We understand the time-consuming effort involved in navigating the challenges of daily life, including finances, careers, and families, each of which has been further magnified by the COVID-19 pandemic. In this regard, it is critical that we each make the greatest effort possible to provide for the future, such as by the most optimal use of available retirement arrangements.

To help you in this critical area, below are 10 questions to consider regarding your retirement accounts (generally, tax-qualified employer retirement plans – such as 401(k) and pension plans – and IRAs).

Q. What are the 2022 limits for tax-qualified retirement plan contributions?

In general, any individual with access to a tax-qualified retirement plan who can afford to make the maximum contribution should be encouraged to do so. As the law generally provides for annual cost-of-living increases of these amounts (“COLA increases”), you should be aware of the 2022 maximum contribution amounts, which are as follows:

• Defined benefit plan – $245,000
• Defined contribution plan/simplified employee pension (SEP) IRA – $61,000
• 401(k) plan elective deferrals – $20,500
• 401(k) plan catch-up contributions for individuals aged 50 and over – $6,500
• Section 457(b) plan – $20,500

Keep in mind that if you are a partner in a business or are self-employed, you must have sufficient earned income to support these contribution amounts.

Q. How about the 2022 maximum traditional IRA contribution amounts?

For individuals who do not have access to a tax-qualified retirement plan, an IRA offers an opportunity to save for retirement as well. Below are the 2022 contribution limits for a traditional IRA:

• Annual maximum deductible amount – $6,000
• IRA catch-up contributions for individuals aged 50 and over – $1,000

Q. What income limits apply to the deductibility of contributions to traditional IRAs made by an individual who is covered by (or whose spouse is covered by) a tax-qualified retirement plan at work?

The following income-based limitations apply to the deductibility of IRA contributions made by an individual who is covered (or whose spouse is covered) by a tax-qualified retirement plan at work:

• Dollar amount for determining deductible amount of traditional IRA contributions:
  • For active participants in an employer retirement plan filing a joint return or as a qualifying widow(er) – $109,000
  • For all others who are active participants in an employer retirement plan (other than married taxpayers filing separate returns) – $68,000
• Adjusted gross income limit for determining deductible amount of a traditional IRA contribution if not an active participant in an employer retirement plan but spouse is an active participant – $204,000
• Adjusted gross income phase-out range for determining deductible amount for traditional IRA contributions:
  • For single individuals and heads of household who are active participants in an employer retirement plan – $68,000-$78,000
  • For married couples filing jointly where the spouse who makes the traditional IRA contribution is an active participant in an employer retirement plan – $109,000-$129,000
  • For traditional IRA contributions by an individual who is not an active participant in an employer retirement plan but whose spouse is – $204,000-$214,000

Q. Have you considered contributing to a Roth IRA?

Contributions to a Roth IRA are made with after-tax money and offer the advantages of non-taxable distributions (including earnings) and no required minimum distributions. In general, distributions from a Roth IRA can be non-taxable if they start:

• After the five-year period beginning with the first tax year for which a contribution was made to a Roth IRA; or
• On or after age 59-1/2, death, or disability

However, certain high-earners may not be permitted to contribute to a Roth IRA – for 2022:

• Adjusted gross income (AGI) limit for determining maximum Roth IRA contributions:
  • If married and filing jointly or if filing as a qualifying widow(er) – $204,000
  • For all others (other than married taxpayers filing separate returns) – $129,000
• AGI phase-out range for contributions to a Roth IRA:
  • For married couples filing jointly – $204,000-$214,000
  • For singles and heads of household – $129,000-$144,000

Q. If your AGI is too high, have you considered a “backdoor” Roth IRA?

Even if your income exceeds the above limitations such that you are not eligible to make a regular Roth IRA contribution, you may still be able to contribute to a Roth IRA indirectly using a “backdoor” Roth IRA contribution. In general, a “backdoor” Roth IRA contribution is made by first contributing after-tax funds to a traditional IRA, and then immediately converting the IRA to a Roth IRA (by completing some paperwork). Alternatively, a retirement account consisting of pre-tax funds can be converted to a Roth IRA by rolling the funds over to a Roth IRA (again, mere paperwork) in a fully taxable transaction, paying income tax on the existing balance. (Note that Congress has recently considered eliminating backdoor Roth IRAs, so this approach may not be available in the future.)

Q. If you work but your spouse does not, have you considered establishing a spousal IRA?

If a working and non-working spouse file a joint federal income tax return, they may each contribute $6,000 (plus an additional $1,000 if age 50 or older) to a separate IRA, provided that the working spouse has earned income of at least the total amount contributed to both IRAs.

Q. Are you on top of the current Required Minimum Distribution rules?

The penalty for violating the RMD requirements is harsh, namely an excise tax equal to 50% of the undistributed RMD amount. It is therefore imperative to be aware of these often-changing rules.

Currently, if the retirement account holder was born prior to July 1, 1949, they will have an RMD required beginning date (deadline for first RMD) of no later than April 1 of the year next following the year in which they turn 70-1/2. For retirement account holders born after June 30, 1949, the RMD required beginning date is April 1 of the year next following the year in which age 72 is attained. After the first RMD has been taken, each year’s deadline is December 31.

An important consideration for the first RMD is that if the individual waits until April 1 of the following calendar year approaches to take their first RMD, then they will also have to take an additional RMD for that same calendar year by the regular December 31 deadline, thus doubling up the RMDs for the first calendar year.

Q. Do you keep track of the performance of your retirement account investments?

Competition is fierce in the investment world, and no less so in connection with investments typically utilized for retirement account purposes. New investment products come to market all the time, and retirement plan fiduciaries often change the available mix offered under the plans they manage as new investment alternatives arise. It can be a critical mistake to design a retirement account investment portfolio on the basis of historical performance only once, at the onset, and to fail to monitor its continuing performance on an ongoing basis. For example, a particular fund may have a superb historical rate of return based on the decisions of a particular investment manager or investment management team, but begin to falter if the manager retires and is replaced, or the team departs for a competing fund company. A close eye should be kept on the performance of selected investments as compared to those of other available alternatives. 

Q. In particular, are you comfortable with the diversification of your retirement account investments?

It is well-settled that diversification is a critical aspect of investing. This applies not only to one’s retirement account investments, but also to non-retirement account investments and to both types of investments in the aggregate. Each investor is entitled to their own particular level of risk tolerance and aggressiveness/conservatism. In the retirement account arena, the impact of diversification becomes an increasingly complex consideration as you approach retirement age, and wherever possible should be analyzed with the assistance of an investment specialist/advisor.

Q. When considering retirement account investment alternatives, do you pay close attention to the associated fees?

There is a wide range of fees applicable to retirement account investments, from the relatively low fees of many mutual funds and exchange-traded funds (ETFs) to the often significantly greater fees of actively managed accounts. Often, because investment fees are established as a number of basis points, retirement account holders may not recognize the potential impact that a seemingly small difference can have over a period of investment lasting for many decades. In particular, the retirement account holder must weigh the benefit of a lower fee against the competing benefit of active management. This tends to be the case especially in the context of very popular actively managed arrangements such as target date investment funds, where the fund manager reallocates investments on the basis of the retirement account holder’s age and anticipated retirement date. 

Contact

Dana Fried, JD, LLM, Managing Director, National Tax

516.417.5064