As you reach certain midlife milestones, you gain opportunities to save more money, whether through tax-deferred vehicles or identifying key expenses where you may be overpaying. Business owners also have a chance to bounce back from what may have been a slower year in 2020 with some favorable tax rules. Which of these options can you take advantage of this year?
Delay tax payments
Business owners who had a down year in 2020 can postpone higher tax payments until April 2022 if you choose. Take advantage of the safe harbor rule and pay your estimated taxes based on 110% of taxes from 2020 rather than on anticipated revenue for 2021. This can help you focus on growth or repay debt you may have had to take on rather than giving your money to Uncle Sam too soon.
Refinance your mortgage (again)
Rates are still at record lows. If you have not reviewed your mortgage and compared it with existing rates, you may have room to save significantly. Even if you recently refinanced, it makes sense to look again.
Be aware that id the amount you’ll be refinancing is more than $750,000 you may be lose some of your mortgage tax deduction when refinancing. It may still be worth it to refinance. If your original purchase was before 2017, you’ve been grandfathered into mortgage deduction up to $1 million. An important distinction is that if you refinance and take out an additional amount above your loan balance, the new debt will qualify as home acquisition debt only up to the current mortgage balance. If the “cash out” puts the mortgage over $750,000, it may not be eligible for deduction.
Lower insurance premiums
Most likely, you purchased life insurance earlier in your career, as you started a family and before you accumulated wealth. If you’re in your 50s and 60s, now is a good time to reassess your life insurance needs. Review your existing policies to see if you still need the same level of coverage you’ve been paying for. For many midlifers, the need to insure changes when kids are out of college and on their own, and you reach higher level of retirement savings. While this is not optimal for everyone, it’s worth a look to see what your insurance costs and what savings may make sense.
Contribute more to your retirement
One of the benefits of the midlife milestone of turning 50 is that in 2021 you can contribute an additional $6,500 above the $19,500 maximum to your 401(k), 403(b) or 457 retirement plan through employee deferral. No need to wait to blow out the candles, though. You can start to save more through contributions in the first month of the year in which you turn 50.
If you contribute to a Traditional or a Roth IRA, the same rule applies in your 50th birthday year: you can also deposit an extra $1,000 over the $6,000 annual contribution limit.
Boost your contributions to a health savings account
If your family has a high deductible health plan (that qualifies for contributions to an HSA), you not only get to contribute $7,200 in 2021 (a $100 increase over 2020), you can also contribute an additional $1,000 if you are 55. (note: if you have an individual plan, you can contribute $3600 plus $1,000 if you’re 55). These plans allow for triple tax benefits: tax deductible contributions, tax-deferred growth, tax-free withdrawals for qualified health care expenses. Same birthday rules apply – you may contribute any time during the year you turn 55.
Consider a Roth conversion
When you have a lower income year or there is a market downturn, it can make sense to convert some of your retirement savings to a Roth IRA. This “back door Roth conversion” helps you save on taxes in the future. You don’t want to make this choice too soon as it is irreversible (and could carry a hefty tax bill), but put it on your radar to talk with your financial advisor later in the year.
While you may not qualify for all of these opportunities, it pays to take a look. The more you can save today, the more freedom you will feel to pursue what matters most to you. If you want to discuss any of these options for your situation, please set up a call with one of our advisors.