Reassessing your finances throughout the year is necessary to optimize outcomes. Throughout the second half of 2024, navigating key areas, such as maximizing tax-free opportunities, protecting your assets amid market highs, optimizing your interest-earning potential on savings and ensuring your estate planning is up to date, is important. By proactively managing these aspects, you could greatly improve your financial stability and security.
1. Maximize tax-free opportunities: There are only 1½ years left to save.
The clock is ticking on the Tax Cuts and Jobs Act, which is set to expire at the end of 2025. Starting in 2026, most tax brackets and federal income tax rates will likely increase. Now is an important time to get as much money into your tax-free bucket as possible before rates go up.
Roth IRAs are one of the easiest and most common methods to move money to “tax-free” status. Other unique strategies involve maximum funded life insurance or municipal bond funds, which may be something to consider after you’ve maxed out your Roth contributions.
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Roth IRAs do come with relatively low contribution limits. For 2024 the limit is $7,000 per person per year, or $8,000 if you are 50 or older. In addition, you cannot contribute the full amount if you have a modified adjusted gross income of $146,000 or more as a single filer, or $230,000 or more as a married couple. Contributions phase out after these limits, and you become ineligible to contribute anything at all when your income hits $161,000 if single or $240,000 if married.
However, there is a way around these limits — if you have access to a Roth 401(k). Those with this savings option can contribute up to $23,000 to their Roth 401(k) (or $30,500 if you are 50 or over). Contributions inside Roth 401(k)s have no income caps, making almost anyone eligible. Any employer match is likely to go into the traditional 401(k), but your own contributions can go in after-tax and grow tax-free inside the Roth 401(k).
The biggest long-term savings could come from a Roth conversion. That is when you take existing traditional IRA or 401(k) funds and pay taxes now to convert to a Roth IRA. Paying these taxes upfront could feel like a burden, but in most cases, it will save you more on taxes in the long term once that money is growing tax-free. Take advantage of today’s “low” tax rates, before they go up in 2026. Remember, to convert to a Roth you need to complete that transaction by Dec. 31 for it to count for this year. You cannot backdate a conversion like you can for a contribution.
Talking to a tax attorney or CPA can help you develop an ideal strategy for how much is appropriate to convert each year given your specific situation. When searching for a tax adviser, keep in mind that it is important to have someone who considers the long-term picture and works to minimize taxes over your lifetime, not simply in a given tax year.
2. Protect your assets from market downturns.
Remember the old adage “buy low, sell high”? We’ve recently seen the market at its all-time highs. While it is impossible to know if and when the market will have another downturn, it may be wise to take advantage of the current market highs and pull some cash out onto the sidelines. Historically speaking, after a market crash it often takes several years or more to break even.
Particularly, if you have a need or desire to spend some of your savings in the next few years, it would be a good idea to have cash available to use if the market were to drop. That way, you won’t be “selling low.” This is especially true given the great interest rates available today for short-term guaranteed accounts (money markets, CDs, Treasury bills, etc.). Whatever you may want to spend or withdraw over the next several years may be advantageous to keep in a guaranteed account (also known as a “volatility buffer”).
3. Be mindful of interest rates.
Speaking of safe money, when was the last time you did an optimization check of your savings accounts? Most advisers recommend having at least six months’ worth of expenses someplace safe and guaranteed. However, just because it is safe doesn’t mean you can’t earn interest on it. Make it a habit to regularly search and see if there are options to earn a higher interest rate on your emergency fund without taking any more risk.
On the flip side of interest rates, just as you can earn high interest in the bank, the cost of borrowing has also increased significantly relative to a few years ago. It is becoming more difficult to find an affordable home to purchase. If you have a great interest rate on your mortgage from a few years ago, don’t be in a rush to pay it down. One potential loophole if you do need to purchase a home and want a lower interest rate is to look for a home with an assumable mortgage. Many loans, particularly if they are FHA, USDA or VA loans, are assumable, meaning you could potentially take over the seller’s existing mortgage with a favorable interest rate.
4. Follow up on your estate planning checklist.
As we go down the home stretch in 2024, it is a good idea to do an annual review of your estate plan. This should start with reviewing the beneficiaries on all of your assets. It is important to remember that beneficiary designations trump everything — this means that even if you have a great will and trust, your 401(k) plan or life insurance policy will pay the listed beneficiary directly, whether or not your will and trust say differently.
Where a trust becomes very important (rather than just a will) is for real estate. If you don’t have your house in a trust, you should strongly consider creating one in order to bypass probate, increase privacy and exercise more control over your assets. Watch out for common trust pitfalls, including naming more than one co-trustee, having a restrictive A/B setup for a married couple even if your assets are under the estate tax limit, or leaving a single property to several beneficiaries without direction on whether/when to sell the property.