With the New Year upon us, it’s a great time to improve your finances. Since this is such a broad category, let’s focus on retirement accounts. Most American workers are eligible to contribute to an IRA account. Many also use an employer account like a 401(k) or 403(b). Here are a few key actions to take now to ensure maximum success for the future:
First and foremost, you need to confirm you’re eligible to contribute to an IRA. For 2014, you will be able to participate as long as your income is within certain limits, which change each year. For the latest limits for your circumstances, refer to this Wikipedia entry. It’s also important to decide whether you want a Traditional IRA or a Roth IRA. The main difference is that a Traditional IRA allows you to deduct contributions from your income whereas the Roth IRA is with taxable dollars, but proceeds grow tax free while in the account.
Next, assuming you’re able to contribute, you’ll want to set up a monthly budget for investing. This is recommended over trying to make a single large investment at some point in the year. Reason being, most people don’t end up following through. By paying yourself monthly and forcing the investments through a paycheck withdrawal or electronic transfer, you’re more likely to set aside what you’d hoped for.
Finally, a key decision for IRA accounts is how you’re going to invest. Some people choose to go to a mutual fund company and set up an account that way. Others may choose to do what’s called a self-directed IRA. This is where you set up an account through a brokerage, which allows you to buy and sell stocks directly.
Since most employers offer some sort of investment plan, now is a great time to take stock of how your account is set up.
Rebalancing your 401(k) account portfolio is important. This means that if you had a mix of stocks and bonds, and stocks did well last year, your portfolio is probably now too heavily invested in stocks. If you’re seeking to maintain a steady ratio (50 percent of each, for example), then you’d need to sell some stock and re-buy bonds to get back to that ratio. Many experts recommend doing this at least once per year, so the beginning of 2014 is the perfect time.
Another key action is to focus on the investment options with the lowest expenses. Since funds will likely sit in the 401(k) account for decades, high fees can quickly eat away at your nest egg. By choosing low-cost index options over actively managed funds, you can save a lot of money in fees over the long-term.
A final idea to improve your 401(k) account this year is to increase your contributions as your salary increases each year, assuming you get a raise. By just increasing your contribution by 1 percent per year, after a decade you’ll be saving double-digits per year!
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.