A Year-End Checklist to Make the Most of Retirement Savings

Liz Weston, CFP®
By Liz Weston, CFP® 
Edited by Sheri Gordon

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Age brings unique opportunities and obligations, including some important year-end tasks that can help you make the most of your money. For people 50 and older, here are some to consider:

Play catch-up if you can

If you’re still employed, use a retirement calculator to see if you should boost your savings rate.

Catch-up contributions could allow you to save more in tax-advantaged accounts. Someone who is 50 or older can contribute up to $26,000 to a workplace 401(k) in 2021, and up to $7,000 to an IRA, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You have until Dec. 31 to contribute to workplace plans for 2021 and until April 15 to make your 2021 IRA contributions. The ability to contribute to a Roth in 2021 phases out beginning at modified adjusted gross income of $125,000 for singles and $198,000 for married couples filing jointly.

Slightly different rules apply for health savings accounts, which are paired with qualifying high-deductible health insurance plans, Luscombe says. Contribution limits for 2021 are $3,600 for people with individual coverage and $7,200 for people with family coverage. People 55 and older can make an additional catch-up contribution of $1,000. As with IRAs, you have until the tax filing deadline, April 15, to contribute for the year.

To contribute to an HSA, the account owner must have a qualifying health insurance plan with an annual deductible of at least $1,400 for individual coverage and $2,800 for family coverage. People on Medicare cannot contribute to an HSA, but they can withdraw money tax-free from an HSA to pay medical expenses, including Medicare premiums, deductibles and copayments, Luscombe says.

Plan for required minimum distributions

Money can’t stay in retirement accounts indefinitely, says certified public accountant Mary Kay Foss, a member of the American Institute of CPAs’ individual and self-employed tax committee. Withdrawals must begin at some point, typically age 72. If you miss a deadline or withdraw too little, you could face a tax penalty equal to 50% of the amount you should have withdrawn but didn’t. Your retirement fund or brokerage can help you calculate the appropriate amount, or you can use the tables in IRS Publication 590-B.

The IRS specifies the minimum you need to take each year based on your Dec. 31 account balance for the prior year. Your required minimum distribution for 2021, for example, will be based on your Dec. 31, 2020, balance.

You must typically take your distributions by the end of the year, although you can delay your first RMD until April 1 of the year after you turn 72. If you delay, you’ll have to take your second RMD by the end of that year, Foss says.

You can put off RMDs from a workplace plan such as a 401(k) if you’re still working for the company that sponsors the plan and you don’t own 5% or more of the company.

Also, there are no RMDs for Roth IRAs during the account owner’s lifetime. A spouse who inherits a Roth IRA can treat it as their own, also avoiding required distributions, but other heirs must begin to empty the account after it’s inherited.

Consider account conversions

Another way to avoid RMDs is by converting an IRA or other retirement account to a Roth, but doing so means paying taxes on the money now rather than later.

Conversions can make sense when you expect to be in a higher tax bracket in retirement and you can pay the tax without raiding your retirement savings, says certified financial planner Michael Kitces, publisher of financial planning strategy site Nerd’s Eye View. Young people are often good candidates for conversions since their tax bracket likely will rise along with their earnings. Most people nearing retirement will be in the opposite situation — their tax bracket will drop once they stop working, so conversions may not be a good idea.

People who have been diligent savers, however, could find themselves pushed into a higher tax bracket once they’re required to start making minimum withdrawals, Kitces says. In that case, Roth conversions before age 72 could be smart, but you’ll want to consult with a tax pro. Converting too much could jack up your tax bill and, if you’re on Medicare, potentially increase your premiums.

Make charitable contributions

You can also avoid required minimum distributions through qualified charitable distributions from your IRA, which can start once you’re 70 ½, Foss says. The money must be transferred directly from the IRA to a qualified charity. These contributions can be excluded from your income but count toward your yearly required minimum distribution if the funds leave your account by your RMD deadline, which is typically Dec. 31.

Qualified charitable distributions can be made from most types of IRAs: traditional, rollover and inherited, as well as from inactive simplified employee pensions known as SEPs and SIMPLEs, which are savings incentive match plans for employees. (Inactive means you’re no longer contributing to these plans.) The maximum annual amount you can contribute this way is $100,000.

This column was written by NerdWallet and was originally published by The Associated Press.