Making contributions to your retirement accounts is guaranteed to strengthen your financial and retirement plan. This year December 31 is on a Saturday, which means you should be planning those 2016 contributions now and targeting Thursday, December 29 to have them completed. Take these actions to keep your retirement on track:
1. Make the maximum contributions to your employer-sponsored retirement plan — 401(k), 403(b), 457, or TSP.
If you have not contributed the annual maximum amount of $18,000 to your employer-sponsored retirement account in 2016, you can reduce your taxes significantly by doing so now. The 2016 employee limit is $18,000 (without catch-up contributions). Many plans allow you to accelerate your contributions before the end of the year; we support that action, provided you can still manage your cash flow and expenses reasonably well. The best way to avoid having to accelerate your contributions toward the end of 2017 is to set your automatic deferral percentage in January. (To help your planning: 2017 contribution limits are the same as in 2016.)
For other retirement plans such as a traditional IRA or Simplified Employee Pensions plan or SEP, check with your financial planner or tax professional.
Note: The amount of taxes you save is based on your marginal tax rate for an individual or joint return. If you’re in the 33% bracket, for every additional $1,000 you contribute to your 401(k) style retirement plan, you should save $330 in taxes.
2. If you are age 50 or older, take advantage of catch-up contributions.
At age 50 or older, you are allowed to make additional contributions to your employer-sponsored retirement plan — 401(k), 403(b), 457, or TSP. In 2016, you can defer an additional $6,000 from your salary into your retirement savings account for a maximum of $24,000 ($18,000 plus $6,000).
3. If you turned 70½, remember to take your Required Minimum Distribution.
After you reach the age of 70½, you are required to take a Required Minimum Distribution (RMD) from your retirement savings by December 31 of each year (except for the first time, when this distribution can be delayed until April 1 of the following year).
Therefore, if you happened to turn 70½ this year (2016), you can either: 1) take your first annual RMD by December 31, 2016 or 2) delay your 2016 RMD until April 1, 2017. In either case, you must also take your 2017 RMD by December 31, 2017.
If you turned 70½ last year (2015) or before, you must take RMDs from all of your IRA and 401(k) retirement accounts prior to December 31, 2016 or be subject to a maximum penalty of 50% of the amount you should have withdrawn. These distributions are taxed as ordinary income for the current tax year.
Request that your annual RMD be broken into a monthly or quarterly automatic distribution in 2017 to avoid future RMD penalties.
If you have several retirement accounts, you can take your RMD from each account (which will preserve a record within the account that you in fact took the RMD), or you can take it from just one or some accounts, as long as it adds up to the full required RMD of your total retirement accounts.
4. Use the Qualified Charitable Distribution (QCD) rule to minimize taxes.
If you would like to avoid paying taxes on your RMD, and you are planning to make charitable contributions for 2016, you can do both in one step by taking advantage of the QCD rule. This rule allows you to use your RMD (or a portion of it) as a donation to a preferred charity or charities and have that amount of your distribution excluded from your gross income calculation for tax purposes.
Caveat: You must make the distribution to the charity directly from your IRA or 401(k) plan! To benefit from this rule, you must have a check issued by your broker or investment advisor directly to the charity or charities. Taking the distribution yourself and then paying the charity using your own checks subjects you to taxes on the distribution. You are limited to a maximum annual charitable contribution of $100,000 under this rule. Call your brokerage or investment advisor or tax professional for assistance if needed.
If you want to use the QCD rule to make multiple contributions to different charities, make a list of those charities and the dollar amounts, and send your list to your investment advisor or broker now to get ahead of the December rush. Also, keep a copy of this list handy; you can use it next year because the QCD rule became permanent in 2015.
In summary, be kind to yourself, your family, and your favorite charity — and help your retirement plan — by making retirement account contributions for 2016 before it’s too late!