With 2004 behind us, most people are taking a breather as they decide how to handle the holiday bills that are just now arriving in the mail. While it’s easy not to plan ahead for this year, planning now can produce some big benefits. Here’s what you should consider:
· Change your retirement plan contribution election. Last year you could elect to defer on a pre-tax basis, up to $13,000 into your 401(k) plan. For 2005, allowable deferral is raised to $14,000. If you turn age fifty (or older) this year, you are allowed to contribute an additional $4,000 on a pre-tax basis. To take advantage of this you need to contact your human resources department and have them increase your elective deferral.
· Review your investment options. While you are increasing your deferral, it is also a good time to review your current investment options. Last year the stock market languished for much of the first ten months before breaking out and ending the year with double digit returns. With the evidence pointing to our economy slowing down, this year may yield lower returns than last year, but I would expect stocks to outperform bonds. Bond mutual funds may have a particularly tough year assuming the Federal Reserve continues its trend of raising interest rates.
· Make annual gifts early. Most people wait until the end of the year to make gifts to family members. By making gifts early you further remove any appreciation gained during the year and you don’t risk failing to make a gift due to some unforeseen event such as death. Remember, you can give up to $11,000 to whomever you choose with out owing a gift tax (married couples can join to give $22,000).
· Add to 529-education plan. The 529 plan is by far the best investment strategy for funding a child or grandchild’s education. You can contribute up to $55,000 lump sum ($110,000 for married couples) and while you don’t receive a deduction for your contribution, distributions, when used for qualifying educational expenses are tax-free. For many of our clients, we have used the
· Review your debt. The end of the holiday season usually marks the beginning of a fresh round of new debt. Examine all of your debts and the interest rate associated with each debt. Make an effort to restructure your debt in a way that lowers your overall interest rate. One way is to switch to a credit card with a lower interest rate. To check out the best deals go to www.welchgroup.com and click on ‘Cool Links’ at the bottom of the home page and then click on ‘Best CD Rates’. There you will find a section on best credit card rates. Don’t lose sight of the fact that mortgage rates are still very attractive. This may be one of your last opportunities to lock in a fixed rate mortgage for under 6%.
· Build an emergency reserve. Commit now to setting up an automatic deposit into an emergency reserve account so that you will have ready cash for unexpected expenses throughout the year. This should be done as an automatic deposit into a money market or similar account and you should try to invest a minimum of 3% of each paycheck.
A little bit of planning done today will go a long way toward ensuring that 2005 is a financially successful year for you.