The start of 2015 is right around the corner, and with it comes an opportunity to make three smart moves that can help you secure a more comfortable retirement.
What are those three smart moves?
No. 1: Update your contribution amount. In 2015, the contribution limits for most employer-sponsored retirement plans, including 401(k), 403(b), 457, and the federal government's Thrift Savings Plan, increase to $18,000 from $17,500. In addition, if you are age 50 or older in 2015, the catch-up contribution limit rises to $6,000 from $5,500. That's more tax-deferred money you can sock away for your retirement, but you need to tell your plan that you want to increase your contribution.
In 2015, the IRA contribution limit remains $5,500, with a $1,000 catch up for those aged 50 and up. If your age now permits you to add the catch up, or if you haven't taken advantage of the $5,500 limit in the past, why not try to max out your plan next year?
All else being equal, the more you sock away for a longer period of time, the better off you'll wind up. So take advantage of the 2015 limits to give yourself an edge in retirement.
No. 2: Align your investment allocations with your current reality. In most 401(k) and other employer-sponsored plans, you set your investment choices once, and then they continue with every contribution until you specifically request another change. That fire-and-forget automatic strategy can do wonders for the discipline needed to keep you investing, but it also means the choices you made years ago might not be relevant to you today.
As you age and your life status changes due to things like children and getting ever closer to retirement, it could make sense to update your selections. Additionally, plan choices change over time, and if a former selection is no longer available, the replacement your plan administrator chose for you might not be the best fit.
So at least once a year, look at the choices in your retirement plans and your current portfolio balance and make adjustments based on your current reality. The increase in 401(k)-style contribution limits coming into effect on Jan. 1 offer a great opportunity to go into your plan and take care of all the adjustments at once.
No. 3: Review your retirement planning tax strategy. When qualified retirement plans got their start, they came with the basic premise of tax-deferred contributions, tax-deferred growth, and withdrawals taxed at your full marginal income tax rate. Those traditional plans still exist, but they have been joined by Roth-style plans. In a Roth-style plan, your contribution is taxed as ordinary income, your investments grow tax-deferred, and qualified withdrawals at retirement age are completely tax free.
On top of those qualified plans, you can always invest in an ordinary brokerage account and label it as "off-limits until retirement." In an ordinary account, you can take money out at any time for any reason without penalty, and you can also buy and hold fairly tax efficiently, only owing dividend taxes along the way and capital gains taxes when you sell. Which option is best for you depends on your individual situation and what your employer offers.
If you're in a low tax bracket now and expect rates to be substantially higher when you retire, a Roth would make the most sense. If you expect either tax rates to be lower when you retire or your income to be substantially reduced, so that you are withdrawing money at lower tax brackets, then the traditional style would likely work more effectively for you. If you're looking to retire super early, then the flexibility of an ordinary brokerage account might provide the best opportunity.
Take control of your retirement in 2015
Whether you plan to retire in the very near future or you anticipate several decades before calling it quits, making these retirement moves in early 2015 can improve your chances of retiring successfully. The new year is just day away, and if a better financial future is one of your resolutions, there's no time like the present to get started.