Above and Beyond

Catch-up contributions are additional amounts beyond the regular annual limits that workers can contribute to certain tax-advantaged retirement accounts, such as 401(k) plans and IRAs. The higher limits are designed to help people who haven’t saved enough to meet their goals and are closer to retirement age. So, only those 50 and older are eligible to make catch-up contributions.

Say that you have contributed the standard 2018 limit of $18,500 to your 401(k) account. If you are 50 or older, you can put aside an extra $6,000, for a total of $24,500. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, the regular contribution maxes out at $12,500 in 2018. But, if you are 50 or older, you are allowed to contribute an additional $3,000 — or $15,500 in total this year.

Be sure to check with your employer before making catch-up contributions. Although most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

IRA Rules

Another way to save more after age 50 is through a traditional IRA or a Roth IRA. With either plan, those 50 or older generally can contribute another $1,000 above the $5,500 limit for 2018. However, the ability to contribute to a Roth IRA is phased out based on income, and this option may not be available to higher-income individuals.

The benefits of making catch-up contributions differ depending on which account you are considering. With a traditional IRA, contributions may be tax deductible, providing you with immediate tax savings. (The deductibility phases out at higher income levels if you or your spouse is covered by an employer retirement plan.)

Roth contributions are made with after-tax dollars, but qualified withdrawals are tax-free. By contributing to a Roth IRA and taking the tax hit up front, you will not lose any of the income to taxes at withdrawal, provided you take them when you’re at least 59½ and have held the account at least five years. Another option if you’d like to enjoy tax-free withdrawals is to convert some or all of your traditional IRA to a Roth IRA — although you’ll also take an up-front tax hit.

Solo Options

If you are self-employed, retirement plans such as an individual 401(k) — or solo 401(k)s — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. To catch up, you can add $6,000 to the regular yearly limit of $18,500 in 2018. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution. The total combined employee-employer contribution is limited to 25% of compensation, up to $55,000, plus the $6,000 catch-up contribution, for a total of $61,000 in 2018.

Understand the Impact

On first glance, catch-up contributions may seem like too little, too late. But do not underestimate the impact these additional savings dollars can have when compounded over time — even if you have only 10 years to invest before you retire. To help ensure catch-up contributions are enough to enable you to reach your retirement goals, talk to your financial advisor. He or she can assess your savings needs based on your income, your retirement plans, when you hope to leave work and other financial goals.

Sidebar: Tax Considerations of Retiring Abroad

Perhaps you’ve always dreamed of retiring to a foreign tropical paradise. Depending on your destination — for example, Central America — such a move can lower retirement living expenses. But keep in mind that, as long as you remain a U.S. citizen, you’ll have to fulfill U.S. tax obligations, no matter where you live.

Even if you move assets to a foreign country and do not owe any U.S. income tax, you will still have to file a return annually with the IRS and you may also need to file in your country of residence. Withdrawals from 401(k)s, IRAs and similar plans are typically taxable and you might owe U.S. tax on income from other investment accounts and on Social Security payments.

If you work at all — for example, as a consultant for your former employer — you will owe U.S. tax on that income. However, the IRS allows some qualifying individuals who work overseas to exclude all, or part, of their incomes using the Foreign Earned Income Exclusion. You may also be able to claim the Foreign Tax credit.

The bottom line: Talk to your tax advisor before deciding to move out of the country.

For more information, contact Steve Lewis. Visit ORBA.com to learn more about our Wealth Management Services.

Three Questions to Help You Tune Up Your Investment Portfolio

Your financial portfolio is always a work in progress. No matter how carefully you match your investments to your goals, changing market conditions and life’s evolving priorities have a cumulative effect — until one day you realize that your portfolio is no longer aligned with your objectives. To remain financially healthy, periodically re-evaluate your investments by asking these three questions.

1. Has My Portfolio Changed?
   Over time, you are likely to find that your asset mix has drifted from your original target. For example, the percentages devoted to stocks, bonds and alternative investments, or between categories of an individual asset class, such as small- vs. large-cap stocks, generally shift over time. If one asset type has performed particularly well (or poorly), your carefully thought-out allocation might look very different today than it did when you first set it up. Specifically, market movements may have left one or more of your asset classes over- or underrepresented relative to your target. If this happens, you may decide to rebalance your portfolio — selling a portion of one type of security that has outperformed and adding to a type that has underperformed.Be aware that rebalancing your portfolio may have tax implications. Ask your tax advisor how often you should do so, given your individual situation.
2. Have My Investments Changed?
   In addition to your portfolio’s allocations, your individual investments can also change over time. Stocks and mutual funds are rarely “set it and forget it” investments, as business conditions are constantly shifting and the prices at which the securities are trading are always in flux. If you own individual securities or mutual funds, you will want to work with your advisor to make sure these investments continue to serve their intended purpose in your portfolio. For individual stocks, for example, reassess the business fundamentals of the underlying companies. With mutual funds, make sure their underlying strategy and management haven’t changed. You’ll also want to compare long-term results to those of a relevant benchmark to ensure your funds are still meeting your expectations
3. Has My Personal Situation Changed?
   Your financial situation and your goals change over time, and a portfolio that suited you in the past may no longer be appropriate. For example, as you near retirement, your capacity to handle investment risk may change as the number of income-earning years ahead of you decreases. In such a situation, you might want to pivot toward income-oriented securities and reduce your exposure to the kind of volatile assets you owned earlier in your investing years. Other personal factors come into play as well. Marriage, the birth of a child, a career change or increased responsibilities for aging parents could all result in revised financial objectives. When your objectives change, your portfolio will likely need to change with them.

Get to Work

A portfolio that is in sync with evolving market conditions and your financial situation involves regular portfolio checkups with your advisor. Together, you can determine the optimal schedule for rebalancing your investment mix and review your goals to make sure you are appropriately invested for the future you envision.

For more information, contact your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.
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