Follow these 8 wise money-saving tips to save more as you go into the New Year.
In this article:
- Boost Contributions to Tax-Advantaged Retirement Savings Accounts
- Minimize Investment Gains Taxes
- Track Your Progress Toward Your Financial Goals
- Think About a 401(k) Rollover or a Roth Conversion
- Consider Donating Money to Charity
- Manage Withdrawals from Tax-Exempt Accounts – Timing Is Everything!
- Assess Your Retirement Plan and Investment Strategy
- Discuss Legacy Plans with Your Family
Wise Money-Saving Moves to Make Next Year Better
1. Boost Contributions to Tax-Advantaged Retirement Savings Accounts
Optimize your nest egg by cleverly using the new 2019 IRS Contribution limits.
A 401(k) account always has a bigger contribution limit compared to a Traditional IRA. As of 2019, a 401(k) can receive $19,000 in contributions for those below 50 and $25,000 for those 50 and above. A Traditional IRA can only accept up to $6,000 for those below 50 and $7,000 for those 50 and above.
For those who qualify, investing in a 401(k) can give higher limits, which optimizes your savings with pre-tax money. Due to the pre-tax characteristic, 401(k) investors can lower their income brackets, which may lead to better tax rates.
On the other hand, some investors do not have many investment options in a 401(k) account, since most of the time the employer finds a custodian to decide investment allocation. Investors who want more active participation in their financial journey can instead opt for an IRA.
By contributing up to the maximum limits to a 401(k) or an IRA, an investor can get more mileage out of every dollar. Time becomes an ally, as well as the government due to all the tax benefits an investor can get.
Another underappreciated savings account that most investors ignore is the Health Savings Account (HSA). Any savings put in the HSA do not incur federal income tax during the deposit.
According to the 26 CFR Tax forms and instructions 2019, contributions for single investors is at $3,500 while contributions for those who have families are at $7,000. If the investor is 55 or older, the catch-up contribution is increased by $1,000.
2. Minimize Capital Gains Taxes
Capital gains not only produce profits, but also taxes. These taxes can eat up your potential nest egg, so finding ways to minimize them legally is a great idea.
A common situation where investors can be unnecessarily taxed lies with the short-term and long-term capital gains tax. If an investor sells an investment after less than a year holding it, the transaction receives the short-term capital gains tax, which is often higher than long-term capital gains tax.
For federal taxes, capital gains tax ranges from 10% to 37% for investments held less than a year, depending on the income bracket. On the other hand, capital gains tax range from 0%, 15%, and 20% for investments held for more than a year.
For example, an investor in the $157,501 to $200,000 income bracket will pay 32% for short-term capital gains tax. If the investor postpones the distribution of income to more than a year, the capital gains tax will decrease to only 15%.
By postponing the selling of the investment by a year in this situation, the investor saves more than half in taxes. The extra money can remain in the account to further fuel growth.
3. Track Your Progress Toward Your Financial Goals
By tracking progress, investors can see the needed actions for improvement and have the motivation to continue saving and investing.
A cash balance sheet or even a yearly report about your IRA or 401(k) is not enough. Write down a road map instead to make it easier to understand where you stand, look to the past, and project the future. Keeping an investment diary can help the investor record every transaction and gain data to improve investment strategy.
Lastly, investors can double-check investment movements to see if there are discrepancies from the investor’s records and the records of the custodian and broker.
Other than providing information, investors can use the data from the investment diary to project possible future movements. These projections can help investors budget their capital for optimal investment allocation.
Use retirement calculators to help formulate a plan.
4. Think About a 401(k) Rollover or a Roth Conversion
If an investor has changed jobs or just wants to transfer their 401(k) holdings to an IRA, doing a 401(k) rollover is necessary. However, not a lot of investors know that a rollover can function as a money-saving action.
How does a 401(k) rollover save money? When you do a 401(k) rollover, you can save on some fees.
IRAs typically charge lower or no annual fees, while a 401(k) charges a percentage of the portfolio asset value each year.
On the other hand, doing a Roth conversion to a Traditional IRA can lead to taxes on the year of distribution. However, if the investor expects that they are in a lower income bracket than usual, doing a Roth rollover can save future taxes as the investor will pay taxes during the rollover year, when they have lower tax rates compared to the future.
By cleverly rolling over capital from one investment vehicle to the other, investors can gain a lower annual fee from a 401(k) rollover and an early tax distribution through a Roth conversion. However, prudence is always necessary if investors want to optimize their finances, so always do research before deciding on doing a rollover or conversion.
5. Consider Donating Money to Charity
You can donate up to 50% of your adjusted gross income, according to the IRS.
In fact, you can even donate more and get the benefits of the lower income bracket for five years, as per IRS publication 526.
The important thing to note when giving a donation is always to itemize such gifts. The Schedule A Form 1040 is the paperwork to send to the IRS for such donations, so it is handy to itemize such gifts as soon as possible.
6. Manage Withdrawals from Tax-Exempt Accounts – Timing Is Everything!
Each retirement account has its own distribution provisions.
Roth IRAs do not have any taxes for distribution unless the investor is younger than 59 and a half years old.
For 401(k) accounts and Traditional IRAs, distributions have effects on your tax bracket as well as additional taxes.
Unless necessary, leave the money in your retirement account to grow.
For some accounts, the law mandates distribution at 70 and a half years old, so withdrawals preferably should be the exception rather than a rule.
For HSA, there is a 20% penalty and taxes for any withdrawals if not qualified. If the investor is 65 years old or over. there are no penalties but will owe taxes on the withdrawals made.
Basically, the HSA becomes a second 401(k) as they have similar tax benefits. Like the savings account mentioned before, prudent withdrawals can affect your income limits and such actions can lead to lower tax brackets if done properly.
7. Assess Your Retirement Plan and Investment Strategy
Planning for retirement is not a simple journey due to changing laws and moving market environments.
Due to the unpredictable financial market, continuous assessment of an investment strategy is a must.
Before entering the new year, talking with your financial advisor or analyzing your investments are great ways to have a head start financially.
8. Discuss Legacy Plans with Your Family
Year-end holidays are usually the time for family gatherings. Since everybody can sit down at the table, having a conversation about family matters after a hearty meal is a practical way to spend time.
For example, assigning which family member will have the financial power of attorney and the medical power of attorney can lessen the impact of tragedies.
Having a will is really helpful for the surviving family. A prepared will can help the surviving family members save time and resources at the time of death.
Not only does discussing legacy plans create money saving ideas for families, it also helps them save up on resources.
Having a power of attorney after the death of a loved one takes much more time and money. Securing the necessary power of attorney after death is not only more expensive but also time-consuming.
Let this infographic be your guide. Download it now and use it as a reference later.
Watch this video and learn these 8 wise money moves to make before the new year:
These 8 money-saving tips can help investors plan better. Jump start your new year with these money moves and reap the rewards of a comfortable retirement with minor obstacles.
Do you have any wise money moves for the new year? Have you itemized your donations and reviewed your investment records? Let us discuss in the comments section below.