Planning your 2012 financial check-up
January 31, 2012
The first months of a new year are always a good time for a financial check-up. Taking a fresh look at your finances allows you to take the pulse of where you are with respect to your goals, and prescribe new courses of action to improve your financial health.
Given the need for a check-up in general, along with some changes specific to 2012, here are five steps you should take early this year:
- Calculate your progress towards your financial goals. From savings accounts to the stock market, returns were generally disappointing in 2011. This means you may not be as far along towards your financial goals as you'd like. Check whether your returns and contributions to savings measured up, and if necessary, adjust your pace of saving accordingly.
- Reset your 401k contributions. You may now be able to contribute up to $17,000 a year to a 401k, which is $500 more than last year's limit. Even if you can't afford to reach that limit, if you got a raise last year, you should make sure you've increased your 401(k) contributions proportionately. In particular, make sure you are contributing enough to take full advantage of an employer match, if your company has one.
- Consider the role of an IRA in your plan. Depending on your tax and income situation, consider whether to use an IRA to supplement your 401(k) or other employer retirement plan. Weigh the benefits of a traditional (pre-tax) or Roth (after-tax) IRA. When in doubt, lean towards the traditional IRA. You can always convert a traditional to a Roth IRA and pay the tax at that time, but once you've paid taxes on income going into a Roth IRA, you can't get them back.
- Catch up on your IRA contributions. There are limits to how much you can contribute into a tax-deductible, traditional IRA, but if you act early in the year, you can make the most of these limits. Contributions for the 2011 tax year don't have to be made until April 17, 2012, giving you a chance to get caught up if you missed making an IRA contribution last year. Also, while contribution limits depend on income and other factors, in general you may be able to deduct a larger IRA contribution if you are over age 50, which is another good way to get caught up on funding your retirement plan.
- Check the competitiveness of savings accounts. Interest rates on CDs, savings, and money market accounts still have not bounced back, but even at their current low levels, it is important to note that they vary widely from one bank to another. At least once a year, you should be checking on the rate you are earning, and comparing it to other CD, savings, and money market rates available in your region.
These steps aren't painful and can be surprisingly quick too. If you make a point to cover each one, your retirement savings could be healthier for years to come.