How are you going to stay on top of your finances in 2021?
Financially planning for retirement can feel like a lot of work, especially if you have multiple moving parts to your money. Dealing with 401Ks, IRAs, Social Security, and RMDs can become overwhelming as the year gets busier, so we recommend taking stock of your finances early and planning ahead.
The beginning of the year is a great time to review your finances but knowing where to start is challenging. So, we’ve created our retirement and financial planning checklist.
Read on to discover the nine key areas you should consider for the upcoming year. We also point out some key changes and information for 2021, so you can start this year as securely as possible.
1. Review your 401K, traditional IRA, Roth IRA, and HSA contributions
If you’re earning income, you should review your accounts and plan how much you want to contribute to each one this year. Do you have a goal for each? How much will you need to contribute to get you there?
Bear in mind that contributions may be limited, so you might need to adjust your plans and payroll accordingly. For example, the contribution limit for 401Ks in 2021 is $19,500. However, if you’re over 50 years of age, you can qualify for the ‘catch-up contribution’, increasing the $19,500 limit by an additional $6,500. This also applies to 403Bs and 457 plans.
Roth IRA accounts have a much lower contribution limit of $6,000, with an additional $1,000 for those over 50.
We’ve detailed the difference between Roth IRAs and traditional IRAs before, but to recap, the main differences are:
- A Roth IRA is tax-free assets: contributed to after you’ve paid tax on the money – these have income limitations, so if you earn over a certain amount, you will not be able to contribute
- A traditional IRA is pre-tax assets: contributed to before you’ve paid tax on the money – no income limitations
To learn more about the pros and cons of Roth IRAs vs traditional IRAs, read this post.
Once you are aware of your accounts’ limitations, we advise you plan your contributions for the year. This way, you can ensure you’re on track to achieving your long-term money goals without having to continually review your accounts’ statuses.
2. Update your beneficiaries
Life sometimes moves so fast that it can be hard to keep up. New grandchildren, marriages, or other life changes may affect who you want as a beneficiary.
It’s important to stay on top of your different accounts and which beneficiaries are associated with them. Your accounts and associated beneficiaries should align with your overall estate plan and life insurance to avoid confusion.
Updating beneficiaries can be easily done online or with a signature on a form. It should only take a few minutes and is something we highly recommend putting in order while you have the time.
3. Consolidate your accounts
If you’ve previously changed employment, you may well have more than one 401K plan open. We often speak to clients who have two, three, or four 401Ks with past employers, that they’ve completely forgotten about – and that have substantial balances in them!
Moving existing 401Ks into a traditional IRA is a fantastic way to consolidate your accounts. It’s completely tax-free, with no risk, penalties, and typically no fees. If you hold multiple traditional IRAs, we also advise consolidating these into just one account.
By reducing the number of unnecessary accounts, managing your money will become more straightforward and less stressful.
4. Assess your mortgage rate
It’s very unlikely that mortgage rates will reduce further, so we recommend taking advantage of them while you can. Now is a great time to refinance your house or any investment properties you have a loan on. An advantageous rate could lower your payments, giving you greater monthly cash flow, or help you pay off the loan faster.
We spoke to a Loan Officer with 15 years’ experience about the benefits of refinancing in our podcast episode ‘Tammi Rowe – Planning Your Mortgage and Retirement’. To find out more about what refinancing could do for you, listen to the episode.
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5. Plan for emergencies
You might be faced with a financial opportunity, for example, paying off your mortgage, but it’ll leave you with less cash in the bank than you’d like. Should you do it? Or should you build up your ‘emergency fund’ first?
Having cash reserves in case of emergencies is necessary. But you don’t always have to choose between keeping lots of cash in the bank or paying off a substantial loan.
One tip we give our clients is to open an equity line of credit. There can be a minimal fee to open it, but there’s no interest if you don’t have any balance. This means that if you spend your cash reserves on something like paying off a mortgage, you have easy access to cash, as an equity line of credit comes with either a debit card, a checkbook, or both.
An equity line of credit is only available to those still working, so if you want an emergency fund for the future, we urge you to set one up while you still qualify. You won’t need to make any payments, and it won’t gain any interest, so long as the balance is zero.
6. Consider how and when you’ll take your RMDs
If you’re turning 72 in 2021, pay close attention. RMDs or Required Minimum Distributions were optional in 2020, however, the rules are changing for 2021, and if you turn 72 this year, you will have to take your RMDs this year and every year going forward.
Your individual RMDs are based on your IRAs’ combined balance, so there isn’t one set figure for everyone. You can spend your RMDs, or you can reinvest them into another brokerage account, but they must leave your IRA and cannot go into another IRA.
Bear in mind that money in a traditional IRA is pre-tax. So, when it leaves the IRA as an RMD, it’s treated as income and will be taxed.
There is no rule when you should take your RMDs, but you must start taking them before December 31st from the year you turn 72. Some people choose to take it monthly, like a paycheck, and others take it as a lump sum at the beginning or end of the year.
If you don’t need to take your RMD and don’t want to pay tax on the money you don’t need, you can make a qualified charitable deduction once you’re aged 70 and a half. This is where you direct your RMD straight from your IRA to a charity of your choice. This way, your RMD leaves the IRA but isn’t claimed as income, making it tax-free.
You can also do this with a portion of your RMD. For example, if your RMD is $10,000, and you want to instruct $5,000 to a charity and keep $5,000 for yourself, you only have to pay tax on the $5,000 you keep.
7. Apply for Social Security
If you’re planning on taking Social Security in 2021, it can be a long process. Right now, there are thousands of people applying every single day, so we advise applying two to three months ahead of when you want to start receiving your Social Security benefits.
You can apply as early as three months before the date that you want to start receiving them, so if you’ve already decided it’s part of your financial plan for 2021, don’t wait. Plan ahead, make the phone calls, and fill out the paperwork as soon as you can so that you can receive your benefits when you need them.
8. Research your Medicare options
Health insurance has never been more vital, so putting a plan in place as soon as possible is recommended. There’s a lot to think about with Medicare, from how your income affects your premiums to when the open enrollment periods are. If you’re turning 65 or going to be receiving Medicare, we encourage you to research your options.
We spoke to Medicare Specialist, Lorraine Bowen, on our podcast, and she answered all of our Medicare questions, including what it covers and how to find out if you’re entitled to it. To learn more about Medicare, listen to this episode.
9. Understand your income plan
When you stop working, you might find it more challenging to keep track of your income. There can be many moving parts in retirement with different income streams and RMDs, and it could leave you with an unnecessarily high tax bill or with fewer cash reserves than you’d like.
Now is the perfect time to adjust your income to ensure that you’re not taking too much or too little. We use a couple of different software programs that help us automatically track income on a month-by-month basis to find a monthly income figure that’s best suited to you. If you want to learn more about how we do this, reach out to us.
Those are our nine key points for preparing your finances for retirement in 2021. By completing this checklist, you’ll be giving yourself peace of mind that you’re on track to achieving your financial goals throughout the year.
We’re going to delve deeper into more of these topics as the year progresses, but if you have any urgent questions about any of the subjects we discussed in this post, please get in touch. You can contact us, or if you want to discuss your retirement goals with a member of our team, we invite you to schedule a 15-minute complimentary call with us.