Financial advisers managing 401(k)s and individual retirement accounts will be required to act in the best interest of their clients beginning in April 2017. There will also be several small tweaks in the rules regarding who qualifies for tax breaks for saving in retirement accounts. Here’s a look at some of the important ways retirement benefits will change next year.
A very small Social Security increase. Social Security recipients will receive a slight 0.3 percent cost-of-living adjustment beginning in January 2017. This change is expected to boost the average Social Security check by $5 to $1,360. The Social Security Administration projects that retired couples will receive an average of $2,260 per month in 2017, up from $2,254 in 2016.
[See: 10 Ways to Increase Your Social Security Payments.]
More Social Security taxes for high earners. Workers typically contribute 6.2 percent of their income into the Social Security system, and companies pay a matching amount, until the employee earns the taxable maximum. The amount of earnings subject to Social Security taxes will increase from $118,500 in 2016 to $127,200 in 2017, which is expected to result in 12 million workers paying more into the Social Security system. Earnings that exceed the taxable maximum are not taxed by Social Security or used to calculate retirement payments.
Financial planners will be required to provide advice in your best interest. For the first time in 2017, a financial adviser who makes investment recommendations to 401(k) and IRA participants will be considered a fiduciary who is legally required to select investments that are the best fit for the client, rather than the most profitable for the adviser. Retirement account advisers must commit to charging reasonable compensation and disclose how they make their money. However, existing investments may be grandfathered in under the old rules, and the fiduciary standard will only apply to retirement accounts, not other types of investment vehicles.
Higher income limits for IRAs. Many workers are eligible to save for retirement on a tax-deferred basis in both a 401(k) plan and an IRA. However, the ability to make a tax-deductible contribution to an IRA when you also have a 401(k) at work is phased out for individuals earning $62,000 to $72,000 ($99,000 to $119,000 for couples) in 2017, up $1,000 from 2016. “If you participate in a 401(k), there are phaseouts on deductible IRAs as you earn more money,” says Helen Berenyi, a certified financial planner and president of the wealth management firm Red Triangle in Charleston, South Carolina. For investors who don’t have a 401(k) but are married to someone who does, the tax deduction is phased out if the couple’s income is $186,000 to $196,000. Retirement savers who don’t have a 401(k) or other type of retirement account at work can defer paying tax on their traditional IRA contributions regardless of their current income.
[See: 10 Financial Perks of Getting Older.]
Higher earnings allowed for Roth IRAs. You can earn $1,000 more in 2017 ($2,000 for couples) and remain eligible to save in a Roth IRA, which could set you up for tax-free investment growth and tax-free withdrawals in retirement. The ability to make Roth IRA contributions is phased out for those earning between $118,000 and $133,000 ($186,000 to $196,000 for couples) in 2017. “It’s good to take advantage of it while you have a low income because there are income limits,” says Julie Ford, a certified financial planner for Ford Financial Solutions in New York. “It is helpful in retirement to have different types of accounts to draw upon because it gives you more options to be tax efficient when you are spending your money in retirement.”
Slightly higher income workers qualify for the saver’s credit. The income limit for the saver’s credit will increase by $250 in 2017. Workers earning less than $31,000 in 2017 ($62,000 for couples) could qualify for this tax credit that’s worth between 10 and 50 percent of 401(k) and IRA contributions up to $2,000 for individuals and $4,000 for couples. “Folks who aren’t making much early on sometimes feel like they have a mountain to climb, and having the ability to have those two extra buckets where you can be contributing to a retirement account and have the saver’s credit can be the extra boost,” says Steve Taylor, a certified financial planner and president of Colt Financial in Franklin, Massachusetts. “The saver’s credit can be worth a fairly significant amount, and it can be to your advantage to claim it.”
[See: 10 Ways to Get Ready for Retirement After Age 50.]
Early retirement account withdrawals allowed for Hurricane Matthew survivors. Victims of Hurricane Matthew in North Carolina, South Carolina, Georgia and Florida can take retirement account withdrawals and loans to cope with costs incurred from the storm, including food and shelter, due to relaxed IRS rules. The usual six-month ban on 401(k) contributions after a hardship distribution will not apply to hurricane-related distributions taken between October 4, 2016 (October 3, 2016 in Florida) and March 15, 2017. However, 401(k) and IRA distributions might still trigger income tax and a 10 percent early withdrawal penalty, and a 401(k) loan must be paid back within five years or upon leaving the job to avoid taxes and penalties on the outstanding balance of the loan.
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
12 Financial Terms Every Retirement Saver Should Know
More from U.S. News
10 Places to Retire on a Social Security Budget
6 Social Security Changes Coming in 2017
7 Tips to Live Well on Social Security Alone
How Retirement Benefits Will Change in 2017 originally appeared on usnews.com
