At this time of year, our thoughts naturally turn to the future and what the new year might bring. Here are some financial housekeeping chores to consider as either year end to dos or as part of your New Year's resolutions.
Saving for retirement, part 1
If you're nearing retirement and have some disposable income, consider contributing the maximum allowable amount to your 401(k) or 403(b) plan. While this year's limit is $18,000 annually—plus another $6,000 if you're age 50 or older—your plan's limit may be less. Highly compensated employees may not be eligible to contribute up to a plan's maximum, either. If you have time, consider maxing out this year—or make that a goal for next year (the limit for 2018 is $18,500).
Saving for retirement, part 2
If you're fortunate enough to meet your retirement plan limits for the year and have excess cash, consider opening a traditional IRA. Anyone can contribute to this type of account, but you must meet certain income restrictions to enjoy tax-deductible contributions. Even without the initial tax deduction, the maximum annual contribution of $5,500—and extra $1,000 bump for people aged 50-plus—potentially grows tax-deferred.
The 2017 tax year deduction phase-out for single taxpayers covered by a workplace retirement plan starts at $62,000 and ends at $72,000 (it's $63,000 to $73,000 in 2018). If one spouse has a workplace retirement plan and the other doesn't, deductions phase out between $99,000 and $119,000 ($101,000 to $121,000 in 2018). And if a couple files taxes jointly and neither has a plan at work, the phase-out is between $186,000 and $196,000 ($189,000 to $199,000 in 2018).
Pay tomorrow's taxes today
While anyone can contribute to a traditional IRA, you must meet income requirements to give to a Roth IRA. The income phase-out range for a Roth IRA is $118,000 to $133,000 for singles and $186,000 to $196,000 for married couples in 2017. In 2018, the income phase-out range for a Roth IRA is $120,000 to $135,000 for singles and $189,000 to $199,000 for married couples. Contributing to a Roth may make sense if you expect your taxes to remain about the same as or higher in retirement than during your working years. If you qualify by income, you can also convert your traditional IRA to a Roth, but be aware you'll owe taxes on the entire converted amount for that tax year.
By the way, you have until the 2017 tax-year filing deadline, April 17, 2018, to contribute to either type of IRA for 2017.
Take care of business, part 1
Do the necessary paperwork to ensure your beneficiary designations are up to date. Sign up for Medicare Part B when you're first eligible, or you will likely have to pay a late enrollment penalty for as long as you own the health coverage. Review your will, trusts, and other financial documents annually and change them when life dictates that change.
Take care of business, part 2
With the exception of Roth IRAs, you must begin taking minimum required distributions (MRDs) from most other retirement accounts after reaching age 70 ½. Failure to take MRDs when required will result in a 50% excise tax on the amount of MRD not taken.
Have the talk
If you're spending the holidays with your family, take the opportunity to talk to them about a couple important financial topics—college choices and long-term care. If your children are old enough to think about their preferred college, they are old enough to understand how much you can contribute to their higher education—and the consequences of taking on too much debt.
Having the long-term care talk with parents can be difficult, particularly if you haven't talked to them about what happens should they need care in the future, as well as the associated cost. However uncomfortable this conversation might be, it's better to discuss this topic now before care is needed.
Now that you have a few year-end suggestions/new year to-dos that can potentially help you save money, have a happy and prosperous 2018.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917