Wednesday, January 18, 2012

Financial Housekeeping for a New Year

Live in the present.  Take a deep breath.  Isn't that better?

2011 is the “year that was” and 2012 is the “year that will be”. Of course we don’t know what kind of year it will be, but it is upon us nonetheless.

Herewith, my to-do list to begin a new year:

Fund your IRA for 2011 before April 17th
• The IRS allows you to contribute to an IRA account for the prior tax year up until the due date of your tax return for that year – April 17th 2012 for most of us.
• If eligible, fund a ROTH IRA – distributions will be tax-free in retirement. Eligibility depends on your adjusted gross income: less than $107,000 if single, less than $169,000 if married.
• If you are fortunate enough to have an income exceeding these limits, fund a Traditional IRA and convert it to a ROTH IRA at a later date – this is perfectly legal – I call it the “Back Door ROTH IRA”.
• Annual IRA contribution limits: $5,000 if less than age 50, $6,000 if 50 or older.
• The contribution limit is applied to all IRA accounts for a given tax year - $5,000 or $6,000 total, no matter how many IRAs.

Fund your IRA for 2012
• You can fund your IRA for the current year anytime beginning January 1st – BUT don’t fund for this year before you have fully funded last year.
• Funding for 2012 NOW gets the money working sooner.

Adjust your 401k Contribution
• For 2012, the maximum annual contribution limit for 401k, 403b and 457 plans is $17,000. This is an increase of $500 from 2011.
• If you are paid semi-monthly, the $500 increase is just under $21 per paycheck – you won’t miss it. You did put in the maximum $16,500 last year, didn’t you?
• If you are age 50+, you can still add the $5,500 catch-up contribution on top of the $17,000 for a total of $22,500.

Review your income tax withholding
• If you will get back more than $1,000 from Uncle Sam, your income tax withholding is too high. You earn no interest and the money is worth less due to inflation. It is not “savings”.
• You can adjust your withholding by filing a W-4 with your employer.

Re-finance your mortgage
• Mortgage rates are at near historic lows.
• Rates on 30 year loans are in the 3.9% range. Rates on 15 year loans are near 3.25%.
• My effectiveness rule is: will the new payment reduce my annual outlay by at least one month’s payment?
• Contact your current lender – they may have an “E-Z Re-Fi” program that will reduce your rate with nothing more required than the paperwork.

Review your legal documents
• Pull out your Wills, Durable Powers of Attorney, Healthcare Directives, etc – does everything still look good?
• New children? New marriage? Good time to visit your attorney.

Get started on financial aid for college
• The FAFSA can be filled out any time after January 1st .
• You should fill out a FAFSA for each student even if you think you won’t qualify for any aid.

Review your spending plan
• Estimate expenses for the year.
• Pre-fund vacations and other large expenditures by depositing money in a specific account every payday.

Relax and enjoy life. Even if you only do one of the items on this list you’ll be ahead of 100% of the people who do none of them!
Kim Miller, CFP®

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