‘Tis the Season’ to be giving… to your financial health
Happy Holidays to everyone wherever this letter may find you! In this article, I am going offer some suggestions on how you can still make adjustments in your savings and investment strategy through April of 2010 to help those whom have procrastinated contributing to your 2009 financial future. At the same time you can be laying the groundwork for smarter investing for 2010 and the years ahead. While we are in the season of shopping and giving, now is the perfect time to sit down with your loved ones and plan ahead for 2010. Yes, this does mean review, or in some cases, start a budget.
How many years have New Year’s resolutions rang hollow? We start out with a bang, only to fizzle. So let’s approach 2010 a little differently. Start 2010 with clearly defined goals to turn 2009 into the year that “was”, instead of being a year of misses and needless procrastination. It is almost as though we are going “Back in Time”.
Let’s start with your IRAs (Individual Retirement Arrangements) and it’s OK to start small and get big. Have you maximized yours and your spouse’s IRA contribution limits? For those of you under 50, the limit is $5K each, or $10K between a husband and wife, even if one of the spouses has no earned income. If you are part of the 50 plus club, tack on another $500! You’ve got until the tax filing deadline, which is always near or on April 15th to make these contributions. If you are within the income limits (which the majority of the readers will be) to contribute to a ROTH IRA, then you can invest after-tax dollars to have qualified “tax free” withdrawals at your retirement. If you are above the income limits, seriously consider contributing to a “non tax deductible” IRA with the intention to convert it to a ROTH IRA in 2010 when the income limit goes away for converting to a ROTH for the one year. The question is, is it better to pay taxes now and have no taxes to pay on those accounts in retirement? It is a very compelling discussion and worth having with a financial professional. I will make a point to address this on my BLOG on the VR Sam website.
But how can you plan to make contributions by April 2010 if your savings looks bleak, especially with the holidays upon you? Make a quick review of how your current investments and savings is being directed. If you have not maxed out your IRAs but are contributing to an Educational Savings 529 plan; stop it. Redirect the money towards your ROTH instead. Why? Your ROTH IRA can be used for educational expenses as well as your retirement, building flexibility into your plan. If your children are young, you can use “tax free” qualified dollars, your Roth, for their education, should you do no other educational planning by the time they start school. This would give you the flexibility to invest in your own retirement and use some of the funds for educational purposes. You are still accomplishing the same thing, right? And then some! Let the 529s be something the grandparents contribute to if you aren’t maximizing your ROTH IRAs. Tell all grandparents about the accounts that are opened with THEIR grandchildren as the beneficiaries. It is very simple for them to add contributions and the contributions limits are quite large. ‘Tis the season’ to be giving.
How much in matching funds are you getting from Uncle Sam in your military Thrift Savings Plan (TSP)/401K? How much? Oh that’s right, NOTHING. If you are contributing to your TSP, reduce it or stop it until at least maximizing your ROTH IRA! It is so easy to “fire and forget” and let it grow tax deferred for years, right? But be sure to redirect it immediately to “keep the money out of your pocket,” especially at this time of year. Remember, you can always increase contributions to your TSP throughout the year so while you qualify for a ROTH, make it the priority.
So what else can you make up now as 2009 winds to an end? Let’s circle back to education accounts? I know, I just said to reduce or stop contributing to a 529 but there are other educational vehicles that should be considered and they are not all created equal. While a comparison of these plans is beyond the scope of this article, the ‘Good Ole ‘ Educational IRAs and Coverdale Savings Accounts (A.K.A ESAs), even with their limited contributions, offer an excellent foundation to saving for your children’s education. The age of your children, and advice from your financial planner, should be carefully considered before contributing to any and all education accounts. My suggestion is to first invest the maximum of $2K per child, and any excess funds should be considered to invest in 529s or other educational vehicles. For these kinds of accounts, you will have until the tax filing date in April 2010 to make your contributions.
Any contributions made in 2010 for tax year 2009 must be earmarked as “previous year” to get the tax advantage for 2009. So heads up! It is easy to make contributions for the “current” year, while thinking you are catching up with 2009. Don’t disappoint yourself!
Finally, let’s put these ideas into practical application. Let’s say you have been contributing $500/mo to your TSP. In order for there to be no change in your family cash flow, stop the contribution and have the $500 go towards a ROTH IRA as “previous” year contributions. At the very least, by April you will have contributed $2000 towards your 2009 ROTH. And if you have adequate savings, contribute as much as you can to maximize your ROTH, with the intention to save even more in 2010.
Happy savings this Holiday Season. Because if you don’t save for yourself, who will? I wish you the very best! Please email me with questions.