The long-term goal of a personal financial plan is to save for retirement in the most effective manner. However, the path to retirement is sometimes altered by events that occur along the way. As a result, most individuals can expect to adjust their financial plan as necessary to accommodate certain life changes as they occur.
At the foundation of most retirement plans is the strategy to accumulate wealth through tax-deferred savings. If you participate in a 401(k) plan, contribute at least enough from your earnings to receive the maximum employer match. If you are not in a 401(k), take advantage of the opportunity each year to contribute to an IRA. As the years progress, your overall savings strategy actually changes as life events unfold.
Your ability to contribute to an IRA may be restricted if you are married to a spouse who is covered by an employer-sponsored retirement plan. The combined income from two persons can sometimes result in a reduction of certain tax deductions. For example, the child tax credit begins to be phased out when the income on a joint tax return reaches $110,000.
Buying a home
The amount paid for interest and property tax on a home mortgage is usually enough to justify itemizing deductions. The extra deductions help to reduce current income tax, but the true value of home ownership often lies in the appreciation in value over time.
If certain conditions are met, an individual can exclude from taxation up to $250,000 in gain from the sale of a home. Under the same conditions, a married couple can exclude up to $500,000.
Children as tax dependents
The addition of dependents on a tax return results in lower taxable income, as well as other potential tax benefits. Once you realize how the inclusion of a dependent affects your tax return, you may be able to adjust your tax withholding. Instead of receiving a larger tax refund, you might prefer to receive a larger amount of net pay each pay period.
Additional retirement contributions
Once you reach age 50, you are allowed to contribute a greater amount to your retirement accounts. The annual contribution limit for an IRA increases from $5,500 to $6,500. At age 50, the amount you can contribute yearly to a 401(k) increases from $18,000 to $24,000.
In addition to the routine events of life, your retirement strategy may be tested by unanticipated events. Contact a financial planning professional for information about all aspects of an effective retirement plan.