four things you need to get done before the end of the year.
Make retirement contributions
You can’t make contributions to your 401(k) plan for 2022 after December 31.
There are contribution limits as well: If you’re under 50, the limit is $20,500; if you’re 50 and older, you can add another $6,500 — called a catch-up contribution — to top out at $27,000 for 2022.
That might be tough to do in the waning weeks before the end of the year, but it’ll make you a lot more prepared for retirement if you can swing it.
There is a caveat to this if you’re in a one-participant 401(k) plan and 50 or older: Your total contributions, not including catch-up contributions, cannot be more than $61,000.
These 401(k) contribution deadlines apply to Roth 401(k) and 403(b) retirement plans as well. The contribution limits are the same for 403(b) plans, but are somewhat less for Roths, depending on your income.
Get your retirement match
Employers don’t always offer to match 401(k) contributions, but when they do, it’s a great way to bolster your retirement savings.
You earn that match by having some money withheld from your paychecks, though plans can vary. There are traditional 401(k) plans, safe harbor 401(k) plans, and SIMPLE 401(k) plans, per the IRS.
In a traditional 401(k) plan, eligible employees can make pre-tax elective deferrals. Employers, for their part, can make contributions for everyone involved in the plan, match contributions based on employee deferrals, or do both.
Safe harbor 401(k) plans resemble a traditional 401(k) plan, but they ensure that there’s an employer contribution.
The tradeoff for employers is they’re exempted from annual nondiscrimination tests that apply to traditional 401(k) plans — a check the IRS performs on traditional plans.
SIMPLE 401(k) plans are designed for small businesses to make sure they can also provide retirement options for employees. Like Safe harbor 401(k) plans, they’re not subject to nondiscrimination tests.
They’re open to employers with 100 or fewer workers who received at least $5,000 in compensation from the employer for the previous calendar year.
Make charitable contributions
If you plan to make a charitable donation, or maybe more than one, this year, you need to get it done before December 31. This isn’t strictly a retirement booster, but it will help with taxes.
Bear in mind that there are limits on how much you can give. For donors who itemize their deductions, you’re looking at a limit of 30% of adjusted gross income for non-cash assets. That hits a limit of 60% for cash contributions.
Another option is to donate appreciated non-cash assets if you’ve held those assets for more than a year. According to Charles Schwab, donors can use this to eliminate the capital gains tax they’d owe if they sold the assets before donating.
You can also donate cash from the sale of depreciated securities if they’re worth less than what you paid for them. That way, you can offset capital gains and up to $3,000 of income. After that, you can claim a deduction from the sale.
If you’re wondering what your non-cash options for donation might be, they include (but are not limited to): publicly traded securities, privately held business interests, and real estate.
Make Roth conversions
The key word here is “conversion.” You’re moving your money from any of the 401(k) options mentioned above — traditional 401(k) plans, safe harbor 401(k) plans, and SIMPLE 401(k) plans — or an IRA, and converting it into a Roth.
The big reason to do so is that with a Roth, you can make tax-free withdrawals in retirement, something that isn’t possible with tax-deferred savings, since you get the tax break the year you contribute.
Here’s the rub, though: First, and this might seem obvious, you need to open a Roth IRA. Next, you’re going to be paying taxes on everything you convert, as it will be considered income for the year you pull the trigger.
Third, you’re subject to more taxes if you take money out before you’re 59 1/2 — according to Wells Fargo, any distributions you take out could be subjected to a 10% additional tax unless you’re disabled, or you’re using the first-time homebuyer exception (there’s a $10,000 limit), or your beneficiaries are taking distributions due to your death.
It’s also advised to avoid opening a Roth if you’ll need the money in the next five years. In addition, you don’t want the bump in income to knock you into the next tax bracket. A word of warning: You can’t undo a conversion. Once that money is moved, it’s moved.
But, if you’re ready to hit the button on a conversion, and remember that the deadline is December 31, it’s just a matter of talking to the account administrator and moving the money.
Of particular benefit here is estate planning, because the income can be passed on to your beneficiaries tax-free — but it still has to have been five years since the Roth was funded, either through conversion or contributions.
Saving for retirement is the smart thing to do. There’s no question about that. And there are tax breaks you can capitalize on while you do so.
Some of it is as easy as making sure to sock away a little more at the end of the year, while some of it involves harder decisions, like converting some or all of your portfolio into a Roth.
Regardless of what you decide, don’t let the year end with your retirement savings to-do list left undone.
Smart Asset Benefits
- Get matched with fiduciary financial advisors
- Advisors are vetted and certified fiduciaries
- Take the mystery out of retirement planning
- Their matching tool is free