Almost half of all working families have no retirement savings, according to the Economic Policy Institute. But even if you save diligently, there are some pitfalls that can undermine the best-laid retirement plans. The Pennsylvania Institute of Certified Public Accountants (PICPA) identifies three common retirement planning errors and offers advice on how to avoid them.
Mistake #1: Save Too Little Too Late
If you’re running behind when it comes to savings goals, the best advice is to get started as soon as possible. Even if you’re in your 50s, there’s still time to build up your nest egg before retirement. And if you’re 50 or older you have added incentives to do so through catch-up contributions to your tax-advantaged retirement accounts. This year, you can contribute up to $18,000 to a 401(k), 403(b), and many profit-sharing plans, plus an added $6,000 if you’re age 50 or older. With an IRA, you can contribute up to $5,500, and another $1,000 if you’re 50 or older. For SIMPLE plans offered by some small employers, the top contribution is $12,500, plus an extra $3,000 for those 50 or older. Your CPA can help you create a customized plan to address your needs, so consult him or her about the best choices for your situation.
Mistake #2: Don’t Revisit Your Choices
Whether you’re contributing to an employer-sponsored retirement savings plan or to an individual account, you’ll typically have a wide variety of investment options. Each situation is different, but as a general rule the investments you select for your overall retirement portfolio should reflect the number of years you have until retirement and the level of risk you’re comfortable with. Keep in mind, too, that no matter what mix of investments you choose when you begin saving, it’s important to revisit your choices at least once a year, or whenever there is a significant change in market conditions or your own financial situation. Continue to review your investment choices even when you retire to ensure that your money is growing as you expected, that your annual withdrawals are still reasonable, and that your funds are on track to last as long as you need them.
Mistake #3: Don’t Factor in Taxes
Most people assume that their taxes will decrease when they retire, but that is not always the case. The federal government classifies distributions from IRAs (except for Roth IRAs), 401(k)s, and other retirement plans as taxable income. Therefore, you must include some or all of these distributions on your federal income tax return. Generally, the taxable and nontaxable amounts you received during the year are reported to you during January of the subsequent year on a Form 1099R. In addition, many retirees take on part-time jobs. That income, combined with income from taxable investment accounts, might create a situation where your tax rate is actually the same or even higher than when you were working full-time. If you retire in Pennsylvania, there is good news: Pennsylvania does not tax retirement income. Regular distributions from IRAs, 401(k)s, and other retirement income reported on a Form 1099R are not subject to Pennsylvania’s 3.07 percent personal income tax. That’s true even if you retired to Pennsylvania after spending your working years outside of the state.
On another front, if your children are grown and your mortgage is paid off, you’ll lose tax breaks and deductions you previously received. Once again, you’ll have more taxable income as a result. It’s difficult to predict whether tax rates will increase, decrease, or remain the same over time, but there’s always a chance they could be higher when you’re in retirement than they are now.
Your CPA Can Help
These are just a few of the many considerations that should be taken into account in your retirement planning. For a thorough review of retirement planning considerations and practical advice you can use, contact your local CPA
and for more information on retirement planning, visit www.picpa.org/moneyandlife