Believe it or not, 2018 is nearly halfway over! This is an important year when it comes to your finances because Jan. 1, 2018 marked the launch of the biggest tax reform in decades. If you haven’t done so yet, now is the time to make some financial adjustments.
Give your paycheck a checkup
Did you notice a bump in your paycheck earlier this year? Many households shifted into a different tax bracket in 2018, changing their take-home pay.
This leads to an important step — checking your tax withholding. If you’re withholding too little from your paycheck, you could owe the government at tax time. If you’re withholding too much, you’ll get a big refund. That may sound like a good thing, but that’s your money the government is holding year-round without paying you interest.
Ideally, you want to have just enough withheld so that the amount comes as close as possible to your actual tax liability for the year. The IRS released an online calculator to help you determine your ideal withholding. You will thank yourself come April 2019 if you take the time now to make adjustments.
Increase your savings
Speaking of that paycheck bump, where has that extra money gone? Instead of spending it, you could be putting that money toward your future. This is your chance to bump up your retirement contributions by saving an additional 1 or 2 percent in your 401(k) or IRA. You haven’t had too much time to get used to the money, so you won’t miss it!
Your ultimate goal should be to save 10 to 15 percent of your salary in your retirement accounts — and this step could get you on your way.
Spread out savings
As you’re increasing your savings, consider where you’re putting your money. Do you have tax diversification? It’s not talked about as much as other types of diversification, but it’s just as important.
Money invested in pre-tax accounts like Traditional IRAs and 401(k)s will be taxed as you withdraw it, meaning you’re at risk of getting hit with a huge tax bill in retirement. An account like a Roth IRA will give you tax diversification because your contributions are taxed upfront, but you can withdraw it tax-free in retirement.
You may want to consider shifting money from a Traditional IRA or a previous employer’s 401(k) into a Roth IRA. You’ll have to pay the taxes as you move the money. Some people like to do a partial conversion, switching over only as much as they’re able to pay taxes on this year, and moving more money next year.
Make a charitable giving plan
The way we file our taxes next year is changing. The standard deduction has nearly doubled, to approximately $12,000 for individuals and $24,000 for married couples. This means most people will no longer itemize their taxes and will not be able to claim the charitable giving tax deduction.
There are still strategies for people who want to donate to charity. If you’re over age 70 1/2, you can use your Required Minimum Distributions, or RMDs, from your IRA and send them directly to the charity to avoid paying income taxes on the donation. There are some limitations to this strategy, so you may want to check with your financial professional for more information.
Speak to a professional
This may be the most important step of your midyear financial review. Sit down and talk to your financial professional and a tax professional to see what’s best for your situation.
Larry Kallevig is the owner of Haven Financial Group in Burnsville. For more than 15 years, he’s been helping clients create financial plans that ensure dependable and comfortable incomes in retirement.