The sluggish economy may have you feeling anxious about your current tax burden and future retirement income.
Fortunately, employers and employees with a 401k plan in place can take advantage of considerable savings, especially with some of the provisions in the recently passed SECURE Act. During a recession, you may want to pull back on what you add to your 401k out of each paycheck, so long as you maintain enough in your account to receive the employer match.
How to Take Advantage of SECURE Act Savings in 2020
Individuals have new options for saving and using their 401ks:
- Savers can wait until age 72 to take required minimum distributions. You used to have to take RMDs at age 70.5, but now you can allow your investments to increase for another year and a half.
- Savers who inherit a 401k must withdraw the entire balance within 10 years of the account’s owner, with a few exceptions. In the past, you could stretch distributions and tax payments over a lifetime.
- Part-time employees who have completed at least 500 hours of service per year for three consecutive years can enroll in a 401k. In the past, you needed twice as many hours to be eligible.
- Penalty-free withdrawals are allowed for birth/adoption expenses (up to $5,000 per child), student loan expenses (up to $10,000 from a 529), and hardship (up to $100,000).
NEW in 2020, business owners are able to save more at tax-time, thanks to these SECURE Act provisions:
- Small business owners with 100 or fewer employees who start a new plan can take advantage of extra tax credits – 50% of their costs (up to a maximum of $5,000 per year for three years), plus an extra $500 credit for three years if they choose auto-enrollment.
- It’s now easier to switch to a Safe Harbor 401k mid-year. The new legislation eliminates the Safe Harbor notice requirement, permits a 401k plan to add a 3% nonelective contribution at any time up to 30 days before the close of the year, and allows a 4% or higher nonelective contribution up until the last day of the plan year.
How to Maximize Your 401k Tax Deductions in 2020
As always, the 401k retirement investment vehicle allows generous cost-saving deductions:
Business owners may take tax deductions for their contributions, as well as their employees’ contributions to the plan. Deductions are also allowed for plan expenses paid.
Employees can choose to make pre-tax contributions, which are not included in the taxable income for the year, therefore lowering their taxable income – and possibly their tax bracket. Taxes are paid gradually, as the 401k money is taken out in retirement. If the 401k plan permits, Roth contributions can be deducted from paychecks after tax has been paid, so these contributions are tax-free when withdrawn from the plan. A tax credit of up to $1,000 is available for low-to-moderate income taxpayers.
How to Change Your 401k Distribution in 2020
For instance, if the stock market is particularly volatile, they may want to consider a portfolio that minimizes volatility with a slightly different allocation. Remaining invested and diversified is the best path to weathering the storm. Now is a great time to look for stock bargains – ones that may have taken a hit with the crash, but will rebound along with the economy.
A 401k has flexible plan features that allow business owners to tailor a plan to their specific objectives, whether it’s running a program at minimal cost, generously rewarding long-term employees, or maximizing tax benefits on plan contributions.
For employees, 401k benefits allow higher contribution limits than most other savings plans, with up to $19,500 in tax-free salary deductions allowed for 2020, along with the employee matching contributions (that’s FREE money!) up to $57,000 total. Investors over 50 can contribute an additional $6,500 on top of this sum to “catch up.”
Call Ubiquity to learn more about maximizing your 401k savings.