One of the toughest parts of retirement planning is the fact that there are so many deadlines and limits involved. Miss a deadline, and you're somewhat out of luck. After all, the limits involved make it that much more difficult to catch up later, since it typically has to come at the expense of another time and dollar limited opportunity.
All that said, the good news about retirement planning is that each year generally brings with it a new set of deadlines and limits. Thanks to that annual reset, there's usually some way to do something smart when it comes to planning for or living your retirement. With that in mind, recognize that it's not too late to make these four retirement plays.
No. 1: Contribute to your 2022 IRA
As long as you have "taxable compensation" for the year -- essentially a salary or contractor-type income from work -- you can contribute to some form of individual retirement account. If you're under age 50, you can contribute up to $6,000 for the year, and if you're age 50 or up, that amount rises to $7,000. You (or your spouse if you're married filing jointly) must earn at least as much taxable compensation as your IRA contribution for the year.
Within the broader IRA framework, you can usually choose between traditional and Roth accounts. In both types, your money compounds tax-deferred while you keep it in the plan. In Roth accounts, you contribute after-tax money into the account, but you can potentially withdraw it completely tax-free in retirement. In traditional plans, you might get a tax deduction for contributing, but any gains get taxed as ordinary income when you withdraw it in retirement.
Do note that there are income limits that might restrict your ability to directly contribute to a Roth IRA, but a backdoor Roth IRA contribution approach may be available for you. Your deadline for any IRA contribution to count for 2022 is April 15, 2023.
No. 2: Contribute to your 2022 401(k)
If your employer offers a 401(k) plan, you can contribute to it directly as a payroll deduction from work. Your contributions for 2022 are limited to a maximum of $20,500 if you're under age 50 or $27,000 if you're age 50 or up. Similar to IRAs, 401(k)s come in either traditional or Roth styles. Unlike an IRA, your employer has to make a plan available for you to contribute to it. Note that if you're considered a highly compensated employee, your contributions may be further limited.
There's lots to like about a 401(k). First and foremost, it's a "set it and forget it" type of investment strategy. Once you set up your contributions, the money comes straight out of your paycheck and directly into your investments, every payday. That is a superb way to automatically build wealth over time.
In addition, your boss may offer you a matching contribution, typically based on your salary and the amount you contribute. If you get a match, then investing in your 401(k) until you maximize that match is the first investment you should make under the vast majority of circumstances.
On top of that, the generous limits available in 401(k) plans mean that it's often possible to amass a large enough nest egg to retire comfortably based just on what's in it.
You have until Dec. 31, 2022 to contribute money via your paycheck to get it into your 401(k) and have it count as a 2022 contribution.
No. 3: Take your 2022 required minimum distribution
If you're age 72 or older, you generally must take a distribution from your traditional IRA or most employer-sponsored retirement plans. Your distribution is based on a combination of your age and the balance in your account as of Dec. 31 of the previous year.
You have until Dec. 31, 2022 to take your required minimum distribution (RMD) for 2022. If you don't take it, you will face a penalty of 50% of the amount you should have withdrawn but didn't. If you don't need the money from your RMD, key options include donating it, investing it, or using it to pay the taxes on a Roth IRA conversion.
No. 4: Execute a 2022 Roth IRA conversion
Roth IRAs are wonderful retirement planning tools. Once money is in your own Roth IRA, it can compound completely tax-free for you for the rest of your life. You never have to take a distribution from your Roth IRA if you don't need the money. If you do need the money, you can take it out of the account free of income taxes once you're age 59 1/2 and money has been in the plan at least five years.
The big challenge associated with Roth IRAs is that money needs to have already been taxed as earned income in order to get into such an account. If most of your financial assets are tied up in pre-tax traditional retirement plans, you need to pay income taxes on that money to get it into your Roth IRA.
To execute a Roth IRA conversion, you transfer money from an existing retirement account to your Roth IRA. That triggers distribution paperwork from your existing retirement account, including tax forms calling out the distribution as income. You don't need to convert your entire balance in the same year, and it often helps to stagger the conversions over a series of years to keep the conversion taxes down.
Your Roth IRA conversion must be completed by Dec. 31, 2022 for it to count for 2022. If you have variable or uncertain income, it might make sense to wait until later in the year to see how much headroom you have to make the conversion efficiently.
Get started now
If you want to take advantage of one or more of these four retirement plays, you should get your plan in place now to make it a reality. They all have deadlines attached, and between those deadlines and the money involved, the sooner you get started planning, the easier it will be for you to take action to make it work. So get started now, and use these tools to help yourself get closer to the retirement you're working so hard to reach.