As a financial planner and investment advisor, I always go through the following steps with my clients at the beginning of the year
1. Emergency fund
I make sure that they don’t have too much or too little cash in their emergency fund. The ideal amount is 6 months burnout. Three months of expenses is ok too, but I am usually on the conservative side here for peace of mind in case of an emergency.
If you have more than 6 months of cash, contribute this extra cash to a Roth IRA (see step 4) or transfer the money in a brokerage account. Make your money work for you.
2. Rebalance your investment accounts
Rebalance your investment accounts that are not invested in target funds (IRA, Roth IRA, 401K, Brokerage accounts).
With the ups-and-downs of the market in 2018, your asset allocation (Bond/Equity) is probably not on target anymore. You should decrease the income portion (bonds) and increase the equity portion (equity). If you have stocks, sell some stocks that increased in price, and buy some stocks that went down.
3. Change your contribution in your 401k/403b
Try to maximize your 401k/403b this year, or at least increase your contribution percentage. The new limit is $19,000 from $18,500 in 2018. What percentage to enter? It depends on your income.
You can calculate it by dividing $19,000 by your gross annual income and multiply it by 100. For example, if you are going to make $100,000 this year, ($19,000/$100,000) x 100 = 19, so you input 19% in order to maximize it. As a general guideline, I usually recommend that you save 10% to 15% of your income.
Individuals who are age 50 or over at the end of the calendar year, can make annual catch-up contributions up to $6,000.
4. Contribute to a Roth IRA for 2018
If you can afford it, contribute $5,500 for 2018 to your Roth IRA, but be careful because there are income limits. The contribution phases out if you earn more than $120,000 (single filers) and $189,000 (married filing jointly or qualifying widow(er)). You have until April 15th to do that.
If you cannot directly contribute to a Roth IRA, do a backdoor Roth IRA conversion for 2018. You won’t deduct $5,500 from your taxes today, but your investment will grow tax-free for the rest of your life.
5. Open or contribute to a SEP-IRA if you are self-employed or have a small business for 2018.
A Simplified Employee Pension (SEP) plan provides business owners with a simplified method for contributing to their employees’ retirement along with their own. For 2018, the total contribution to a SEP-IRA account should not exceed the lesser of 25% of income (20% for self-employed before self-employed tax deduction is included) or $55,000.
You can open a SEP-IRA and contribute to a SEP-IRA for 2018 before April 15th, 2019.
If you already sent your tax return to the IRS, it’s not too late! You can file an amended tax return – you have three years to do it from the date you filed your return (or two years after you paid the tax due, whichever is later).