As 2011 comes to a close, we need to take this opportunity to wrap up some retirement planning loose ends. Here are some retirement planning tasks to complete before the holidays.
401(k). The 401(k) contribution limit for 2011 is $16,500, and if you are 50 or older you can add an additional $5,500. Now is the time to check your 401(k) account to see how much you have contributed since the beginning of the year. If you haven’t maxed out your 401(k), this month is your last chance to add funds that count toward tax year 2011. It’s also a great time to increase your contribution rate so that you don’t have to worry about it in 2012.
Roth IRA. Roth IRA contributions are limited to $5,000, or $6,000 if you are 50 or older. The easiest way to contribute to a Roth IRA account is to deduct a set amount automatically from each paycheck. Some people also contribute manually throughout the year. Although you can make 2011 contributions until April 2012, December is still a good time to double check your contributions and see if you can add any more money. Once you contribute after-tax dollars to a Roth IRA you won’t have to pay tax on any withdrawals in retirement, including decades worth of gains.
Capital loss write-off. December is a great time to take a quick look at your taxable accounts as well. The stock market made some great strides in the beginning of 2011. If you sold some stocks, you most likely have some profit on the books. Consider selling off some loser stocks to offset those capital gains. If you don’t have any gains, it is still a good idea to sell enough bad performing stocks to take advantage of the $3,000 tax write-off.
Rebalance. Once you finish dealing with contributions and sell off some stocks, then you should check your asset allocation. Stock markets all over the world fluctuated greatly in 2011 and your asset allocation probably no longer resembles your target allocation. You can use the cash from selling your losers to rebalance your asset allocation in 2011. Also remember to change your 401(k) investment elections to help rebalance your entire portfolio.
529 saving plan. If you have children, consider using any money left after taking care of your retirement contributions to fund a 529 college saving plan. If you pay state income tax, then it could be worthwhile to contribute to the 529 to get a state tax write off. Check your state’s 529 plan to see what the allowable state tax deduction is and whether it will reduce your tax bill.
Enjoy the holiday. Once you have wrapped up all these loose ends, it will be time to relax and enjoy the holidays with no guilt. If you couldn’t max out your retirement account contributions this year, you can always try to improve next year.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.