This year has been marked by levels of uncertainty most of us have never experienced before in our lifetimes. If there was ever a year where planning and preparedness were needed, it was 2020. While we can’t erase all traces of this year when the clock strikes midnight, there are a few things we can do to get 2021 started off on the right financial footing.
Double Check Your 401k Deferral
The contribution limit for 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan remains unchanged at $19,500 for 2021. The same goes for catchup contributions for workers age 50 and older, it’s staying put at $6,500.
Although the contribution limits aren’t changing next year, the compensation limit for these plans has climbed to $290,000. This is especially important for high earners who might be on the cusp of that limit as these plans can only use up to $290,000 when applying the matching formula.
Let’s say you make earn $400,000 a year and your company has a 100% match on up to 5% of your deferrals. For sake of ease, we are ignoring any additional restrictions that may apply to highly compensated employees (HCEs), as those can be plan specific. With this in mind, you can still contribute the full $19,500 for the year, but your company match would be limited to $14,500. ($290,000 compensation limit x 5% match = $14,500).
If you aren’t sure of your company’s matching formula, make sure to check with your employer so that you aren’t leaving money on the table.
Consider Refinancing
Just when we think interest rates cannot possibly go lower, they do. Rates have continued to slide throughout 2020 with the average 30-year fixed-rate mortgage sitting at 2.66% as I write this. If you have a $300,000 mortgage with a 4% interest rate and can refinance to 3%, you would save over $60,000 over the life of your loan and about $2,000 a year in payments.
It’s also not a bad time to evaluate your refinancing options with other debt, like student loans. If you have federal loans be cautious before moving forward with a refinance, as there are other benefits to take into consideration with this kind of debt. This year was a prime example, with interest on those loans being slashed to 0% and payments being paused for most of the year.
Check Your Tax Withholding
If there’s been a significant change to your household income, it’s worth checking in on your tax withholding. Whether you’re drawing from your retirement accounts or still receiving a paycheck, the IRS has a tax withholding estimator that can help you determine if you’re withholding enough for taxes.
If you find that you need to change your withholding from a paycheck you can do so by completing a new W-4 and handing it in to your employer. And good news – starting in 2020 the new W-4 form has been simplified and has done away with asking you to choose a number of allowances. Instead, you just answer a few questions about your filing status, dependents, and income and you’re finished.
While withholding too much throughout the year is basically giving the government a tax-free loan, withholding too little can cause an unexpected tax bill the following year. The best thing to do is get as close to $0 owed as possible without having a giant refund. This allows you to hold on to as much of your paycheck as possible without loaning it out tax-free.
Don’t Wait to Invest
If you’re waiting for the next market drop to start investing, don’t. While it’s tempting to sit out until things cool off, it’s impossible to market time your way back in. While the economy is still feeling the effects of the virus today, the stock market had already begun to recover just a few weeks after its March lows and hasn’t looked back since. No one could have predicted that. The best time to invest is, well right now. If you have a systematic approach to investing and re-balancing, you’ll able to take advantage of the market’s movements, no matter their direction.
From all of us here at TAAG, Happy New Year! Here’s to a happy and healthy 2021.