We are three weeks in – are you still on track with your financial resolutions? If not, consider the following TO DO list of items we recommend that you get done early in the year:
1 – If you are still in the process of doing annual Roth conversions, consider doing some or all your 2021 conversion now. If you believe the stock market will continue to rise for the year, the earlier in the year you do a conversion, the better. This would mean as the market continues to climb, that growth would be in your Roth IRA. If the growth is in your Roth IRA, it is tax-free. If the funds remain in your Traditional IRA, the growth would be in your tax-deferred account, and you will later need to pay taxes on that growth.
If you believe the market is headed for a decline, you will want to wait to do your conversion when the market is down. This will allow you to convert a greater number of shares. When the share price increases, if the growth is in your Roth, it will be tax-free.
Not sure about what you think the market is going to do during 2021? Maybe hedge your bets and do some of what you want to convert now. Plan on doing another Roth conversion in the summer and then doing a final one for the year in December. If the market does decline significantly at some point in time during the year, do the balance of your conversion at that time.
Using your stimulus money to pay the taxes on a Roth conversion would be an excellent use of these unexpected funds.
2 – Make your IRA contributions early in the year. You can make IRA contributions up until April 15th of the following year. If you put the money in during January for the current year, it means that for that 16 months, it is growing tax-free in the Roth IRA or tax-deferred in the Traditional IRA. You lose that 16 months of growth if you wait to fund your IRA at the last moment, near the April 15th deadline.
If you want to take advantage of the highs and lows in the market, consider making monthly investments to be buying in at several different price points.
Funding your IRA would be another good use of your stimulus money if you are financially doing well.
3 – The start of the year is an excellent time to review your beneficiaries and make sure they are up-to-date. Look at beneficiaries on your retirement accounts – those through work and your IRA accounts. Review beneficiaries on all life insurance policies, both through work and those you have purchased independently. Do you need to update beneficiaries for your pension? Do you need to update the transfer on death (TOD) or payable on death (POD) individuals on your accounts? When was the last time you reviewed your will to make sure the beneficiaries in it are current?
Getting married or divorced would indicate a need to change beneficiaries. Become a widow or widower might mean a beneficiary change is in order. Have you given birth to a new child or become a grandparent that would suggest a need to change beneficiaries? Review your documentation and make sure your beneficiaries are up-to-date.
4 – The start of the year is a good time to consider increasing the percentage you contribute to your employer plan. The maximum contributions for 401(k) and 457 plans remains at $19,000 if you are under age 50 and $26,000 if you are age 50 or older. 403(b) plans can have even higher limits since they offer catch-up options. SIMPLE IRAs have a maximum contribution of $13,500 or $16,500 for those under age 50 and those age 50 and over, respectfully.
If your employer is offering a Roth version, the recommendation is to take advantage of that and put your dollars into the Roth 401(k), Roth 457, or Roth 403(b). With the anticipation that taxes are likely to increase in the future, some believe they will be increasing significantly; getting taxes paid now rather than later is the recommendation. Any employer match is required to go into your pre-tax dollar account.
If your employer does not yet have a Roth version, we recommend that you talk with human resources or management to try and get a Roth version in place. Having a Roth version gives individuals with higher incomes who do not qualify for Roth IRAs an opportunity to get tax-free growth on retirement dollars. Even for those who can do Roth IRAs, having the additional dollars in a Roth account at work can be advantageous.
5 – We recommend that everyone take their RMD early in the year. There are new rules delaying RMDs to age 72 if you had not turned 70 ½ by December 31, 2019. If you had obtained the age of 70 ½ before that date, you need to follow the “old rules.” Beneficiary IRAs under the “old rules” must take an annual distribution and have a lifetime to take distributions. For those under the “new rules,” you have ten years to liquidate the entire account with no annual distribution requirements.
Many individuals wait until December to take their RMDs. The advantage is this does give you tax-free or tax-deferred growth for a few more months. The disadvantage comes if someone were to pass away during the year before taking their RMD. The beneficiaries now need to take the RMD before the end of the year. Depending on where the account is located and how quickly funds can get to the beneficiaries, there is a concern about getting that distribution done timely.
Remember, Roth IRAs do not have any RMD requirements. Roth plans through an employer often have RMD requirements because they want to get funds out of the plan. If you do not need those funds, we would recommend that you roll your employer plans’ Roth balance to a Roth IRA to avoid having to remove it from the tax-free account.
6 – Finally, the beginning of the year is a great time to get organized. Review your spending plan or budget. How did you spend your money last year? Are there adjustments that need to be made? Automate your savings to make sure it happens each and every month. Review expenses to determine where you can cut them without changing your lifestyle. Decide and make a plan to get debt paid down. Consider if you need to adjust tax withholdings from paychecks, pensions, or retirement plan distributions.
This is an excellent time to review your important paper records. Many of you have a Trolley book or a family preparedness book that needs reviewing. Make sure that your records are organized and that papers are where they belong. Start with a clean slate by getting file drawers or folders cleaned out. Shred receipts, invoices, and bills that are not required to be kept. Get your tax folder ready for documents as they come in the mail, or you print them from online sources. Review your credit report at AnnuaCreditReport.com and fix any errors.
Getting through this TO DO list and starting yourself out on the right financial foot can hopefully be the start to a less stressful financial year. If you need assistance on how to accomplish any of this TO DO list, we would be happy to assist.
