Review your finances now to keep on track in 2021

Medical Economics Journal, Medical Economics April 2021, Volume 98, Issue 4

It’s always a good time to do a financial review. You’ll make sure your savings and investments are aligned with your goals and reduce income taxes.

It’s always a good time to do a financial review. You’ll make sure your savings and investments are aligned with your goals and reduce income taxes.

Review IRA, 401(k) and other retirement plan contributions.

If you didn’t fully funded your retirement plan(s) in 2020, this year you should consider what you can afford to salt away. Contributions to 401(k) plans reduce your taxable wages. Many employers will let you make an additional one-time contribution up to the IRS limit.

You may be able to save on 2020 taxes by making deductible contributions to an IRA by April 15, 2021. If your income is too high to get a deduction because you or your spouse are also covered by a retirement plan at work, consider socking away money in a Roth IRA, which has more liberal income limits.

Review your asset allocation and rebalance if needed.

Confounding expectations, the stock market has boomed in the past year. As a result, you may find that your asset allocation is unbalanced.

Suppose a few years ago you set your allocation as 50% equities (stocks and stock funds) and 50% in fixed-income (bonds, certificates of deposit [CDs], fixed annuities, money markets and similar instruments). Thanks to strong market performance, you’re now 65% in equities and 35% in fixed income.

You’ve done well! Now it’s time to start reallocating to get back to 50-50. Reallocating money in retirement plans as well as annuities and life insurance policies takes less planning because gains here are not taxed until withdrawn.

Some people have enough money in their retirement plans so that they can accomplish their overall rebalancing using only these accounts. Remember, it’s your overall asset allocation that counts, not the allocation in any one account.

If you do need to rebalance your taxable investments, be aware of tax strategy. For instance, if you have unrealized losses, you can sell off losing investments to offset gains from selling your winners. If you’re rebalancing a lot of taxable money, you may want to consult a certified financial planner or certified public accountant for help.

Consider all your options. You may be able to get a better rate than you expect.

To boost the economy, the Federal Reserve has slashed short-term interest rates to close to zero. Today, most savings instruments like money market accounts, CDs and bonds pay very low rates, even if you’re willing to tie up your money for a few or several years. If you’ve got CDs or bonds that are about to mature, it pays to consider other options.

If you can afford to tie up your money until age 59½ or are already that age, there’s another choice that typically pays a higher rate: a fixed-rate annuity. Your age is important because if you withdraw money from your annuity before age 59½, you’ll owe the IRS a 10% penalty on the interest earnings you’ve withdrawn.

Also known as a multiyear guarantee annuity or a CD-type annuity, a fixed-rate annuity behaves a lot like a bank certificate of deposit, with some notable differences.

Like a CD, it pays a guaranteed interest rate for a set period, usually three to 10 years. Unlike a CD, the interest credited to the annuity is tax-deferred until you withdraw it.

While CDs today pay less than 1%, a three-year fixed annuity pays up to 2.4% and a five-year contract up to 3% annually. Annuities are not FDIC-insured but are covered by state guaranty associations, up to certain limits, that vary by state.

A fixed-indexed annuity is another choice if you don’t mind a fluctuating interest rate. It credits interest based on the growth of a market index, such as the S&P 500.

Indexed annuities are suited for people who want to save for the long term while limiting risk without precluding growth.

Keep beneficiaries updated.

The listed beneficiaries on annuities, life insurance policies and retirement plans will receive the proceeds upon your death. Check that they’re up to date. Life changes such as marriage, divorce, the birth of children or grandchildren or the death of a loved one may require updating your beneficiaries.

If you’re married, your spouse is normally your primary beneficiary and your child or children are contingent. If you’ve been divorced and remarried, make sure your ex-spouse isn’t still the beneficiary.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. Send your financial questions to medec@mjhlifesciences.com.

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