It’s the year you are going to retire! Before you start planning your retirement party, there are a few details you need to address first to set the stage for a successful retirement:
1. Max out your 401(k)
2. Max out your Roth IRA
3. Max out your HSA
4. Consider working one week longer
5. Beef up your savings account
6. Read up
Let me explain each point:
1. Max out your 401(k)
Once you terminate employment, you can’t contribute to your 401(k). If you normally max out your 401(k) through regular contributions throughout the year, but you retire in June, you will be missing out on some serious tax benefits.
Talk to your 401(k)-plan administrator about increasing your contribution rate, so you are maxed out by the time you retire.
Note: In 2021, if you are over age 50, you can personally contribute up to $26,000 with any employer matches and contributions being on top of that.
2. Max out your Roth IRA
If you are below the income limits, you should also consider maxing out your Roth IRA. The Roth IRA is one of the best retirement savings accounts available.
Technically you can contribute to your Roth IRA after you retire, but you can only contribute to a Roth IRA in a year you have earned income!
So, if you retire in June of 2021, this is the LAST year you can contribute to your Roth IRA unless you earn a paycheck again in future years.
Note: In 2021, if you are over age 50, you can contribute up to $7,000 for each spouse if you have enough earned income to match that.
3. Max out your HSA
You can only claim tax-deductible contributions to a Health Savings Account if you are enrolled in a high-deductible health insurance plan. If you change insurance providers and you are going on Medicare when you retire, you will no longer be able to take tax deductions for contributing.
So, take advantage while you can and stock some money away into this awesome, tax-friendly account.
Note: In 2021, if you have a family plan, you can contribute up to $7,200 ($3,600 for an individual plan). You can contribute to an HSA after you enroll in Medicare, you just don’t get a deduction.
4. Consider working a week longer…
A lot of people decide they will retire at the end of the year. It just seems like it will be simpler.
Well, it might wrap your year up nicely, but you might be blasted with taxes. How so?
When people retire, they often get significant payouts. Maybe there is paid out vacation time or a deferred compensation plan. If you retire at the end of the year, you are getting an entire year of wages PLUS all of the additional retirement payouts in ONE tax year. You might be rocketing yourself into a higher tax bracket!
Consider working one week longer, so all of your retirement payouts are taxed in a separate year than your wages.
This will also allow you to max out your Roth IRA and HSA for an additional year, so double win! 😊
5. Beef up your savings account
If you have extra cash, consider increasing the balance of your savings account. Retirement is a major transition, and it is helpful to have flexibility while you figure out your new normal.
Perhaps add another few months of living expenses to the account.
6. Read up
Mentally prepare for the transition. Going from working every day to suddenly doing “nothing” might be harder than you think.
Here are a couple blogs you might find helpful as you prepare:
– The Big Question: When Can You Retire
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Remember, an object in motion stays in motion. Prepare financially, of course, but also prepare your mind and body for an active, fulfilling retirement!
I work with a team of advisors who specialize in retirement planning and managing wealth throughout retirement years. We would love to help you!
