Review workplace retirement plan contributions
Contribute to traditional or Roth accounts — or both
One decision is whether to put money pre-tax in a traditional 401(k) or workplace plan or contribute after-tax dollars in a Roth account. One rule of thumb to help guide that decision is your age and income, with younger people more likely to be in a lower tax bracket now than in later years.
“They may recommend you put all in a Roth, particularly if you are in a lower income tax bracket and the tax savings really isn’t important to you right now,” said Kamila Elliott, president of Grid 202 Partners and chair of the CFP Board of Directors. “If you’re in a higher income bracket, perhaps having some pre-tax savings could be beneficial.”
Increase automatic contributions to accounts
Whether you’re putting new money into a traditional or Roth 401(k), experts advise reviewing your automatic contributions. Try to increase them by 1% to 2%, or at least enough to get your company’s matching contribution, even if you can’t fully fund the account.
Do your best to get the employer match.
Kamila Elliott
chair of the CFP Board of Directors
“For some people, $20,500 is a stretch,” Elliott said. “It’s a great goal to have but they can’t achieve it.”
If you can’t reach the maximum contribution limit, she said, “do your best to get the employer match — and then slowly work your way up.”
Check out target date funds for simple rebalancing
Also, take the time to rebalance your portfolio, so you’re not taking on more, or less, risk that you want or need, financial advisors say. With the S&P 500 Index soaring nearly 27% in 2021, many investors may have a greater percentage of their retirement money in equities than they planned for to help meet their retirement goals.
Young recommends initially investing in a target date fund that gradually shifts assets from stocks to bonds as you get closer to retirement or when you’ll need the money. “It adjusts for you and makes sure that the risk level is appropriate,” he said, adding target date funds are a “one-stop way to get invested and not have to worry about so much going forward.”
Evaluate options for old 401(k) money
JGI/Jamie Grill
And for the job changers, if you still have 401(k) money with a former employer, you can leave the funds there, but you may want to consider rolling it into a 401(k) with a new employer or into an individual retirement account. Just don’t cash it out or you’ll face a potentially significant tax hit and pay a penalty, depending on your age, Young warns.
Also, for new contributions to traditional or Roth IRAs, you can put in up to $6,000 this year, same as last year. And, if you’re 50 or older, the maximum contribution is $7,000. If you didn’t make an IRA contribution in 2021, you have until the tax filing deadline in April to do that and have it count for last year.
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