When year-end is fast approaching, taking a few minutes to give your finances an once-over will help ease the post-holiday money hangover. By completing just a few tasks, you will save money on your taxes, make your tax preparation much less stressful and give you a bit more peace of mind during this hectic holiday season.
At Work
Use up your flex spending dollars at work. If you don’t, you will lose it! This is for those extra medical expenses (eyeglasses, prescriptions). Don't miss out on saving those hard earned dollars. Schedule those doctors’ appointments or get those new glasses you need. Plus, there are some over-the-counter drugs that some flex-plans cover, such as Claritin and Zantac. Check with your HR department about new items that are now covered. If your company offers a flex spending account and you don’t take advantage of it, you could be missing out on saving hard earned dollars. If you are self-employed, you can check out a medical savings account to get similar benefits. If you haven’t already, maximize your retirement contributions for your 401(k) or self-employed retirement plan. Also, if you have moved recently, let your employer (or previous) know therefore you can get all your W-2 forms together. This will save you so much time when you are doing your taxes.
At Home
It’s time to clean out your closet. Donate any clothing or other items you don't use any more to your favorite charity. It is a great tax deduction! Make sure you keep your receipts. You can also attend a charitable benefit (another reason to celebrate with friends and support a good cause). If you itemize your deductions, it should help save money on your taxes. Consider setting up an automatic savings plan. Why not get a head start on your New Year's Resolutions? Start small, $50 a month, and then raise it in 6 months. You will be saving so much money without even thinking about it. If you already have one, raise the monthly contributions by $100.
Your Investments If you are expecting a tax refund, get your paperwork together now (i.e. charitable donations, work-related expenses, brokerage account statements, medical receipts)! You will have a head start on collecting your refund - and putting it straight into the bank - which will save you time and get you your money sooner. Even if you are not expecting a refund, this is a good time to start collecting information for your taxes. You should also put off buying any mutual funds for your taxable accounts until January 1st. Many mutual funds declare capital gains in December and you could be hit with a tax bill right away.
To ROTH Or Not To ROTH
Even though the ROTH IRA has been around for a few years, it still holds an allure and I am always asked about it. If you qualify, I am a big fan of the ROTH IRA. The ROTH IRA is an individual retirement account with special tax benefits. Your contributions are made with after-tax dollars, they grow tax-deferred but when you start withdrawing the money, it is TAX-FREE. Because it is an account, you can invest in whatever you like (mutual funds, stocks, bonds). As of 2006, you are able to contribute up to $4,000 per year. If you are over 50, you can contribute up to $5,000. This will continue to increase over the next few years.
You can only contribute to or open a ROTH IRA if you make less than $95,000 as a single person or $150,000 as a couple. If you make more than $95,000 the next year, you can't add any more money to your existing ROTH IRA. However, nothing will happen to your existing ROTH IRA. You have to open a Traditional IRA. If you have a year in the future where your income dips below $95,000 you can add to your ROTH IRA again.
You are eligible to start withdrawing money from your ROTH IRA penalty free after age 59 1/2. If you need the money before that, you will be charged a 10% penalty only on ROTH IRA earnings. One of the great benefits about a ROTH IRA is that there is no age where you are required to begin taking withdrawals. With other IRAs and 401ks, you are required to start taking a minimum distribution at age 70 1/2, but there is no age limit with the ROTH IRA. Another great thing about the ROTH IRA is that if the principal has been in the account for at least five years, you don't pay any penalty to take the money out. You also don't pay any penalty if it is used for a first home, qualified education expense or certain hardships.
If you currently have a Traditional IRA and want to convert it to a ROTH IRA, beware, because you will be hit with a tax bill. Make sure you understand the impact of taxes before making this decision. You can transfer your ROTH IRA from one firm to another. As long as it stays in it's ROTH IRA form, you can transfer it as much as you like. In addition, you can change the investments within your ROTH IRA whenever you like as well.
Other than that, a ROTH IRA is the same as a Traditional IRA or 401(k) in that the money grows tax-deferred and is a great retirement savings vehicle. To understand more about what to invest in an IRA or where to open an IRA, see “Making Your IRA Count”.
You can only contribute to or open a ROTH IRA if you make less than $95,000 as a single person or $150,000 as a couple. If you make more than $95,000 the next year, you can't add any more money to your existing ROTH IRA. However, nothing will happen to your existing ROTH IRA. You have to open a Traditional IRA. If you have a year in the future where your income dips below $95,000 you can add to your ROTH IRA again.
You are eligible to start withdrawing money from your ROTH IRA penalty free after age 59 1/2. If you need the money before that, you will be charged a 10% penalty only on ROTH IRA earnings. One of the great benefits about a ROTH IRA is that there is no age where you are required to begin taking withdrawals. With other IRAs and 401ks, you are required to start taking a minimum distribution at age 70 1/2, but there is no age limit with the ROTH IRA. Another great thing about the ROTH IRA is that if the principal has been in the account for at least five years, you don't pay any penalty to take the money out. You also don't pay any penalty if it is used for a first home, qualified education expense or certain hardships.
If you currently have a Traditional IRA and want to convert it to a ROTH IRA, beware, because you will be hit with a tax bill. Make sure you understand the impact of taxes before making this decision. You can transfer your ROTH IRA from one firm to another. As long as it stays in it's ROTH IRA form, you can transfer it as much as you like. In addition, you can change the investments within your ROTH IRA whenever you like as well.
Other than that, a ROTH IRA is the same as a Traditional IRA or 401(k) in that the money grows tax-deferred and is a great retirement savings vehicle. To understand more about what to invest in an IRA or where to open an IRA, see “Making Your IRA Count”.
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