5 New Year’s Resolutions for the Almost Retired

The start of a new year is always a good time to check in on your finances.  Here are five resolutions to help you get on track if you’re thinking about retiring soon.

1) Think about what you want to do in retirement.  Do you want to travel the world? Do you want to turn a hobby into a small business? In my experience, the happiest retirees are the ones who had a clear picture about what they wanted to do once they retired.  Spend some time thinking about what you want to do when you have the time to do whatever you want.

2) Finally create a budget.  To successfully transition into retirement you need to know what you spend now and how that might change in retirement.  If you plan to travel more extensively in retirement you must accountant for that.  The same goes if you pay off your mortgage and are only responsible for taxes and insurance in the future.  Consider using an automated service like Mint.com or Quicken® to help determine your yearly expenses. Knowing your budget helps you determine if you are financially ready for retirement.

3) Review your potential income sources in retirement.  Go to www.ssa.gov to register for a username and password to review your Social Security benefits.  Pull any pension estimates from your current or past employers.  Add in any income you may earn from part-time work in retirement. Determine the value of your nest egg by adding together all your retirement and investment accounts.  If your savings totals 20-25 times the size of your current income you are probably in good shape.

4) Max out your 401k/403b/IRA contributions.  As you approach retirement it is likely you are at your highest earning years and once you retire you will fall to a lower tax bracket.  Now is an ideal time to max out contributions to retirement accounts to avoid paying taxes today and instead pay taxes in retirement at a potentially lower rate.  For 2015, those over age 50 can contribute up to $24,000/year to a 401k and/or up to $6,500/year to an IRA if they qualify.

5) Talk to a professional.  While you may have a good handle on your financial readiness, it may still be worthwhile to check in with a CERTIFIED FINANCIAL PLANNER™ professional.  Often a professional can identify holes in your financial plan that you weren’t aware of such as: 

·         Determining the most tax efficient withdrawal strategies after you retire which could save you thousands in taxes. 

·         Identifying potential risks in your portfolio that could jeopardize your retirement.

·         Determine the optimal strategy for claiming Social Security (very important for married couples!) 

A professional can help you answer many if not all of the questions you need to answer as you transition into retirement.

4 Ways to Reduce Your 2014 Taxes

Few things are as painful as filing your tax return in the spring and realizing you owe the government even more money.  Fortunately, the 2014 tax year is not over yet and there are some ways you can potentially reduce your tax bill.  Here are some ideas to lessen the tax bite:

1.  Make a traditional IRA contribution.  You can make a traditional IRA contribution all the way up to April 15^th 2015 and still have it count for the 2014 tax year. Those under age 50 can contribute up to $5,500/year and if you’re over age 50 you can contribute an additional $1,000/year for a total of $6,500/year.  The contribution will be tax deductible as long as your AGI (adjusted gross income) is below the limit. 

Here is a nice recap of the 2014 AGI limits*:  http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/traditional_ira/contribution_limits

Example: You make a $5,500 traditional IRA contribution and you fall in the 25% Federal tax bracket.

$5,500 X .25 = $1,375 in tax savings

The tax savings may be even greater since a deductible traditional IRA contribution will reduce your AGI, which may potentially affect other tax credits and deductions.  Also, this example doesn’t even include the potential state income tax savings.  I once advised a couple to make full traditional IRA contributions and they reduced their tax bill by over $3,800!

*Source: Charles Schwab & Co.

2.  Make a donation to charity.  If you itemize your deductions, you can claim donations to a qualified charity as a tax write off.  You can donate cash, used goods, clothing and your car. 

For those in high tax brackets with investments in a taxable brokerage account you can even donate shares of mutual funds/stocks and avoid paying taxes on the capital gains!  This can be substantially better than giving cash in many instances. 

If you aren’t sure which charity you want to give money to or when you want to donate but would like the tax deduction immediately you could set up a Donor Advised Fund (DAF).  This helps separate the time of the tax deduction from the time of the gift.

Make sure to keep receipts, records and appraisals so you can prove the donations if the IRS ever audits you.

3.  Capitalize on any tax losses you have.  If you bought a stock or mutual fund through a taxable brokerage account and the value of the investment has declined it may be worthwhile selling the security to be able to write off the loss.  The loss will offset any other capital gains you have potentially saving you 15% or more.  If you don’t have any gains to offset, up to $3,000/year can be used to offset ordinary income which can yield even higher tax savings.

Example: You buy XYZ stock for $10,000 and it declines to $6,000.  You sell it for a $4,000 loss.  You have $2,000 of capital gains from other stock transactions and you are in the 25% Federal tax bracket.

$4,000 loss offsets the $2,000 gain.  The remaining $2,000 of losses offset your ordinary income.  Tax savings:

$2,000 of offset capital gains x .15 (long-term capital gains tax rate) = $300  

$2,000 of offset ordinary income x .25 (Federal tax rate) = $500  

$800 in taxes saved/avoided.

If you still think the stock is worth owning you can simply buy it back as long as you wait 30 days to avoid the wash sale rules.  Here is a nice recap of the wash sale rules*:

http://www.investopedia.com/terms/w/washsalerule.asp

*Source: Investopedia

Best of all, if you have substantial capital losses over and above offsetting $3,000 of ordinary income, the losses carry forward to future tax years so they aren’t wasted.

4.  Make a contribution to a 529 plan for your child.  Many states offer a tax break for contributions to a college savings 529 plan.  A 529 plan allows contributions to grow tax-deferred and if the money is used towards qualified college expenses there are no taxes owed on the earnings.  In New York a married couple can deduct up to $10,000/year of 529 contributions which may save them approximately $650 in state taxes.  This type of account is a great way to save for your child’s college costs. 

This website provides a great recap of which states allow tax breaks for contributions*:

http://www.savingforcollege.com/529_plan_details/ 

*Source: Savingforcollege.com