Retirement Planning Tips
Create and Review Your Budget
Budgeting can feel like an overwhelming task for some people but keep in mind that the best budgeting method is one that works for you! A budget can also be crucial to understanding and directing where your money goes. Here are a few tips that can help you get started:
- First, evaluate your spending based on your previous year’s actual numbers.
- Assess your budget to see how much you spent in each category and identify your top 10 spending categories.
- Analyze the results to see if your spending reflects your true goals and priorities.
- Then prioritize the most important categories or the "essentials." For those still saving for retirement, adopt the "pay yourself first" mindset by making savings contributions an essential expense.
- Determine if there are any surpluses or shortfalls in the budget. In the case of shortfalls, review each spending category (e.g., monthly subscriptions, insurance, utilities) and shop rates to see where expenses can be trimmed from the budget.
- Finally, add a reminder to review and reevaluate the budget monthly or at least once a year—comparing budgeted expenses to actual spending—to help you stay on track to achieve lifetime goals.
Don’t Wait to Save! Create a Consistent Savings Strategy
The "pay yourself first" adage effectively ensures you are continually routing a specified savings contribution from each paycheck each month to achieve your financial goals. Begin by taking advantage of any employer-benefit plans at your disposal. Often there is a company match program ranging from 3-6% where the employer matches the employee contribution dollar for dollar (if one is made) up to that limit. Review the types of plans available and contribution limits:
- 2023 standard contributions limits: $22,500/$30,000 (if age 50 or older).
- Pre-tax 401K/403B Plans: contributions are made pre-tax, and distributions are fully taxable in retirement.
- Roth 401K Plans: contributions are made on an after-tax basis, distributions (particularly the growth) are income-tax-free after age 59 ½, and the account has met the 5-year aging rule.
- After-Tax Plans: some plans offer a third option that allows the participant to contribute beyond the standard limits each year. These funds are contributed on a post-tax basis; the growth is deferred but taxable in retirement.
Take Advantage of Other Savings Vehicles
Health Savings Accounts (HSAs) are a great vehicle to save for future healthcare expenses in retirement. Their triple tax advantage sets them apart from other savings vehicles, making them excellent ways to fund medical expenses in the coming years.
- Contributions are pre-tax, assets grow tax-deferred, and distributions for "qualified medical and dental expenses" are withdrawn on a tax-free basis. See contribution limits.
- HSA Requirements: Must be enrolled in a High Deductible Health Plan.
- Contribution deadline: contributions can be made up to the tax filing deadline for a given tax year (2022 contributions can still be made for those with the Oct 15 extended tax filing deadline this year).
- Shoebox your medical receipts: there is no limitation on when you can reimburse yourself for past medical expenses so long as you keep records of your receipts.
- Be sure to invest! Healthcare costs are among the highest inflating spending categories for most households. Thus, it's essential to invest the funds in vehicles within your HSA that will help you keep pace with these rising costs.
Roth Conversions & Ideal Timing
What is a Roth Conversion?
A Roth conversion is the movement of funds from a pre-tax retirement account, like a 401(k) or Traditional IRA, to, most commonly, a Roth IRA. During the conversion, you move funds from pre-tax status to post-tax status. While this can cause some discomfort in the tax that will be charged on any amount converted, this is done voluntarily and purposefully. The idea is to take money from accounts that have an embedded tax liability and move that money to a Roth account, which is permanently tax-exempt. This allows any money converted to grow freely without worrying about future taxation.
When Is the Best Time to Do a Roth Conversion?
The best time to do a Roth conversion is in a lower-income year. If you earn less money than you usually do in any given year, you'll fall into a lower tax bracket. While you'll make less money overall, this can be an opportunity to convert pre-tax assets to Roth status. Within the low income year of your choice, it's best to wait until the end of the year to complete a Roth conversion, as you'll have a better idea of your total income for the year and, ultimately, your marginal tax bracket. If you complete Roth conversions too early in the year, you may accumulate income later on and be pushed into a higher tax bracket than you intended.
Remember, Roth Conversions Are Entirely Voluntary
You can leave all of your money in pre-tax retirement accounts for as long as the IRS allows. At 72 (or 75 by 2033), you'll be required to take a portion of your money out in the form of Required Minimum Distributions (RMDs). However, you can get away with paying as little as possible in federal tax if you time your Roth conversions correctly.
Concentrated Stocks
Whether it is from a savvy investment made years ago or a generous benefit from your employer, many investors find themselves with a large stock position in a single company. If you own a high-flying stock, the pain of selling and creating significant capital gains tax can be too great to face despite wanting the benefits of a diversified portfolio.
What happens when you own $1 million in a company but feel you can’t sell? Or if that $1 million turns into $700k? If you find yourself in a similar dilemma, it is worth speaking to your Main Street Research advisor if the "Set it and Forget it" strategy is not for you. We offer many different solutions – from creating a path to sell to gifting to options trading – and will work with you to determine what works best to match your financial goals.
Calling All Business Owners
What SECURE Act 2.0 Means for Your Company and Retirement Savings
The Secure Act 2.0, signed into law on December 23, 2022, contains several provisions that aim to make it easier and more affordable for small businesses to offer retirement plans to their employees. Here are some of the key provisions related to small businesses:
- Increased startup credit: the startup credit for small businesses establishing a retirement plan has been increased to 100% (up from 50%) of administrative costs up to a maximum of $5,000 in each of the plan's first three years. This credit is available to businesses with up to 50 employees. (Section 102)
- New tax credit for automatic enrollment: starting in 2025, the law provides a new tax credit of up to $500 per year for three years for employers who include automatic enrollment for eligible employees in their 401(k), 403(b), or SIMPLE IRA plans. Employees can opt out of automatic enrollment, but they will default into the plan unless they take action to opt out.
- Tax credit when joining Multiple Employer Plans (MEPs): tax credits are not just available when an employer starts their own retirement plan. SECURE 2.0 allows unrelated small businesses to join together in an MEP to offer a retirement plan to their employees. The primary benefit lies in reducing administrative and cost burdens for small employers. (Section 111).
- Simplified plan administration: the law makes several changes that aim to simplify plan administration for small businesses, including allowing plans to be corrected without penalty within a certain period of time and allowing employers to adopt safe harbor plans at any time during the plan year.
If you are a small business owner, please feel free to reach out to learn more about the tax incentives of SECURE Act 2.0 and the benefits of simplifying retirement plan administration.
If you'd like to update your wealth plan or learn more about our risk management strategies beyond stop-losses to mitigate catastrophic decline, please don't hesitate to contact your Main Street advisor or reach us at team@ms-research.com.