For most Americans, meeting with their tax professional is akin to going to the dentist. It can be painful and potentially full of bad news, yet we all have to do it if we want to be financially successful. One of the key benefits of meeting with your tax professional is the opportunity to focus on retirement planning.
All across the country in meetings with tax professionals, taxpayers are being reminded that they can still fund certain retirement plans such as IRAs, Roth IRAs and Health Savings Accounts (HSAs)&a;nbsp;for 2018 until the April 15&l;sup&g;th&l;/sup&g; deadline.&a;nbsp; Even better, SEP IRAs can be funded up to when you file your return.&a;nbsp; That can be a huge benefit for those self-employed individuals on extension.
But in the weeks leading up to the April 15&l;sup&g;th&l;/sup&g; deadline, taxpayers are often trying to quickly come up with the funds to contribute to these retirement plans.&a;nbsp; For many, that might be hard to find the $5,500 needed for IRA and Roth IRA contributions (and an additional $1,000 for the age 50 plus &a;lsquo;catch up&a;rsquo; contribution) as well as $3,500 to $7,000 for your HSA.&a;nbsp; It&a;rsquo;s a large financial commitment to make even though it can be good for your overall retirement picture.
But rather than going through this rush every year when your tax professional mentions these opportunities, it would be better to create a streamlined process for retirement planning.
&l;strong&g;Take the Thinking Out Of It&l;/strong&g;
Planning for retirement can be an overwhelming process. Ideally, strategies for retirement planning should be simple and straightforward. Typically individuals should expect to use several different retirement plans to achieve success.&a;nbsp; The first step is to look at best funding methods for IRAs and HSAs throughout the year versus the rush at tax time to fund these accounts.
The IRS lays out the maximum plan contributions in the months leading up to the new year. &l;a href=&q;https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000&q; target=&q;_blank&q;&g;For instance, the 2019 contribution amounts were announced in November 2018.&a;nbsp;&l;/a&g; With this information in hand, one of the best things a taxpayer can do is fund their accounts on a monthly basis and adjust the amount upward every year to meet the contribution limit increase.
This is a good strategy for several reasons. First, it avoids a frantic rush to fund the accounts prior to deadline, which helps with cash flow. It&a;rsquo;s probably easier to come up with a few hundred dollars a month than $6,000 in one lump sum to fully fund for 2019.&a;nbsp; It also enables retirement funding to be incorporated into a monthly budget.&a;nbsp; For example, to fully max out an IRA for 2019, &a;nbsp;the taxpayer would make a monthly contribution of $500, or $583.33 for those over 50.
Second, by moving money into the account through a monthly transfer, it means that the taxpayer is investing in the markets on a monthly basis. This is often called &l;a href=&q;https://www.investopedia.com/terms/d/dollarcostaveraging.asp&q; target=&q;_blank&q;&g;dollar cost averaging &l;/a&g;where you invest the same dollar amount into an investment on a regular basis, regardless of the cost of the investment.&a;nbsp; This type of strategy can help mitigate short term volatility as the taxpayer is buying in at a variety of prices as the markets return.
Further, the ease of using a target retirement mutual fund can take the guesswork of how to build out a cost-effective diversified portfolio. The monthly investment into this type of fund allows broad market exposure.
&l;strong&g;Use Your Tax Appointment as Your Annual Check Up&l;/strong&g;
In funding an IRA and HSA, you want to always be moving forward towards retirement success. But a watched pot never seems to boil and the same is true with retirement planning.
One of the biggest mistakes a taxpayer can make is looking at their investment accounts too frequently. When an account is reviewed too often, the investment can become an emotional issue, and the taxpayer may react to market volatility in a manner that is contrary to their best long-term interest.
The best investors are those who can remain detached. It&a;rsquo;s easier to be objective if you review the portfolio quarterly, biannually or even just annually.
That is where the visit to your tax professional could be incredibly helpful. In your annual tax meeting, bring your investment statement so that a tax professional can look at how the account did over the year.&a;nbsp; They can help you benchmark your account to make sure it continues to perform over time.
&l;strong&g;Process Can Create Success&l;/strong&g;
For most investment accounts, a monthly transfer from a bank account into an IRA or HSA is very simple to set up. But that one simple action can open up the path to retirement success.&a;nbsp; Consistently funding and investing your IRA or Roth IRA becomes a repeatable action that fosters success.&a;nbsp; While it might seem small in the short term, the impact of annual funding compounding over 10 or 20 years can mean the difference between retiring on schedule or needing to work longer.
&a;nbsp;&l;/p&g;
No comments:
Post a Comment