Making extra mortgage payments in order to cut the amount of interest paid is quite popular these days. The theory is that you’ll save interest and then be able to save money for other things later. But, I’m not sure this is the right approach if you’re not fully saving for retirement, because you’ll miss out on years of compound interest.

Retirement Maximums
This year, the maximum 401K contribution is $16,500. The maximum Roth IRA contribution is $5000. That means a couple (assuming you both have 401K options at work), could contribute $43,000 a year to retirement. Obviously, most people can’t afford to contribute that much, but you should be contributing at least 10% of your income to retirement before you consider paying off a low-interest debt like a mortgage.

The Cost of a Mortgage Over Time
If you have a fixed rate mortgage, the interest portion remains flat for the life of the mortgage. So, in 20 years time, the $1500 costs far less than it does now. Yes, it’s still $1500, but your income will have increased just to keep pace with inflation. The mortgage will become a smaller and smaller portion of your monthly expenses, meanwhile, the money you save for retirement grows and grows and grows.

You Can’t Make Up for Lost Time
So let’s say you decide that it’s more important to be debt-free than it is to save for retirement. Let’s take an income of $50,000 as an example. You save only 3% for retirement ($1500) and put an extra $5000 a year towards your $150,000 mortgage at 6% interest. Now you have an extra $899 a month you can spend on other things, like retirement. We’ll also assume you don’t earn any raises, just to keep things simple. If you follow this option, you’ll pay $72,697 in interest and pay off your mortgage in 14 years and 2 months. Meanwhile, you’ve saved $31,000 for retirement at a very conservative growth of 4% (plus 3% inflation). Once you add the mortgage funds to your retirement in year 14, you’ll only manage to save $107,780 in 30 years.

Now let’s look at saving 10% for retirement and paying the mortgage over time. You’ll pay $173,000 in interest on the mortgage over 30 years. You’ll also save $104,000 toward retirement in 14 years, and $434,812 over 30 years.

So, yes, you’ll save $101,000 in interest, but you’ll lose $327,000 in retirement savings. That seems like a bad deal to me.

Retirement is Almost Always the Highest Priority
Certainly, you should make sure you have an emergency fund with six months of living expenses before you max out your retirement. Make sure you can pay your mortgage or rent and other vital bills.

Next, find a way to balance your credit card debt and your retirement goals. We kept our retirement savings low while paying off credit card debt, because credit card debt costs far, far more.

However, before you start saving for your dream home, or a boat, or a fancy car, or even deciding to pay off your mortgage early, make sure you max your retirement as much as your budget will allow. Yes, you won’t have to worry about making mortgage payments when you’re retired if you pay off the mortgage early, but you may not have enough money to heat that house if you don’t prioritize your retirement.

Yesterday I wrote about the benefits of the Roth 401K, and mentioned that you can roll the money into a Roth IRA to avoid required minimum distributions. So now I should probably explain what a Roth IRA is and why you should have one.

What Is a Roth IRA
A Roth IRA as an individual retirement account that you can set-up without going through your employer. You can invest the money you deposit in mutual funds and stocks. It’s very similar to a traditional IRA, but with a few key exceptions:

Post-Tax Contributions: When you fund a traditional IRA, you receive a tax deduction for your contribution. With a Roth IRA, you don’t receive a tax-deduction. However, the contributions and growth are both tax-free when you withdraw them during retirement because you paid the tax on the money you contributed already.

Income Limitations: Roth IRA contributions are subject to income limits. If you’re single, the limit is $105,000-$120,000. If you’re married filing jointly, it’s $167,000-$177,000. If your income exceeda the cap, you can still own a Roth IRA, but you can’t contribute to it that year.

No Required Minimum Distributions: 401Ks and traditional IRAs require you to withdraw a minimum distribution every year (except 2009) once you reach age 70 ½. Not with the Roth. You can leave the money there forever. If you pass it on to heirs, they can also leave the money there forever.

Looser Early Withdrawal Rules: I covered this in a previous post about withdrawing from a Roth IRA. Suffice it to say, you can withdraw your funds for a wider variety of things and with fewer penalties with a Roth IRA. Obviously, it’s still not recommended because you’re depleting your retirement, but it’s easier.

How to Open a Roth IRA
Opening a Roth IRA is simple. Choose a brokerage or mutual fund and tell them you want to open a Roth IRA. You can usually apply online, but will need to submit some signed paperwork. A brokerage will give you more options because you won’t be limited to a single fund family, but it’s a personal decision. You can open a Roth IRA for 2009 until April 15, 2010, so you could actually make double contributions in the year you open it by designating some contributions for 2009 and some for 2010, even though they all took place in 2010.

If you don’t work, but have a spouse who does, you can open a “spousal IRA”. Basically, you can contribute money from any source, as long as your spouse has qualifying income.

Roth IRA Contribution Limits
The contribution limits for a Roth IRA are the same as the limits for traditional IRA: $5,000 for most people, $6,000 for those over the age of 60. This is a total for both traditional and Roth IRAs per person, not per account. So, you and your spouse can contribute $5,000 each to any type of IRA account.

If you exceed the cap and want to open the account, you still can. Simply contribute to a traditional IRA, and then roll it over to a Roth IRA. Starting in 2010, there are no income limits for rollovers, only initial contributions.

The Roth 401K was introduced in 2006 as a counterpart to the Roth IRA. It was originally set to sunset in 2010, so most employers chose not to offer it. The sunset provision has been removed, so many employers are offering them this year. If your employer offers it, you should seriously consider switching into it. If your employer doesn’t offer it, campaign for it! It really is that good.

What a Roth 401K Is
A Roth 401K is a retirement account similar to a traditional 401K in that your employer sets up the plan and takes contributions from your paycheck. If your employer provides a 401K match, they can continue to do so, but must put matching contributions in a pre-tax account. You can typically invest in the same selection of mutual funds as your traditional 401K. Contributions remain the same: $16,500 for 2010, plus an extra $5,000 contribution for employees over age 55. Unlike the Roth IRA, there are no income limitations on Roth 401K eligibility.

If you open a Roth 401K and then switch jobs, you can either roll the funds into a new Roth 401K with your new employer or open a Roth IRA. There are no income limitations if you open the account for a Roth 401K rollover.

How a Roth 401K Differs from a Traditional 401K
There are a few key differences between the two plans:

The Roth 401K uses post-tax dollars. That means that your contributions don’t reduce your taxable income. If you contribute $50 per paycheck, your paycheck will be reduced by $50 and your taxes will be slightly higher than they were before.

Roth 401K retirement withdrawals are tax-free. All withdrawals – even the gains. If you withdraw $50,000 a year to live on, that’s exactly how much you have to live on. You don’t have to worry about setting some aside for taxes. Of course, there are two stipulations: you must be 59 ½ and the account must have been open for five years in order to receive the money tax-free. Since this is a retirement plan, that shouldn’t be a problem for you.

You can avoid required minimum distributions. Both traditional and Roth 401Ks require you to start withdrawing your savings at age 70 ½, but there’s a loophole for the Roth 401K. You can rollover your funds into a Roth IRA before the initial required minimum distribution and avoid it! Roth IRAs don’t have RMDs.

The Advantages of a Roth 401K
Even if you currently have a high tax rate, there are still advantages to choosing a Roth 401K and paying the taxes on your contributions now. First, tax rates will be going up. (Argue all you want, but most advisers agree on this point.) If you pay the taxes now, at least you know what you’re getting into.

Second, the growth is also tax-free with the Roth. Here’s a scenario: you put $1,000 in now and pay $250ish in taxes on that income. That money grows to $10,000 by the time you retire (totally making up numbers here.) If you have a traditional 401K, you’ll save the $250 on your taxes now, but owe $1,000 in taxes in retirement (assuming the 10% tax bracket at retirement.) If you have a Roth 401K, you’ll only ever pay $250 in taxes. Unless you lose a greater portion of your investment than you contributed, the Roth 401K will save you money in the long-run.

Third, not owing taxes makes it easier to plan your retirement budget. You don’t have to set aside money for taxes. Just withdraw the money and spend it as needed.

Converting to a Roth 401K
The easiest way to switch to a Roth 401K is to redirect your current contributions to the new plan. Ask your benefits administrator for the form. You can also convert your current 401K funds until the Roth 401K, but you’ll have to pay the taxes on that money. You should avoid using retirement funds to pay those taxes, so you should only convert if you have money for the taxes in savings. If you decide to convert your current account, that tax will be paid over two years. You don’t have to pay it all this year.

If this plan is available to you, you should seriously consider it. It will save you a LOT of money in the long-run, even if it costs you a little more right now.

As we near the close of 2008, some people will consider adjusting their retirement plans. Although rebalancing may be unrealistic right now, there are some things you should consider. For example, if you don’t currently invest in a retirement plan, get one now. You may also discover that you have new retirement plans available, including a Roth 401K. If it’s available, it’s worth considering a switch.

Enroll or Increase Contributions
Most employer-provided retirement plans only allow contribution level adjustments or enrollments during designated open periods, which are usually quarterly. Check with your plan administrator to find out when your next adjustment period is. If it’s not open now, it will be soon.

If you received a raise and don’t have credit card or other high-rate debt, boost your contribution to include the raise. You won’t miss it if you never see it in your take-home pay. If you do have debt, use the raise to pay it off, first. After the debt is gone, put the money towards retirement or savings rather than fritter it away on this and that.

If your company offers a match, boost your retirement contribution at least enough to receive the full match. Not all plans offer a match, but it’s free money if yours does.

For 2009, the government imposes a 401K contribution cap of $16,500 for most people, and $22,000 for people over 50. Your employer may impose a lower cap. If you’ve reached the cap, good for you. You can still find more ways to save for retirement, though. Depending on your income, you could open an IRA or Roth IRA,. You have until April 15 to contribute for 2008, or you can start your 2009 contributions on January 1.

Rebalance Your Retirement Plan
Because stocks don’t perform the same from year to year, it’s usually important to rebalance at least annually unless you have a broad selection of index funds or a target-date fund. A basket of stocks or a range of mutual funds in different sectors may need to be rebalanced more than once a year, but no more than quarterly. Use the asset allocation and portfolio allocation tools available through your retirement plan, Quicken, or online financial services to see if your portfolio still matches your preferred asset allocation and risk level.

If one sector outperformed, a specialized fund or specific stock could push your portfolio out of balance. If a fund manager changed, you could find that your fund is more or less risky than it was when you invested in it. Your rebalancing period is the best time to bring your portfolio back in line with your age and risk tolerance.

This is a sample portfolio asset allocation chart from Quicken 2005:

Sample Portfolio Allocation

The next chart is a sample target asset allocation chart from Quicken 2005 based on my time-frame and risk comfort level. In my case, it’s more than five years and I have a high tolerance for risk (because I’m still young.) The more risk you’re willing to take, the higher the return they estimate you’ll receive:

Target Asset Allocation Example

Avoid tinkering too much, though. This is your retirement fund, so you don’t want to be swapping rapidly in and out of stocks or funds or taking big gambles. If you want to do that, use a separate, non-retirement account.

This year, be mindful of tinkering too much. Unless you’re sure that a particular sector will be declining for a long time (real estate and the US auto industry come to mind), avoid making heavy shifts into or out of any single sector right now. There’s too much unpredictability in the market and you don’t want to miss out on a recovery in one segment because you focused on another.

Change Retirement Plan Options
Now that Congress has made the Roth 401K option permanent, more employers are starting to offer it. Like the Roth IRA, the Roth 401K is funded with after-tax contributions, but employer matches are funded with pre-tax dollars. The funds are subject to the same contribution caps as traditional 401Ks.

The main difference between a traditional 401K and the Roth is the tax treatment at withdrawal. Earnings on Roth 401K contributions are not taxed at withdrawal if they’ve been in the fund more than 5 years and you’re older than 59 ½. The Roth 401K is best for people who are currently in low tax brackets, but expect to be in a higher tax bracket after retirement. If you’re a younger worker in a growth field, the odds are good this will be the case. A Roth 401K may also be worthwhile if you currently have several deductions, such as mortgage interest or dependents, that you won’t have in retirement.

Unlike the Roth IRA, there are no income limits for the Roth 401K, but you must start taking withdrawals at age 70 ½.

If you already have a 401K, you can’t roll it over into a Roth 401K, but your employer may allow you to open a new account. If you change employers, you can roll your old 401K funds into an IRA, and then start a Roth 401K fresh with your new employer.

It’s a safe bet that Congress and our new President won’t find a way to fix social security this year, but you can protect yourself by investing in your own retirement. Even if rebalancing isn’t a good idea right now, consider increasing your contributions or opening a new type of plan, if available. Stocks are dirt cheap right now – and that usually means it’s a good time to buy if you invest carefully.

I’ve purposely not looked at my 401K account this week. I did check it a month ago to see if I needed to rebalance. At that time, I’d lost 2% less than the broader market and was well-diversified, so I didn’t change anything. I still don’t plan to. There are still a few things you should do about your investments during this crisis, however.

Don’t Panic
I know it’s hard, but panicking won’t do you any good. There’s absolutely nothing you can do to fix this and there’s no stock you can buy that is guaranteed to reverse your losses right away or avoid additional losses.

Invest in Index Funds
If you hold individual stocks in your retirement accounts, it might be time to move that money into a diverse range of index funds. It’s hard to predict when or how much a specific stock will recover. Although you do risk missing out on a huge recovery if you shift the money to an index fund, you also avoid the risk of losing even more money on a stock that fails to recover.

Personally, I would choose at least the following index funds:

  • S&P 500 Index Fund
  • Small Cap Index Fund
  • International Index Fund (Europe and Asia)
  • Value Fund

You could also consider an Emerging Markets Fund, but it’s a bigger risk. If you want to invest in a couple of sector-specific funds, energy and health will most likely be winners in the coming years. Real estate might not be a great sector to get into for a while, but it’s a choice only you can make.

Increase Retirement Contributions
The old rule says that you should buy low and sell high. If you’ve got a long time horizon (say 20-30 years), then now is the time to increase your contributions as much as you can comfortably afford. If you have a 401K match, increase contributions up to the limit on the match, then deposit the rest of your contributions into a Roth IRA (if eligible). If you don’t have a match, contribute the max to a Roth IRA instead.

Don’t Try to Time the Market
Don’t try to buy a fund right now to lock in a specific base price, because you may not get today’s price. You could get tomorrow’s price and no one knows what that will be. Instead, continue the traditional method of dollar-cost-averaging. Invest in your retirement plan throughout the course of the year, rather than all at once. That will be easier on your budget, too.

Don’t Get Fancy
Your retirement account is not the place to try shorting stocks or buy options. Keep it simple when your future is on the line.

Look for Losses in Taxable Accounts
If you had taxable gains earlier in the year, now is a great time to harvest some losses, especially if you own financial stocks that appear unlikely to recover in the near term. You can always re-buy them in 31 days if you think they’re a good buy in the long term.

Doing all of the above won’t stop that sick feeling you have in your stomach. The only cure for that is putting it right out of your mind. Don’t look at the statements, don’t think about your losses. Just move forward. The market will recover eventually and it will take your retirement account up with it if you stay the course.

If you receive health benefits from your employer or are enrolled in the company 401K plan, then you’re most likely subject to open enrollment rules. Basically, that means you can only make changes to your plan at designated periods unless you experience a life status change. Here are some basic questions and answers about the open enrollment period.

How Does the Open Enrollment Period Work?
During open enrollment, you can make changes to your health plan, which includes switching to a new plan if your company offers more than one, adding or removing beneficiaries, increasing or decreasing coverage, or opting out of coverage entirely. Open enrollment typically lasts one to two months and you should receive a notice from your employer announcing the period in case you need to make changes.

Many retirement plans also have open enrollment periods. These are usually quarterly, but could be yearly. Open enrollment is the time when you can join the plan, leave the plan, or change your contribution level.

Do I Have to Wait Until Open Enrollment if I Get Married? If I Have a Baby?
Although I have met one person who could only add a new child to her health plan during open enrollment, most plans allow you to make changes outside of open enrollment if you experience a “life status” change. Life status changes include:

  • Marriage
  • Divorce
  • Birth
  • Adoption
  • A child surpassing dependent eligibility (usually 24 or college graduation)
  • A change in employment for you or your spouse.

That last one can be tricky, though, so change your plan during open enrollment if your spouse is planning to leave the workforce before the next period.

What Should I Do If I’m Planning a Life Change?
If you currently have a baby on the way, you should contact HR to ask if you need to add the dependent now or can wait until the baby arrives. Do the same if you’re planning to get married. Most of the time you can wait until the event occurs, but some plans don’t allow changes outside the period. You don’t want your baby born without coverage. At any rate, you’ll need to know about parental leave or other benefits, so this is a good time to cover all your bases.

If you’re planning to retire, you should also ask HR what you need to do to prepare for that. There may be paperwork to complete in order to start receiving benefits.

Must New Employees Wait for Open Enrollment?
In most cases, new employees can be added to either a health plan or retirement plan immediately or at the end of the waiting period. Most waiting periods are a maximum of 90 days. Ask your new employer about the waiting period before leaving your old job so you can arrange for COBRA coverage or transfer to your spouse’s employee health plan during the interim.

When Is Open Enrollment?
For many employers, open enrollment occurs during September or October. Some employers have it in January if their fiscal year is also the calendar year. Many government entities have open enrollment during May or June, which is also usually when their annual budgets begin. If you don’t know, ask your HR director now and mark your calendar for the start of the next period.

What Do I Do if I Missed Open Enrollment?
Unless you’ve had a life status change, you’re probably out of luck until the next period.

Although open enrollment periods are strict, they’re easy to manage if you’re aware of the dates and take action during that period. This is not a time to hem and haw. Make changes while you can, otherwise you’ll have to wait another year.

As you’ve no doubt seen on other personal finance blogs, the Roth IRA is a wonderful and powerful retirement savings tool. It’s also a wonderful and powerful tool for covering necessary expenses right now, tax and penalty-free. However, there are certain Roth IRA withdrawal restrictions. Here’s how to make sure you do it right.

Roth IRA Withdrawal Period
You never have to withdraw funds from a Roth IRA, but you can withdraw funds anytime. Converted assets and earnings can only be withdrawn after a five-year waiting period, but there is no waiting period for contributions. The waiting period begins on January 1 of the tax year of your first contribution. Note that it’s tax year, not calendar year. If you contributed on April 15, 2008 for the 2007 tax year, then the five-year clock started on January 1, 2007 and you can start withdrawing on January 1, 2012. If you contributed on April 15, 2008 for the tax year 2008, then the clock started on January 1, 2008 and you can start withdrawing on January 1, 2013.

Tax and Penalty-Free Roth IRA Withdrawal Limits
Annual contributions can be withdrawn tax and penalty free anytime, for any reason. You can withdraw earnings tax-free and penalty-free if any of the following applies:

  • 59 ½ or older
  • Deceased (distributions to beneficiaries)
  • Disabled
  • Up to $10,000 toward purchase of first home.

Penalty-Free Roth IRA Withdrawal Limits
You can withdraw earnings without penalty for specific reasons, but you’ll have to pay regular income tax on the distributions. The penalty-free reasons are:

  • Higher education costs
  • Medical insurance premiums following a job loss
  • Medical expenses more than 7.5% of your adjusted gross income
  • Distributions are part of a series of substantially equal payments
  • IRS tax levy
  • Qualified reservist distribution.

If none of the above apply, you can withdraw earnings, but you’ll pay an additional 10% early withdrawal tax on top of the regular income tax.

The Order of Distribution
The first funds you withdraw are considered your contributions, even if you had gains between contributions. Once you exceed the amount you contributed through annual deposits, you can next withdraw money from IRA conversions. The final withdrawals come from earnings.

When Should You Withdraw?
Even though you can withdraw funds from your Roth IRA, that doesn’t mean you should. Don’t treat it like an emergency fund. Remember, even if you don’t have to pay taxes or penalties, withdrawn money no longer earns gains.

I used my Roth IRA (that had no gains after seven years) to cover a portion of my grad school expenses. Because I had no gains or losses, and the other option was more credit card debt, it was a good deal.

However, you should always look to your emergency fund, then your savings, then maybe even a home equity loan or other sources of funds before you use your retirement funds to pay the bills. Once you get in the habit of poking into your retirement, it’s hard to stop viewing the money as a piggybank. Of course, sometimes the situation is desperate. If you can do it tax and penalty-free, then you shouldn’t feel bad about using the money to put food on the table or pay your medical bills when you have no other options.

See IRS Publication 590 for more information.

Most people are aware of the importance of diversifying their portfolios. What they aren’t clear on is how to do that, and then how to proceed once that’s done. It’s not enough just to choose the right balance of investments. You also need to rebalance them once a year to ensure that your investments are on track with your goals.

How to Diversify the Portfolio
The first step to investing is choosing a diverse portfolio of investments. You can take several strategies to find the right asset allocation:

If you choose a risk-based chart, you should decrease the risk as you age. The closer you are to retirement, the safer your money should be.

You’ll find a wide range of options within each of these categories, so research carefully to compare expenses, performance, and the type of investments they hold. Then allocate your money accordingly. If you have a 401K, you may be able to allocate your money automatically every month, but you’ll have to choose a method for carving up investments in taxable and personal non-taxable accounts.

How to Rebalance the Portfolio
As the market moves, different sectors or asset classes will zoom while others lag behind. Mark a date on your calendar each year to rebalance your portfolio to your intended allocations. That reduces the risk of steep slides and climbs. Using a calendar date to rebalance also prevents you from trying to goose your returns by delaying the rebalancing. I did that once, and watched the stock collapse the day before I planned to sell it. If I’d gotten out when I should have, I would have made $18,000. Instead I made $6,000.

If you’re rebalancing 401Ks and IRAs, then compare the performance of your current holdings with your targets. If one has zoomed up, sell a little and use the proceeds to buy more of something that’s below your targeted allocation. This is also an opportunity to adjust the risk level or asset allocation classes if your needs have changed.

If you’re rebalancing a taxable investment, it gets a little more complicated. When you sell high-flyers, reduce the tax impact by selling a loser. Be hard-nosed about this – don’t let your emotions prevent you from selling a stock that’s going in the tank. The odds of it recovering are not good. Trust me. I rode Lucent all the way down. You can use losses to write off all your capital gains, plus $3,000 (in other words, you can have a capital loss up to a maximum of $3,000.)

Don’t Hold the Same Assets in Multiple Accounts
If you’ve saved the max in your retirement accounts and still have money to invest, don’t just duplicate your protected holdings. Instead, branch out to cover more sectors or asset classes. According to Money, you should hold your taxable bonds in your retirement accounts and keep your stock funds in your taxable account so you can harvest the losses.

Once you choose a diversification plan, select your investments, and set a date to rebalance, you can let your money grow without worrying about it day and night. I use a combination of asset classes and risk for my asset allocation. What’s your approach?

The news likes to bandy about the $2 million figure when predicting the amount the average American will need for retirement. These one-size-fits-all predictions don’t really work, though. $2 million could last a person in low-cost area quite a long time, but run out quickly for someone who previously earned a high income and lives in a high-cost area (like, say, Los Angeles.)

How Do You Determine the Amount You Need to Retire?
What’s the right number then? According to Money you shouldn’t worry about the number, so much as saving a good amount every month. I tried to use both their tool and the Fidelity tool they recommend and got wildly different answers.

The Money tool said I would need just under $2 million. The Fidelity tool wants me to save $4.5 million. That’s a pretty big difference. So which one is right?

It’s hard to say. Both tools allowed me to input annual raises, but those are hard to predict. Unless you plan to stay at your current job until the day you retire, you don’t know how much your income will increase from year-to-year. If you work for a generous company, you could see bumps of 10% a year. Another company might only give 4% bumps. And what if you change jobs? What sort of increase does each job change come with? My husband’s last job change came with a 28% raise. Will that continue to bear out?

Savings are a problem though. Both would only let me input a flat figure of additional savings. I couldn’t get it to adjust to always be 10% of my income, which means my final total always lagged behind.

These tools are probably only good if you’re about 15 years away from retirement and have a better idea of what you can save. If you’re looking ahead 30-35 years like me and my husband, it’s all up in the air.

Use a Percent as a Goal, Rather than a Number
Since the numbers I get from different tools are so different, I’m going to ignore the hard number. Especially since inflation changes the picture. Is that $2 million in today’s dollars or $2 million in 2039 dollars?

Instead, my goal will be to save a minimum of 10% of our income every year. That way, our savings automatically increases as our income increases. In years we can save more or get nice bonuses (we both have good opportunities for that), we’ll do so.

As our income grows, we may even be able to increase that number to 15%. Or maybe we’ll have employers who match our 401K investments (they currently don’t.)

A hard number, especially one like $5 million is scary. With all the variables and potential changes to Social Security, tax laws, etc., I’d rather focus on a percentage I can control than a fixed number that loses meaning with each passing day.

Do you target a hard number or focus on a percentage? What’s your retirement strategy?

Most people remember to check their investments, retirement accounts, and financial goals at the end of the year, but you should also check-in with your finances in the middle of the year to make sure you’re on track. This weekend, take a few minutes to check the following areas.

Retirement Accounts and Savings
If you’ve invested your retirement in index funds, you probably won’t need to do any mid-year rebalancing. You should avoid tinkering with those accounts more than once a year unless one of your investments has collapsed or changed hands. However, this is a great time to increase your retirement savings if you received a raise since the beginning of the year or make a deposit in your IRA if you’ve fallen behind.

Non-Retirement Investments
You should monitor your non-retirement investments more often. If any investments have exceeded your goals or your portfolio is out of balance, now is the time to rebalance. The market is jittery at the moment, so avoid making fear-driven changes, but you may want to remove funds or investments that have changed managers or focuses. If you started with a value fund, and now it’s a growth fund, it’s probably not doing what you want it to do. Replace it with another value fund you’ve carefully researched.

Health Savings Accounts and Flexible Spending Accounts
Some employers enroll employees in HSAs and FSAs in the fall while others do it at the beginning of the year. Regardless of when yours opens to new funds or permits changes in the plan, review your remaining balance now. If you have an FSA that loses the remaining balance at the end of the year, make plans to spend the balance down by the end of the year. Schedule a physical, make an eye appointment, schedule that procedure you’ve been putting off.

If you have an HSA, you don’t have to worry about spending down the funds, but you may want to reconsider your annual contribution if you have a large amount leftover or don’t have enough to get you through the year.

Financial Goals
I check-in with my financial resolutions every month. At the minimum, see how you’re doing with yours at the middle of the year. Are you falling behind on your savings or debt repayment goal? See where you can cut back spending. Have you received a raise? Direct the additional funds toward your goals with automatic deposits and payments. If you’ve already met your goals, set new ones.

Taxes
Has your tax situation changed? You might be subject to a different tax treatment if the following apply:

  • You or your spouse returned to the workfore
  • You or your spouse left the workforce
  • You had a child
  • Your child graduated from college or turned 24 before January 1 of this year
  • Your child started college
  • You or your spouse received a raise
  • You bought or sold a house
  • You started or closed a business
  • You received a bonus or taxable windfall.

If any of the above apply, use the withholding calculator to make sure you’re withholding enough from your paychecks to cover the taxes. If you’re withholding too much, file a new W-4. If you’re not withholding enough, file a new W-4 or start setting money aside in a savings account. Visit the IRS website to determine whether you need to make quarterly payments.

If you take just a few minutes to check in with your finances now, you’ll have fewer surprises at the end of the year. That financial peace of mind will make your summer much happier.

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