We’re continuing with our series on New Year’s resolutions that you can do to improve your finances. Be sure to read Part 1 for extra tips!
Pay Down Those Credit Cards
If you owe money on your credit cards, determine how much you can realistically afford to pay down during the year. For best results, try not to charge additional purchases on those cards while you’re trying to pay down what you owe. Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to pay each month to pay off a debt.
Maximize Your 401(k) & 403(b) Plan Contributions
At work, you probably have the opportunity to save for your retirement through a 401(k) or 403(b) plan sponsored by your employer. The maximum annual contribution for 2013 has increased to $17,500. And anyone who will be 50 or older by December 31st can contribute an extra $5,500 this year. Remember, amounts contributed to these plans reduce your taxable compensation and grow tax deferred.
Unless you’re already on track to contribute the maximum to your 401(k) or 403(b) plan this year, now’s the time to instruct your employer’s benefit department to increase the percentage of your salary going towards this tax-advantaged retirement savings account.
And if you’re self-employed, set up a solo 401(k) plan or a SEP IRA plan as soon as possible, if you haven’t already done so, and try to contribute to these plans systematically over the year.
Contribute $5,500 to a Roth IRA
Roth IRAs are one of the few tax-free investments available to individuals. This year, you can contribute up to $5,500 to your Roth IRA. You won’t get a tax deduction, but amounts contributed grow tax-free, as long as certain conditions are met. Consider signing up with a mutual fund company to have $458.33 automatically transferred from your checking account into a Roth IRA each month.
Don’t forget, if you’re single and your adjusted gross income (AGI) exceeds $127,000 or married and your AGI exceeds $188,000, you’re not eligible to contribute to a Roth IRA that year. If your income exceeds the applicable threshold, you’re still eligible to contribute to a traditional IRA for that year. The amount contributed isn’t tax deductible if either you or your spouse is covered under a retirement plan at work, but grows tax-deferred. You can also convert your IRAs to a Roth IRA at any time under the current rules, no matter how high your income will be.
Take Advantage of the Tax-Free College Savings Opportunities
Money contributed to Education Savings Accounts (formerly Education IRAs) and 529 Plans grow tax-free, as long as any money withdrawn is used for tuition and certain other college expenses, or in the case of ESAs, for private elementary school or high school as well. You can contribute up to $2,000 per year per child into an ESA, and up to $14,000 per year, or frontload $70,000 at one time, into a 529 Plan, subject to certain restrictions. With tax rates on the rise, these tax-free opportunities become even more attractive to most taxpayers.
Avoid Resolution Pollution
Did you set so many financial goals that you’ll end up attaining none of them? If so, take this opportunity to restate your financial resolutions for 2013.