No, 2020 is not over yet. While a lot of us may wish that was the case for one reason or another, we still have to stick it out for another couple of months. But that’s not necessarily a bad thing. If this year has upended your retirement plan, you still have some time left to course-correct. Here are three moves you should make before 2020 is over if they make sense for you.
1. Contribute to your retirement accounts
Millions of Americans lost their jobs, at least temporarily, this year, and that can throw off your retirement contributions. If things are a little more stable for you now, consider bumping up your retirement contributions to make up for your missed contributions earlier in the year.
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There are a few things you’ll need to keep in mind, though. First, you’re only allowed to contribute up to $19,500 to a 401(k) in 2020, or $26,000 if you’re 50 or older. You may also contribute up to $6,000 to an IRA, or $7,000 if you’re 50 or older. Most people won’t max out their accounts, but if you typically contribute a lot to your retirement accounts, you don’t want to exceed this. Otherwise, the IRS could tax these funds twice.
You also can’t contribute more money than you earned during the year. Unemployment benefits don’t count as earned income according to the IRS. So if you only earned $15,000 at your job this year and you’ve spent the rest of the year on unemployment, the most you could contribute to all of your retirement accounts for the year would be $15,000, unless you return to work later on in the year.
2. Do a Roth IRA conversion if it makes sense for you
Roth IRA conversions change your retirement savings from tax-deferred to Roth. Tax-deferred retirement contributions reduce your taxable income, but you must pay taxes on distributions in retirement. Roth contributions don’t reduce your taxable income, but your distributions are tax-free. So switching from tax-deferred to Roth involves paying taxes on your savings this year.
Now could be the ideal time to do this if your income is a little lower than it normally is and your investments are down. Roth IRA conversions usually raise your taxable income and could potentially push you into a higher tax bracket, but the effect on your tax bill might be negligible this year if you didn’t earn as much as normal this year. Plus, if your investments are down, you’ll be converting less money. If you had $10,000 in a traditional IRA at the end of last year and it’s fallen to $9,000 because of the pandemic, you’ll only have to pay taxes on an extra $9,000 rather than $10,000 to do a Roth IRA conversion now.
You’ll need to open a Roth IRA if you don’t already have one, and you’ll have to check to see what your plan allows. If you’re still employed at your job, your 401(k) may not permit you to transfer your assets to an IRA. Talk to your plan administrator to learn how you might go about transferring your funds and any fees associated with the conversion.
3. Redo your retirement plan if necessary
Now’s as good a time as any to redo your retirement plan if it’s been derailed this year. Prepare yourself to start fresh in 2021 by creating a new plan that takes into account your current retirement savings balance and the years left until your chosen retirement date.
You can follow the same steps as you did to create a retirement plan the first time. Figure out the rough length of your retirement by subtracting your estimated life expectancy from your chosen retirement age. Then, multiply this amount by your average annual expenses in retirement, adding 3% annually for inflation. Use a retirement calculator if that makes things simpler for you.
Then, subtract money you expect from other sources like Social Security or a pension to figure out how much you must save on your own. You can get an idea of your Social Security benefit by creating a my Social Security account.
Once you’ve got your plan, you can make adjustments until you find something that works for you. It might be as simple as raising your monthly contributions slightly to make up for your missed contributions this year. Or you may have to delay retirement by another year or two to give yourself additional time to save. What you don’t want to do is continue on with your old retirement plan like nothing’s changed.
This year has affected a lot of people’s retirement savings, and the long-term consequences of this recession have yet to be felt. You can’t predict everything that’s going to come next, so you have to keep a close eye on your retirement savings and make adjustments as you go to keep yourself on track for the future you want.