How You Can Avoid The Biggest Hurdle To Early Retirement

How You Can Avoid The Biggest Hurdle To Early Retirement

Summary

  • For those retiring "early" the hurdle to pass is what is referred to as the 'Healthcare Gap' - obtaining healthcare coverage before age 65.

  • There are multiple options to use until you reach Medicare.

  • We run through several popular options including Obamacare, COBRA, as well as one most people have never even heard of.

RETIREMENT UPDATE: Possible Coming Changes To Your Retirement

Original article was from April 17, 2019.

The Senate held a hearing this week for the “Retirement Security and Savings Act,” which would allow people with little in savings to catch up and also help small businesses provide retirement plans to its workers.

The House of Representatives is expected to vote on the Retirement Enhancement and Savings Act (RESA) by the end of the month, a bill that would expand auto-enrollment features, link small businesses together to offer retirement accounts and describe a fiduciary responsibility. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) is also waiting for a vote in the House.

These bills, which we discussed more in depth last month, have been moving their way through committee in Congress. As usual, with each step revisions and modifications are made.

They look like the will go to conference for combination in June, where the Senate version and the House version are reconciled and 'combined'.

President Trump is expected to sign it.

Here are the four main provisions:

Small Business Access to 401k's

This is the main provision (there are over 50 between both bills)- to increase access to 401k's for small businesses. The Multiple Employer Plans (MEPs) would allow smaller businesses to group together and spread the costs of offering 401k plans to their employees, similar to what you see in HR services with the PEO (where small businesses group together to lower their medical rates on health and other insurance plans).

These bills allow small businesses in different industries to join together to “obtain more favorable pension investment results and more efficient and less expensive management services,” per the Senate Finance Committee summary.

In addition, lawmakers on both sides want provisions to provide tax credits to small businesses to make it more affordable for them to set up their own retirement plans.

Another group of workers who might see increased access to retirement savings plans: long-serving part-time employees. There are provisions in the House bill for part-time workers. On the other end of the Capitol, Senators Rob Portman and Ben Cardin are pushing similar provisions. Their plan would allow part-time workers access to their company’s retirement plans once they work over 500 hours for two consecutive years.

Save for Retirement While Paying Off Student Loans

This proposal was originally part of other retirement security bills, including the Retirement Security and Savings Act, but Sen. Wyden introduced the concept as a stand-alone proposal as well this week. The proposal, called Retirement Parity for Student Loans Act, would let employers make matching contributions to a 401k for employees who are paying off student loans, but not mandate it.

Basically this means if a 401k plan provides a 100% matching contribution on the first 5% of salary reduction contributions made by a worker, then a 100% matching contribution must be made for student loan repayments equal to 5% of the worker’s pay, according to Wyden. (It would be mandatory if an employer is offering a match, but they can offer whatever match they want.)

Contribute and Save for Longer

The plan would eliminate the maximum age to contribute to an IRA. Currently, you are only eligible to contribute to a traditional IRA if you are younger than 70 ½. There are no age limits on contributions to 401k plans or to Roth IRAs.

Lawmakers are also considering increasing the age when account holders must begin taking required minimum distributions (RMDs) from their accounts and pay taxes. Currently, RMDs begins at age 70 ½. The House bill would increase the limit to age 72. On the Senate side, the proposal from Senators Portman and Cardin would increase the age to 72 in 2023 and then up to age 75 by 2030.

Portman noted that as people are living longer, we must ensure that their savings last longer...

More Access to Retirement Plans

Experts are also pushing more forceful measures to encourage younger people to save. Tobias Read, Oregon’s State Treasurer, testified in Washington recently that the minimum age for investing in an IRA should be lowered. We should be “allowing minors as young as 16 to open their own accounts and hold the money in their own names,” he said to lawmakers. Many agreed, so we could see that added to either bill.

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A Few Tax Moves To Make Before Year End

It's December and it's time to start planning for our 2018 taxes.  There are several crucial moves that can save you some money and set yourself up for a a more successful 2019.

This should act as a reminder list for those who get so busy at the end of the year that they miss some very important deadlines and cost themselves serious money! 

Retirement Accounts

Remember, some types of accounts are on a calendar year basis and some are not.  For those who have not maxed out their 401ks, now is the time since it's on a calendar-year basis.  You don't want to leave any match money from your company on the table!  The max contribution is $18,500 (this does not include any matches your company may make). Those 50 years of age or older are allowed to make an additional $6,000 catch-up contribution.Think about dumping your final paycheck for 2018 all into your 401k.

IRA accounts on the other hand must be done by tax day (April 15). So it's best to fill out a 401k before topping up the IRA account.  Max contributions for an IRA in 2018 are $5,500 and if you are 50 years old or over, you are allowed a $1,000 additional catch-up contribution. 

Charity

For those that will be itemizing their taxes for 2018, there is still time to make a charitable donation.  This doesn't always have to be in the form a check...  think about cleaning out the closet of clothes you don't wear, toys from the basement, or even an old junky car you've been meaning to get rid of.  Those types of donations allow you to deduct their fair market value on your return, thereby lowering your taxes. 

Charities like Vietnam Veterans of America, Salvation Army, and others will come to your home and pick up your donations.  For a vehicle or boat, you will generally receive a $500 contribution certificate.  If the value of the vehicle exceeds $500 at auction, you will receive a top up certificate of the difference.

FSA

You must use your Flexible Spending Accounts (FSA) funds before year end or you lose them.  Most plans have an either or option:  Either you can roll over some portion of funds to be used in the following year (typically a $500 max) or they will give a grace period of typically around 30 days extended beyond the period end to use those funds.

For those coming to the end of the period with a large amount of funds, be sure to splurge instead of losing them. Grab a new pair of glasses, load up on your medicines, or get a procedure you've always wanted done (think corrective-eye surgery or microderm-abrasion from your dermatologist).  Also, if you take over the counter drugs for a condition you've spoken to your doctor about, get an RX or medical necessity letter from your doctor so you can FSA those expneses as well (think fiber pills for regularity issues, Advil for consistent migraines, etc...).

Here are a few stores that list only FSA-eligible items.  Stock up on items you may need next year early!

FSAStore.comAmazon WalMart

Just be sure to follow the rules for your FSA.  Lastly, see if you can pre-order any medications or products like contact lenses for the coming year, if its permitted by the plan.

Don't forget- FSA is different than HSA.  Typically, FSA plans are more restrictive on what the funds can and cannot be used on.  

Property Taxes

Every jurisdiction is different- but many allow exemptions that lower the property taxes of your residence.  In NY, there is a STAR exemption that must be filed by January 1.  Beyond the basic exemptions many states have, there are numerous other exemptions available out there:  military service exemptions, volunteer fire/ police exemptions, and senior citizen exemptions to name just a few.  Be sure to inquire about possible exemptions you may be eligible for.  

Also, for those that live in jurisdictions that allow you to grieve your property taxes, remember to file that before year end or whatever the deadline is (most are Dec 31 to Mar 31).  Now that there is a cap on deductions for property taxes, reducing them outright is the only way to lower your overall property tax liability in many high tax states. 

Tax Loss Harvesting

We recently released an article on tax loss harvesting as it pertains to CEFs (read it HERE).  More broadly, tax loss harvesting is selling those stocks or funds that are underwater (at a loss).  Then taking the loss to offset against gains, reducing your overall tax bill.  

Remember, this needs to be in a taxable account like a brokerage account.  If its a retirement account, losses are not necessarily tax deductible. 

Lastly, if capital losses exceed capital gains, the filer is entitled to claim a deduction against the loss in the amount of $3,000 or the total net loss, whichever is less. When a net capital loss exceeds the $3,000 limit, it can be carried forward to future years. 

Best Places To Retire To Make Your Retirement Income Go Farther

Best Places To Retire To Make Your Retirement Income Go Farther
  • We focus on the other side of the coin - reducing expenses rather than solely looking at growing your retirement nest egg.

  • Where you live in retirement is one of the biggest factors in how long your retirement funding will last.

  • State, local, sales, and other taxes, especially on social security and pensions, play a key role in the longevity of your retirement funding.