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Update Your Monthly Contributions [Video]

by Financial Design Studio, Inc. / November 2, 2020

Did you know the maximum amount that can be contributed to retirement accounts can change from year to year?  It’s true.  So do you update your monthly contributions to your retirement accounts?  Taking advantage of these contribution limit increases can make a big impact over your working career.  Today, I want to walk through this with you to make sure you are indeed maxing out these accounts when able!

For the year 2020, the maximum amount that can be contributed to a 401(k) is $19,500.  If you’re over age 50, you get to contribute an additional $6,500 for a total of $26,000.  If we are just looking at the $19,500 that works out to $1,625 per month.  What can you do if you’re not on-track to maximize your 401(k)? 

Update your monthly contributions example

Start by taking a look at your paystub, the most recent would be the most helpful.  There is a line on there that indicates how much you are contributing both for the current period and another for the year-to-date.  Find the year-to-date number and write it down.

For our purposes, let’s use the example of $12,000.  Next, take the annual limit of $19,500 and subtract the $12,000.  This results in $7,500 which represents how much we’d need to add or before year-end.  Let’s also say that in our example that there’s only 5 more pay periods remaining for the year.  Dividing the $7,500 by these 5 remaining pay periods, results in $1,500.  This means that our payroll deferrals need to be at least $1,500 a pay period to stay on-track and hit our target of $19,500.  If you notice the current period’s amount is less than this, you’ll want to make an adjustment soon.  Keep in mind that the changes may not be immediate, so be sure to work with your payroll department to determine the appropriate amount to elect to meet your goal.

Traditional IRAs and Roth IRAs

For the year 2020, the maximum amount that can be contributed to Traditional and/or Roth IRAs is $6,000 or if over the age of 50 an additional $1,000 for a total of $7,000.

Following the same process, we take the amount already contributed year-to-date and subtract that from the contribution limit. This amount is then divided by the number of months remaining before the end of the year to determine how much is needed on a monthly basis.

While contributions to IRAs can technically be made up until April 15th after year-end, many of our clients like to complete their contributions during the calendar year.  Not only do we find that this is easier to conceptualize, but it also helps with cashflow and budget planning.

Unlike employer plans, like the 401(k), both the Traditional & Roth IRAs are subject to income phase-outs.  This means as your income increases, you may make too much or exceed thresholds disallowing you from receiving a tax deduction for contributions in the case of Traditional IRAs or even being able to make a contribution at all in the case of Roth IRAs.  For this reason, it’s important to know where you fall on the phase-outs.  Contributions after you’ve met threshold limits would be considered “in excess” and would need to be subsequently taken back out or else you could incur penalties & interest.

We understand there’s a lot of detailed information here.  The point is to help you determine if you’re on-track to maximize your retirement contributions in any particular year.  If you need help to figure out what makes the most sense for you and to max out your 401(k), Traditional IRA or Roth IRA, please reach out to us.  We would be happy to help you!

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Financial Design Studio, Inc.

We are financial advisors in Deer Park and Barrington, IL. A team with a passion for helping others design a path to financial success — whatever success means for you. Each of our unique insights fit together to create broad expertise, complete roadmaps, and creative solutions. We have seen the power of having a financial plan, and adjusting that plan to life. The result? Freedom from worrying about the future so you can enjoy today.