The midpoint of the year is a good time to assess whether you have been adequately preparing for retirement. If you haven’t been saving enough to qualify for all the tax breaks and employer contributions you are entitled to, there’s still plenty of time to make corrections before the end of the year. Here’s how to tell if your retirement savings are on track.
[Read: How to Qualify for Retirement Savings Tax Breaks.]
Max out your 401(k). You can defer paying income tax on up to $18,000 that you contribute to a 401(k) plan in 2017. Halfway through the year you should have contributed at least $9,000 to be on track to max out your 401(k). The halfway point jumps to $12,000 for workers age 50 and older, who can deposit a maximum of $24,000 in a 401(k) plan in 2017. Contributions to a 401(k) are typically due by the end of the calendar year.
Claim your 401(k) match. Find out how much you need to save to qualify for employer contributions to your 401(k) plan, and make sure you contribute at least that amount to your 401(k) plan. A 401(k) match is likely to be the best return you can get on any investment.
Look for lower cost investments. Your 401(k) plan is required to send you an annual 401(k) fee disclosure statement that lists every fund in your 401(k) plan and how much it costs to own. Take care to check this statement each year to see if better investment options have been added to your plan or if there are lower cost alternatives to your current fund choices. “If you have an employer-provided plan, be sure to check the plan document and investment options for any changes since your last review,” says Ben Brown, a certified financial planner and CEO of the investment management firm Entelechy in Bethesda, Maryland. “You may find that there are new, lower cost options available.” Paying lower fees means you get to keep more of your investment returns.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
Save part of your raise. If you received a raise this year, aim to put a portion of it toward retirement savings. “Employee performance reviews and salary raises are sometimes scheduled around a fiscal year ending June 30,” says David Wattenbarger, a certified financial planner for DRW Financial in Chattanooga, Tennessee. “A raise in income is often an easy opportunity to boost savings by deferring the new income into a dedicated retirement savings account.”
Rebalance your portfolio. Most people select an asset allocation that matches their risk tolerance when they begin saving for retirement. But as the stock market rises and falls, your actual investments may no longer match your target asset allocation. If this is the case, take a few minutes to shift your assets back to the investment mix you are comfortable with. “I would recommend checking your asset allocation to make sure your account is in line with your target,” Brown says. “If it has drifted due to market movement, it’s a good idea to rebalance back to your target allocation, particularly in tax-advantaged retirement accounts where you don’t have to worry about generating capital gains.” It’s also a good idea to assess whether your risk tolerance has changed over time and make any necessary adjustments.
[See: How to Pay Less Tax on Retirement Account Withdrawals.]
Fully fund your IRA. You can deposit up to $5,500 in an IRA in 2017, or $6,500 if you are age 50 or older. “Take a look at your annual retirement savings goal,” says Helen Ngo, a certified financial planner and principal at Capital Benchmark Partners in Atlanta. “If it is $5,500 for the year and you’ve only contributed $1,000 so far at this point, you will need to aggressively save $750 per month for the next six months to meet your target.”
A traditional IRA deposit will qualify you for a tax deduction. Income tax won’t be due on your traditional IRA savings until you withdraw it from the account. Alternatively, an after-tax Roth IRA contribution could allow you to take tax-free withdrawals in retirement and earn tax-free investment growth. You can contribute to a traditional and Roth IRA in the same year, as long as the total deposits to both types of account don’t exceed the annual contribution limit.
IRAs have the added bonus of a later contribution deadline than 401(k) plans. You can make deposits that will count toward tax year 2017 up until your tax filing deadline in April 2018. “Given how high the current stock markets are, I would contribute at regular intervals for a number of weeks or months, rather than put the whole amount at once, assuming you have the money,” says Inga Chira, a certified financial planner for Attainable Wealth in Los Angeles. “If $5,500 is not an option, put as much as you can. Anything is better than nothing.”
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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A Midyear Retirement Savings Checkup originally appeared on usnews.com
