3 Year-End IRA and 401(k) Moves

Year-end Planning for Retirement

When it comes to year-end planning for retirement accounts, there is no time like the present!

With just weeks left in 2018, there is precious little time left to make sure that you’re taking advantage of available planning opportunities and avoiding costly penalties. With that in mind, here are three year-end IRA and 401(k) moves to consider…

Correctly Distribute all of Your RMDs

No year-end planning for retirement accounts is complete without checking to make sure that you’ve correctly taken all of your RMDs. Unless you turned 70 ½ in 2018 – in which case you can timely take your 2018 RMD until as late as April 1, 2019 – you must take your 2018 RMDs by December 31, 2018. So if you haven’t yet taken all of your RMDs, time is running out and you’d better get to work!

While incredibly, some custodians will process distribution requests received early in the day on December 31st by the end of the day, many custodians have policies that require distribution requests to be submitted much sooner to ensure processing before the end of the year. That means that you may have even less time than you think to get your RMD act in order.

Besides double-checking to make sure that your RMD amount was correctly calculated, you should also make sure all of your RMDs have been distributed from the “right” accounts. While RMDs for multiple IRAs can be aggregated and taken from any IRA or combination of IRAs, with the exception of 403(b) accounts (which follow a similar rule to IRAs), each of your employer retirement plan RMDs – such as those from a 401(k) plan – must be calculated and taken separately for/from each plan.

(Note: Inherited IRAs are treated separately, but the same Dec. 31 deadline applies to distributions beginning in the year after you inherit.)

Satisfying IRA RMDs Using Qualified Charitable Distributions

If you still haven’t taken your full IRA RMD and you are charitably inclined, you should give some consideration to something called a Qualified Charitable Distribution (QCD). In short, QCDs are special IRA distributions that can “offset” up to $100,000 of your cumulative IRA RMD each year. And while you can simply take your RMD and write a check to charity “like normal”, the QCD is generally a far more tax-efficient way of giving to charity.

Unfortunately, if you’re already taken your RMD for the year and are only first hearing about the QCD now, there is no way to retroactively treat your earlier 2018 distributions as a Qualified Charitable Distribution. In addition, if you still have RMDs from retirement accounts other than IRAs (e.g., 401(k)s and 403(b)s), the QCD won’t be of much use. The QCD can only be used by IRA owners (including beneficiaries) who are actually 70 ½ or older. So if you have non-IRA accounts or have already taken your 2018 RMD, the best that you can do is to make sure you take appropriate action now so that you can use the QCD next year.

Maximize Your Tax-Saving Opportunities

If you have the free cash flow to be able to do so, it often makes sense to “max-out” your available retirement plan(s). For 2018, the maximum amount that you can defer to 401(k)s and similar plans is an $18,500, with an additional catch-up contribution of $6,000 if you are 50 or older by the end of the year. Unfortunately though, unlike IRA contributions, which can be made for 2018 up through April 15 of 2019, salary deferrals for 2018 must generally be completed by the end of the year (i.e., by December 31st of 2018). So if you want to “beef up” your year-end 401(k) contributions at this late date, your best bet is to reach out to your HR department and increase contribution rate for any remaining 2018 paychecks.

In conjunction with the salary deferral limit, there’s a separate limit on “overall additions” to a plan during the year, which caps the combined amount of salary deferrals, employer matching contributions, non-elective employer contributions, profit sharing contributions, and all other contributions, to $55,000 for 2018.

Unlike the salary deferral limit, however, the annual additions limit applies separately to each of your employers. This can be especially meaningful if in addition to working a primary job, you also have a “side-gig” (in which case your second employer is you!) and you have some the ability to fund more than one plan. In such cases, you should not only consider how much to contribute to your “regular” retirement plan, but also whether you should be creating a retirement plan of your own!

Source: Forbes
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