Tax season is under way as we plan to finalize our taxes for 2013. This is also a great time to be tax planning for 2014. One of the best tools available to control taxes is your 401(k), 403(b), 457 plan, and other employer-sponsored plans. Don’t wait until the end of the year to scramble for tax savings. This is the time to plan your deferrals to minimize tax liability for the coming year. It is also a good time to review your retirement account performance.
Begin by making sure you are contributing enough to receive the maximum match (if your employer offers one). This is a huge retirement planning advantage, and estimates say one-third of all employees do not contribute enough. Forget about tax savings or investment returns. Employer matches are free money available just for participating. Increase your deferral to maximize the match.
Is your retirement account still properly diversified? The U.S. stock market had a big advance in 2013, and the chances are you have become overweighted in stocks. Decide on a balance between growth and low risk investments and stick with it. Many plans offer an automatic rebalancing option. Allowing your account to rebalance on a periodic balance will help avoid becoming concentrated in one asset class.
Save something from every paycheck and don’t borrow against your plan. Time is your biggest ally when planning for retirement, and you don’t want to waste a single day. Some rationalize borrowing from their retirement plan because they believe it is like paying interest to themselves. The custodian must hold plan assets as collateral in a safe place until the loan is repaid. This money is usually kept in a money market, earning less than 1%, while the average rate charged against 401(k) loans today is close to 6%.
Make saving for retirement a priority. The longer the money is left to grow in your retirement plan, the easier it may be to reach your goal. You’ll save taxes and have a more comfortable retirement.