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Fix Your IRA and 40l(k) Now

By Terry Savage on November 15, 2018

Here are three things you must do now to make sure your IRA or 40l(k) accounts don’t get caught in the year-end crunch — and that you’re well prepared for 2019. A few weeks ago, you received your third quarter statement of performance for the year. Or you can go online to check not only your balances, but your “asset allocation.” Evaluating your investment choices is Step 1 in making smart year-end decisions about your retirement plan.

Asset allocation

Most people can’t name the top three funds in their 40l(k) plan. They might have set it up years ago, and each new contribution goes into the same few funds. The headline indexes don’t always reflect the performance of different asset classes. For instance, if you’ve been sending money to a bond fund, this might be the time to switch to a more “balanced fund. When interest rates rise, as they are likely to continue to do, bond prices fall. A balanced fund may own some bonds, but also derive income from dividend-paying stocks.

Don’t think you can avoid this review of your 40l(k) plan because you’re inside a “target-date” fund — one that promises to adjust the asset mix to become more conservative as you reach retirement age, and beyond. Many of those target date funds have very high percentages allocated to stocks, reflecting the likelihood that you’ll live at least 25 years after retirement and will need the growth stocks provide over the long run. But in the shorter term, a large equity allocation could cause acute anxiety if the market declines sharply. Consider putting some money in a “stable value” fund inside your 40l(k) — or a money market fund in your IRA — to create liquidity for withdrawals and to mitigate market risk.

Take RMDs Now

Now is the time to take your annual required minimum distribution (RMD) if you are over age 70 1/2. Remember, you must total the value of all your retirement accounts — but you can take the money from only one, or more, of your retirement plans. Any custodian will do the calculation for you, if you give them the total assets. Don’t wait until the last minute to liquidate some mutual funds to raise the cash you need to withdraw.
Remember, nothing says you must spend all that money you withdraw! Set some aside for tax-time next April. Or use the money in a few months to make next year’s IRA contribution, if you qualify.

Set up higher contributions for Next Year

After years of unchanged contribution limits since 2013, the IRS has announced an increase for 2019. The current contribution limit of $5,500 will rise to $6,000 in 2019. And for those age 50 or older, the “catch up” limit jumps to $7,000. These limits apply to both traditional and Roth IRAs.
For 40l(k), 403(b) or similar workplace plans, the allowable contribution limit rises to $19,000 in 2019 — although the “catch up” contribution limit for workers age 50 and older remains at $6,000.

Contact the HR department now to increase your payroll contributions next year to take advantage of the new, higher limits in 2019. And similarly, if you make automatic contributions to an IRA through a mutual fund, you’ll want to adjust your monthly contributions higher.
The income limitations for Roth IRA contributions will rise, as well, in 2019. The income phase-out for allowable Roth contributions will rise from $122,000 to $137,000 for singles, and from $193,000 to $203,000 for couples.

Workers who want to contribute to a deductible IRA, even though covered by a workplace plan, will also see increases in allowable income limits. And 2019 will bring increased opportunity to set up an IRA for non-working spouses whose spouses contribute to a workplace retirement plan. This lets the stay-at-home parent contribute to her or his own IRA — until the family income reaches $203,000, at which point the deduction is fully phased out.

Take the time to deal with retirement accounts now — before the year-end rush. For so many reasons, you’ll be glad you did. And that’s The Savage Truth.

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