As I write this, we’re closing in on August 26, which is also known as Women’s Equality Day. On that date in 1920, women in the United States gained the right to vote — the same right men have had since the founding of this country.
But Women’s Equality Day is perhaps a bit of a misnomer because it suggests that since late 1920, women have been treated equally to men. If you consider finances, that’s still not true today!
New research shows women make just 82 cents for every dollar a man makes. If you read this blog with any regularity, you’re used to me emphasizing the need to put 10-15% of your income into retirement savings. But what does that mean for women versus men’s retirement savings? If you’re only making 82% of your male counterpart’s income, your 10-15% is diminished. That means the wage gap is a double-hit for you: You miss out on the income today, and your retirement savings suffer as well.
If you throw in Social Security, women face another financial hurdle. Your Social Security retirement income is based on your highest 35 years of earnings. If you consistently earn less than similarly-employed men, your Social Security checks will be smaller as well.
For a dream retirement, it’s important to do everything you can to compensate for being underpaid! Fortunately, Secure Act 2.0 provides a number of ways to do so.
Part-Time Worker Access to Retirement Plans
Before Secure Act 2.0, part-time workers likely didn’t have access to retirement plans through their employers. If you’re younger and working part time, it’s still important to save for retirement. In the past, this often meant establishing an IRA, but with the new part-time contributions provisions in Secure Act 2.0, you can now contribute to your employer-sponsored 401(k) and enjoy certain legal protections that don’t exist for IRAs in many cases.
Remember to take advantage of any matching contributions from your company. This may or not be available with your employer; while the Act provides for part-time employees participating in retirement plans, it does not require your employer to match your contributions.
Older part-time employees will also see advantages. I have retired clients who have part-time jobs at the country club to get access to free golf. Now, they’re eligible for a 401(k) and can contribute to it past age 70, giving them an extra incentive beyond skipping greens fees!
This rule change is particularly special to me. In 2009, I went to Washington, D.C. with other financial professionals to argue on behalf of the original Secure Act. In meetings with congresspeople, we specifically pushed for delayed required minimum distributions, or RMDs.
There are a number of reasons you’d want to delay RMDs, including giving yourself extra time to convert traditional retirement accounts to their Roth equivalents. Converting to a Roth means you pay taxes on the account now instead of when you withdraw from it. As I constantly remind my clients, we are in an incredibly favorable tax environment right now because of the Tax Cuts and Jobs Act.
However, that will sunset at the end of 2025, at which point it’s almost inevitable that taxes will increase. In many cases, it could make more sense to pay taxes now, at lower rates, than it would to delay those taxes and end up paying higher rates.
This becomes especially important when you factor in Social Security, which many forget to consider. Social Security income is taxable, based on your provisional income. For married couples filing jointly, if your provisional income is higher than $44,000, you might have to pay taxes on 85% of your Social Security income.
In today’s high cost of living environment, $44,000 isn’t all that much; if you have RMDs contributing to your provisional income, it could be quite easy to go above that threshold. Plus, provisional income is calculated to include 50% of your Social Security benefits. If you get $40,000 per year in Social Security income, that adds $20,000 to your provisional income, meaning all your other income, including RMDs, needs to be less than $24,000. By converting to Roths, which do not have RMDs, you could spare yourself some taxation on your Social Security income.
This is particularly important for people, like many women, who earned less over their careers; when you have a lower retirement savings level to begin with, losing any of it to unnecessary taxation is particularly unfortunate.
Increased Catch-Up Contributions
This benefit applies not only to women who are at a disadvantage in saving throughout their working lives, but to both men and women who didn’t save enough. Before Secure Act 2.0, people older than age 50 could make catch-up contributions to their retirement accounts of up to $7,500 per year. Now, workers between ages 60 and 63 can contribute up to $10,000 per year, and catch-up contributions are indexed to inflation, so they’ll continue to be valuable as the cost of living rises.
If you can afford to make additional contributions, it could be a good idea, but be aware of the downside: If you contribute to a retirement account in the wrong tax classification, you could be wasting your time. If your tax bracket won’t be lower in retirement, deferring taxes is probably a mistake.
I have a client who has four dependent children living in his home. He makes a good living, but with all the deductions and tax credits he’s eligible for, he doesn’t owe taxes. Imagine my surprise when I discovered he was deferring his taxes into a 403(b), which is the public-sector equivalent of a 401(k) — an account on which you will pay taxes when you withdraw from it in retirement. Why!? There’s almost no scenario in which his tax bracket in retirement will be lower than it is now.
I explained the consequences of his tax strategy, and he quickly let me help him change it. That’s the advantage of working with a financial advisor who has your best interests in mind. At Asset Preservation Wealth & Tax, we look at the big picture and take into account what factors will impact your finances now, and decades into the future. Despite being at a relative savings disadvantage, women do not have to give up the dream of a comfortable retirement as long as their planning is undertaken properly.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.