It’s not too late to make some retirement and other money moves before ringing in the new year, said Bill Smith, managing director at CBIZ MHM, an accounting and business consulting firm.
“Talking about what to do at year-end, there are a lot of different things to consider,” Smith said recently on Yahoo Finance’s The Final Round. “Some of which [depend on] whether you are still working and whether you’ve reached age 70 1/2.”
If you’re still working...
“You still have the ability to make contributions to your qualified plans like your IRAs or your 401(k)s,” said Smith, who oversees the firm’s national tax office. “You want to make sure you maximize those.”
By doing so, you lower your taxable income for 2019.
For 2019, you can contribute up to $19,000 in your 401(k) retirement account, which is funded by pre-tax dollars. If you’re 50 or older, you can put in another $6,000 as a catch-up contribution.
For traditional and Roth IRAs, you can contribute up to $6,000 for 2019. Those 50 and over get an additional $1,000 to contribute.
In 2020, the 401(k) contribution limit increases to $19,500 and catch-up contributions rise to $6,500. The contribution and catch-up limits remain unchanged in 2020 for traditional and Roth IRAs.
If you’re 70 ½...
If you reached 70 ½ in 2019, you must take a required minimum distributions, or RMDs, from your retirement accounts. These are the annual amounts you must withdraw each year to avoid penalty.
But there are exceptions. You can delay your first minimum distribution until April 1st of the year after you turn 70 1/2, according to the IRS.
“It’s very important you make those required minimum distributions,” Smith said, “because not only are the distributions taxable, but if you don’t distribute, there’s a penalty of 50%.”
Most withdrawals are included in your taxable income, except for any part that was already taxed or that can be received tax-free.
While penalties apply for traditional IRAs and 401(k)s, they don’t apply to Roth IRAs. Withdrawals from Roth IRAs aren’t required until after the death of the owner.
Should you defer your income?
If you expect to receive a bonus this year, ask if you can receive it in early 2020 instead, Smith said, so you don’t have to pay taxes on it until the following year.
“It always makes sense to pay tax a year later,” Smith said. “The general rule, we like to say, is you want to accelerate deductions and defer income.”
What to expect in 2020?
Smith predicts no new tax legislation will be passed in 2020 due to political tension in Congress. A newly elected president also won’t be able to propose any changes until that person takes office in 2021.
“You can pretty much count on what we have now as the same tax laws that we’ll have next year,” he said.
Dhara is a writer for Yahoo Finance. Follow her on Twitter @dsinghx.