The new year is the perfect time to review your financial situation, take advantage of last-minute tax breaks for 2019, make the most of new opportunities to save for the future, and to look for ways to save money on fees, taxes, interest and insurance. As the start of a new decade, it’s also a great time to do a deeper dive into your finances — reviewing your investments, making sure you’re protecting your assets, and assessing your progress towards your savings goals. The following steps can help you get your savings and investments off to a good start for the new year.
1. Save more in tax-advantaged accounts. The contribution limits for employer-based retirement plans increased by $500 in 2020 — you can save $19,500 for the year in a 401(k), 403(b) 457 or the Thrift Savings Plan. The limit rises to $26,000 if you’re 50 or older. If you get a raise or promotion, save some of the extra money before you get used to spending it. If you can’t afford to max out your 401(k), contribute at least enough to get any match offered by your employer — don’t leave free money on the table. Your contributions either lower your taxable income or can grow tax-free for retirement.
2. Don’t forget last-minute opportunities to save for 2019. You still have until April 1, 2020, to contribute up to $6,000 to an IRA for 2019 (or $7,000 if 50 or older). Those contributions can be to a Roth IRA if you’re single and your modified adjusted gross income was less than $137,000 in 2019, or less than $203,000 if you’re married filing jointly. You don’t get a current tax break for Roth contributions, but you can withdraw the money tax-free after age 59 ½ (and can take your contributions without penalties or taxes at any time). See the IRS’s factsheet for more information about the income limits to make Roth IRA contributions or tax-deductible traditional IRA contributions. If you work but your spouse does not, you can also contribute to an IRA on his or her behalf. And if you earned any self-employed income in 2019, you can still make tax-deductible contributions to a Simplified Employee Pension. See Retirement savings options for freelancers for more information.
3. Give a kid a huge head start for the future. Contribute to a Roth IRA for a kid. There’s no age requirement for children to contribute to a Roth IRA — they just need to have earned income from a job during the year. Kids who had a part-time or summer job can contribute up to the amount they earned from working to the Roth IRA, with a $6,000 maximum for 2019 and 2020. Contributing to a Roth when they’re young can give them a huge head start on their financial future. They can withdraw the contributions at any time without penalties or taxes — which can help them with a house down payment or back-up emergency fund — and they can withdraw the earnings tax-free after age 59 ½. You can give them the money to contribute, and you may have to sign some extra forms to set up the custodial IRA account with the brokerage firm, bank, or other financial institution. They have until April 15, 2020, to contribute based on their 2019 income.
4. Get a triple tax break with a health savings account. If you had an HSA-eligible health insurance policy in 2019, you have until April 15, 2020, to make tax-deductible contributions to a health savings account. The contributions lower your taxable income, the money grows tax-deferred, and it can be withdrawn tax-free for eligible medical expenses in any year. To qualify for 2019, your insurance policy must have had a deductible of at least $1,350 for self-only coverage, or $2,700 for family coverage. You can contribute up to $3,500 for the year if you had self-only coverage, or $7,000 for family coverage (plus an extra $1,000 for people age 55 or older). If you had an eligible policy for part of the year, your contribution limits may be pro-rated based on the number of months you had the coverage. The income and contribution limits are slightly higher in 2020. Your employer may even match your contributions. See Six strategies to make the most of a Health Savings Account for more information.
5. Check your credit report. Your credit record can make a big difference in your interest rate on loans and credit cards, and it can also affect your car insurance premiums, your ability to rent an apartment or get a cell phone, and your chances of getting some jobs. Check your credit record for errors and ways you can improve. You can get a free copy of your credit report from each of the three credit bureaus every 12 months at www.annualcreditreport.com. Also review your report for suspicious activity, which might be a clue that an identity thief has stolen your personal information. For more information about improving your credit score, which is based on information from your credit report, see What’s in my FICO scores?
6. Streamline your retirement accounts. If you’ve worked at several places during your career, you may have a lot of different 401(k) accounts and probably just received year-end statements from all of those plans. It’s a good time to review the statements to see how much you paid in fees and how the investments have performed, and consider rolling over the old retirement accounts into an IRA with a brokerage firm. You may have more investing options and lower fees with the IRA, and consolidating accounts will make it easier to keep track of your investments. The brokerage firm can help you transfer the money into the new IRA so you don’t trigger a tax bill.
7. Assess your progress towards your financial goals. No matter how old you are, it’s a good idea to do a retirement-savings check-up every few years and see where you stand. And the beginning of a new decade is a particularly good time to assess whether you’re on track to reach your goals. If it looks like you’re falling behind, you can increase your 401(k) or IRA contributions, adjust your investments, cut back your spending plans, or plan to work a few years longer. For more information about translating retirement savings into retirement income, see Making sure your assets last in retirement.
8. Protect your finances. Give yourself an insurance check-up. Do you have enough life insurance to provide for your family if you die and your income stops? Have those needs changed if you’ve had kids or they’ve grown up, or if you now have a higher income, larger mortgage or other new expenses? A life insurance calculator, such as the one at Saturday Insurance, can help you run the numbers. See Life insurance check-ups for every life stage for more information. Also, have you considered how you might pay for potential long-term care expenses as part of your retirement plans? See How to decide if long-term-care insurance is for you for more information.
9. Save on car and home insurance. Reviewing your car and home insurance every year can help you save money. Make sure you’re getting credit for all of the discounts you deserve (such as the good student discount for high school and college students with a B average or better, low-mileage discount, breaks for certain occupations and home improvements, and a multi-policy discount if you keep your car and home or renters insurance with the same insurer). You may save even more money if you take a defensive-driving course or if you sign up for a data tracking program, where you install a device in your car or app on your phone and your insurer keeps track of your mileage and driving habits. And you may be able to save up to 20% on your premiums by increasing your deductibles from $250 to $500 or $1,000, which also helps prevent you from filing small claims that could cause your rate to rise. It’s also a good idea to shop around for coverage every few years, especially if you’ve had any life changes since you last bought your insurance — such as if you now have a teenage driver, moved to a new home, or bought a new car.
10. Master your health insurance plan for 2020. This is a great time to review your health insurance coverage for the year. You may have a new health insurance policy for 2020, or your current plan may have changed its coverage details, network of doctors and hospitals, and its drug formulary on January 1. Find out whether the doctors and facilities you like to use are still in the plan’s network and see if your out-of-pocket costs for your medications have changed (and if you can use a generic drug or a therapeutic equivalent that has lower co-pays). Also find out which hospitals and urgent-care centers are covered and what steps you should take in an emergency — so you aren’t scrambling to figure out the rules while you’re racing to go to the ER.
11. Review your investments. Make sure your investments still match your timeframe and risk tolerance. Do you need to rebalance your portfolio? If some of your investments have performed better than others, your portfolio might be more risky (or less risky) than you had originally intended — for example, if your stock funds have performed better than your bond funds, the portfolio might have a much higher percentage of stock funds than you want. There are several ways to rebalance your portfolio to get it back on track. You can sell some funds that have performed well and buy more of the type of funds that have underperformed, or you can invest new money into the funds that are now underweighted. You can sign up for an automatic rebalancing program with some 401(k)s and other retirement plans. If you’d like more help making sure your portfolio matches your timeframe, you can invest in a target-date fund, where professional investment managers create a diversified portfolio based on your retirement schedule and gradually shift to more conservative investments as that date gets closer. For more information, see Savings tips for all life stages.
12. Make a plan for paying down debt. The less money you have to pay towards high-interest debt, the more you’ll have available for your other goals. Make a list of all of your debt — including credit cards, car loans, student loans, mortgage, and any home-equity loans or other debt — and then prioritize which loans to pay off first. High-interest credit-card debt should be first, followed by other high-interest loans that aren’t tax-deductible. If you have student loans, look into your payoff options — the Department of Education’s repayment estimator can help you compare your payoff options for federal student loans. If you have a low interest rate on your mortgage, paying that off might be your last priority. But you may still be able to reduce your costs over the long-term — if interest rates have dropped since you took out your mortgage, assess whether it’s worthwhile pay the fees to refinance to a lower rate, or consider adding money to your payments in months when you have extra cash so you can pay off the loan faster.
13. Replenish your emergency fund. It’s a good idea to keep at least three to six months’ worth of expenses in an emergency fund that you can access without penalty for unexpected expenses, which can help you avoid expensive debt. Keep the money in a separate money-market account or savings account so it doesn’t get mixed up with your regular bills. If you had to use any of the money from the emergency fund over the past year, now’s a good time to start replenishing the account. See the Consumer Financial Protection Bureau’s Essential guide to building an emergency fund for more information.
14. Update your legal documents and beneficiary designations. The start of a new decade is also a good time to review your will, powers of attorney, health-care proxy and beneficiary designations on your retirement savings and life insurance policies to make sure that the money will go to the people or charities you’d like to support. Review all of your accounts, in addition to your legal documents, especially if you’ve gotten married or divorced, had children, or if any of your original beneficiaries have died. Don’t forget to check on old 401(k)s from former employers — you may have designated your parents or other family members if you started the job before you were married, but want your spouse to inherit the money now. If you don’t change the beneficiary designations, they won’t inherit the money even if you’ve updated your will — your beneficiary designations supersede any information in your will.
15. Make short-term savings goals. Think about your savings goals for the next year or so — whether it’s paying for summer vacation, buying holiday gifts for your family or friends, or making a down payment on a new car or house. Then start setting aside a little money every month towards that goal. Saving a small amount each month makes the goal seem more manageable and can help you avoid landing in debt later on. And working towards these short-term goals can make saving more fun.
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Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.