⏳⏳⏳Catching up on retirement, American-style

Part one about 401Ks, Social Security and Medicare

Who isn’t thinking about retirement these days? It’s probably because we’re in the heart of tax season and getting messages about putting money in our retirement plans, whether that is an RRSP or a 401K. 

Photo by Towfiqu barbhuiya on Unsplash

I wrote about catching up on retirement for Canadians last year. Since then, I’ve received similar questions from Americans so I spoke to William Bevins Jr., a private wealth manager at Cypress Capital, based in Nashville, and Herman Thompson, a financial planner with Innovative Financial Group in Atlanta. 

Both men addressed the recent move and backtracking by the GOP to cut or change Medicare and Social Security. 

“Nobody is cutting Social Security or Medicare,” says Thompson, who points out that no politician is going to annoy the most solid voting block, which is made of senior citizens. 

Bevins Jr. agrees, saying, “I feel that social security will be around for the foreseeable future. Both sides like to use these benefits as a talking point, but are fully aware of their importance to millions of Americans.”

So for Americans over the age of 40, Social Security and Medicare are secure. Apart from that, what other government programs are there to help before and after retirement? 

According to Bevins Jr., people over age 50 are allowed to make additional contributions to their retirement accounts. The additional contributions help soon-to-be retirees catch up on their retirement savings. He says the amounts vary from $1,000 for traditional IRAs and $7,500 for 401(k) and 403(b) plans.

When asked which plan was the best to maximize retirement savings and whether someone should use the 401K, the Roth IRA or another option, the short answer from both was, it depends on the individual’s situation. 

However, there are some benefits to different plans. Thompson focuses on the traditional 401K because it provides a deduction for both federal and state taxes, depending on where you live. “So if they're about to retire in places like Florida, Texas, Tennessee, or Nevada, they don't have a state income tax,” he says. “If you're in a high-income tax state, like California and New Jersey, or even a moderate income tax state like Georgia, and you end up retiring in one of these sunny climates that doesn't have a state income tax, you just made anywhere from five to 10 per cent of your taxes just disappear forever by using the traditional 401k.”

Another thing a person can do to catch up is to make non-deductible IRA contributions, says Bevins Jr. He explains that the funds within would experience a tax deferral. 

“Also, buying index funds with a long-term goal in mind will help grow wealth outside of the qualified plans at very low costs.”

He says that the key to maximizing retirement savings is education. “There are many different plans with ever-changing rules. It is important to stay on top of the type of plan(s) someone currently participates. If you understand how your plans work and what is and is not allowable, you're doing yourself the largest favour in the world.”

In the next newsletter, Bevins Jr. and Thompson share more about Roth IRAs, taxes and deductions, and why Uber Eats should be taken off people’s budgets.  

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This week’s readings:

RRSP myths prevail as Canadians rush to contribution deadline (BNN Bloomberg)

As many as 1 in 10 Canadians don't file their taxes — and Ottawa owes many of them money (CBC)

What’s my money worth? (CBC)

Whether it was due to layoffs or personal reasons, here's how to explain an employment gap and get hired (Financial Post)