2021 is right around the corner. It’s time now to take stock of what we expect to happen in the upcoming year, and we’ll do that from a retirement savings perspective.
First, it’s too late to make any major changes in our retirement savings for 2020. The ability for a “qualified individual” to take a coronavirus related distribution expires on December 30. Second, if we haven’t maxxed out in our retirement savings, there’s no time to do anything about it. Most of us who are still working are now in the first pay period of 2021.
There are some things about 2021 that we do not know now and won’t know until much later. We don’t know what path the pandemic will take, though many of us are assuming that things will get back to (or close to) what we once called “normal” at some time during the year.
We do not know if there will be further changes made to retirement savings by a new Congress.
• Towards the end of the current Congress, legislation was introduced to build on the SECURE Act by making additional changes. Like the SECURE Act, this legislation had broad bipartisan support. Of note were a proposal to raise the age where minimum distributions must be taken to 75, and to increase the amount that can be contributed as a “catch-up” contribution. We will see if this comes up in the next Congress – I bet it does.
• Social Security is likely to be looked at, but Congress has previously been loath to make changes that might affect their chances of being re-elected.
• Taxes might be changed. It’s possible that tax rates might be increased, and that the federal estate tax exclusion may be lowered. If the control of government remains divided, this is less likely to happen than if one party controls the Presidency, Senate and House.
We do know the contribution limits for both the TSP and IRAs have not been changed.
• The TSP’s elective deferral amount remains at $19,500 and the catch-up amount is still $6,500. If we’re 50 or over (including those of us who turn 50 in 2021), we need to be aware that “spillover” contributions begin in 2021. We will no longer need to make two separate elections if we want to take advantage of catch-up contributions. See previous articles in FEDweek’s TSP Investment Report for more on the spillover.
• For IRAs, the regular contribution stays at $6,000 and catch-up contributions remain at $1,000 (where they’ve been for over a decade). If you’re 50 or over and planning on contributing catch-up money to an IRA, pay attention to any changes in catch-up contributions that might be made by Congress.
And we can make a few assumptions. We can assume that:
• There will likely be some type of financial stimulus. How much depends on the make-up of Congress and the course of the pandemic.
• It will be unlikely to have required minimum distributions waived for a second consecutive year.
We should take stock of what we expect in 2021 and plan accordingly. However, we always need to keep the words of philosopher Yogi Berra in mind, “It’s tough to make predictions, especially about the future.”
The G Fund is Underperforming Inflation
If TSP investors leave money in the G Fund, it is guaranteed not to lose money nominally, but slowly chips away at purchasing power at current rates. On the other hand, if they invest heavily in the equity funds, they have more upside exposure, but also a lot more volatility risk.
TSP: Stocks and The Economy Diverge
As many folks know by now, this has been an unusual year for most asset prices. Despite the biggest economic shock in modern history, stock indices have hit fresh all-time highs in 2020, partially due to large government stimulus and a rapid expansion of the money supply.