Personal financial planning is an ongoing process.? The good news is that financially speaking, 2013 was a really good year. The stock markets are at all time highs.? Many real estate markets around the country rebounded nicely.? And interest rates remain near historic lows.
Hello 2014.? Who knows how financially friendly this year will be? For that reason, here are some prudent steps you can take to keep your personal finances moving on the right track:
- REset your retirement savings:? Most people find it easier to max out their retirement contributions by budgeting a set amount each month.? Instruct your employer to withhold $1,458.33 per month for your 401(k) or 403(b) plan to ensure that you hit the max of $17,500 in 2014.? Are you self-employed?? If so, you can sock away up to $52,000 next year into a SEP, Keogh or Solo 401(k), which equals $4,333.33 per month.? And if you’ll be 50 or older by December 31st, the maximum 2013 contribution jumps to $23,000 for 401(k) and 403(b) salary deferrals and $57,500 for Solo 401(k)’s.
- REfinance your home mortgage:? Back in 2012, my wife and I locked in a fifteen-year fixed-rate mortgage at 2.875% with no points.? While mortgage rates are no longer that low, according to our go to mortgage guy Bob Cahill of Leader Bank, there are still a variety of low-rate mortgage products currently available to people looking to purchase a new home or refinance an existing mortgage.
- REduce your personal debt: Over time, people and businesses seem to have forgotten that any money borrowed needs to be repaid.? Remember, leverage equals risk.? Make 2014 a year to pay down some of your personal debt.? Perhaps you can delay the purchase of a new car, scale down your awesome vacation, or settle for a 42 inch flat screen TV.
- REvise your savings and debt reduction goals: Take a few minutes to set new savings goals including how much you?d like to put away towards your retirement, a child?s education, and/or the down payment on a home, and also to reset how much you plan to pay down your student loans, personal debt, and home mortgage.? Download our MDTAXES debt/savings calculator?(excel) to help you crunch the numbers.
- REbalance your investment portfolio:?? Warren Buffet said it best by stating, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”? During 2013, the stock market posted substantial gains.? By rebalancing your portfolio to its original or updated asset allocation, you lock in gains from the sectors that performed the best and move money into sectors that underperformed and soon enough should be poised to catch up.
- REcalculate how much your retirement savings will be worth when you retire: With the Dow at all time highs, now’s a great time to take a look at how much buying power you can expect to have upon retiring by downloading our MDTAXES?unique on-line retirement calculator?(excel).
- REvisit your life and disability insurance needs: As you move through your career and your life, your disability insurance needs change. Give some thought to how much of these insurances you need versus how much you currently get through your employer?s benefit package and how much coverage you’ve already purchased for your personal policies.
- REsolve errors on your credit report:? Each year, you?re entitled to three free credit reports, so there?s no excuse to not look at this important financial report annually, especially since errors are not uncommon.? Order your free report at www.annualcreditreport.com.
Questions about financial planning steps you should take for 2014? Please check out our MDTAXES Directory of Financial Advisors to find a professional familiar with the financial planning issues that affect you and your colleagues.
Contributing to a retirement plan is one of the best tax shelters available to you during your working years.? Recently, the IRS announced that most of the retirement savings limits will NOT increase for 2014.
RETIREMENT PLAN LIMITS FOR 2014:
Maximum Contribution for 2014
?401(k) or 403(b)?Deferrals
?$17,500 in 2014
?Roth and Traditional IRAs
?$5,500 per person
|?Self-employed Retirement ? Plans
SEP or Keogh – $52,000/yr
Solo 401(k) – $52,000/yr
SIMPLE – $24,000/yr
?$14,000 per donor (up to $70,000 in one year)
If you?ll be 50 or older by December 31, 2014, you can contribute an extra $5,500 into your 401(k), Solo 401(k), or 403(b) plan, an extra $2,500 into your SIMPLE, and an extra $1,000 into your IRA.
It’s not too late to cut your 2013 tax bill.? Prior to Dec. 31st:
- ?Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year.? This year you can put away up to $17,500 ($23,000 if 50 or older) into your 401(k) or 403(b) plan.? If you?re self-employed, consider setting up a Solo 401(k) by 12/31.
- Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven?t had enough taxes withheld during the year and might get hit with an underpayment penalty.
- Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds), and then can be used to offset up to $3,000 of wages and other income.
- Send in your January 2014 mortgage payment early enough so it will be processed prior to 12/31/13.? By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
- Clean out your closets and donate your clothing and household items to a charitable organization since “non-cash” contributions are deductible if you itemize.? Don?t forget to get a receipt. And make sure to make a list of the donated items, including each item?s condition since only donations of clothing and household items in “good condition or better” qualify for a deduction.
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2014.? And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.
- Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and won?t be subject to the alternative minimum tax.
- Pre-pay or pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.
On Halloween night, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations. Unfortunately, the bulk of the retirement savings limits will not increase from 2013.
According to the October 31st announcement made by the IRS on Pension Plan Limitations for 2014, “Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.”
No Increases for 2014
Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. Like 2013, you can contribute up to $17,500 into a 401(k) or 403(b) plan through salary deferrals in 2014.
Anyone 50 or older by December 31, 2014 can contribute an extra $5,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $23,000. That is the same as what was allowed during 2013.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE’s work just like 401(k) plans, which means it’s up to you to fund the bulk of this retirement savings account through salary deferrals. For 2014, the maximum contribution into your SIMPLE remains at $12,000. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2014, for a total annual contribution of $14,500, unchanged from 2013.
And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2014 increases by $1,000 to $52,000.
Increase to IRAs
Don’t forget about IRA’s. Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $5,500 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $6,500. You have until April 15, 2015 to contribute to your IRAs for 2014.
There is a bit of good news for people looking to contribute to a Roth IRA in 2014. While the amount you can earn and still contribute to a Roth has not increased for single individuals, this threshold did increase by $2,000 for single individuals and $3,000 for joint filers as follows:
||Single ? Individuals
||Married ? Couples
|Phase-out ? begins
|Phase-out ? ends
If your income is too high for a Roth, don’t forget that the rules changed a few years ago, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.
And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $181,000 – $191,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2014 Budget
Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2013 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2014.
2014 Maximum Retirement Account Contributions:
Retirement Savings Option
||Under the age
|50 or older by December 31st
401(k) or 403(b)
As people switch jobs, change financial planners, or just move through life, it’s not uncommon to leave a trail of IRA accounts, 401k accounts, and 403b accounts. Why not take this opportunity to clean up these retirement accounts by consolidating them into one or two accounts?
Consolidating all of your retirement accounts into just a few accounts makes a lot of sense for many reasons, including:
? The fewer the number of accounts, the easier it is to manage your investment portfolio. There are recommended asset allocations based on your age, financial goals, and risk tolerance available on most financial websites. Plus, make sure to either periodically rebalance your investment portfolio on your own, or seek the assistance of a financial professional to help maintain the recommended asset allocation for your portfolio.
? You also generally have the opportunity to borrow half of the balance in your 401k or 403b account, up to $50k. This can include a Solo 401k as well. Please note, however, that you can only take out a loan from the account at your current employer based on that employer’s rules. For that reason, rolling old 401k and 403b money into your active 401k or 403 account could give you tax-free access to more of your retirement money in case of a financial hardship or to use as the down payment on a home. You can also usually roll IRAs into a 401k or 403b account too thanks to one of the Bush Tax Acts. (Please note that if you leave your current job and have not paid off the full amount borrowed, the remaining outstanding balance will be treated as a taxable distribution subject to federal income taxes, state income taxes, and depending on your age, a 10% early withdrawal penalty as well.)
Consolidating your accounts should actually be quite easy. Since one goal of every financial institution and investment advisor is to hold and/or manage as much in assets as possible, and they all love slow moving retirement assets, they should be extremely helpful as you complete the necessary paperwork to initiate and complete these rollovers.
Caveat converter. Anyone who contributes to a Traditional IRA each year, and then converts that IRA to a Roth IRA, probably does NOT want to roll their 401k and 403b accounts into an IRA. The way the formula works that determines how much of a Roth Conversion is taxable, the more money you have in IRAs, the higher the percentage of the conversion that is taxable. IRA assets include Traditional IRAs, Rollover IRAs, SEP IRAs, and SIMPLE IRAs.
Why not also take this opportunity to rebalance your entire investment portfolio as part of the spring clean up? Consider putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.
And while you’re at it, why not take this opportunity to review who is listed as a beneficiary on your retirement and insurance accounts too? No matter what your will says, the person who will receive money held in your retirement or insurance accounts when you die is the person listed as the beneficiary on that account on the day you die. If you got married, divorced, re-married, had kids, have kids getting married, reached the point where your kids are having kids, or other circumstances to your family life, did you update the beneficiaries listed on each retirement and insurance account to direct those assets to the proper person or charity upon your death?