So You Have Extra Cash at Year End, Now What?
Whether you budgeted like a boss this year, landed an annual bonus, or received money as a holiday gift, there are things you can do to put those dollars to work for you. Below are our end-of-year recommendations to set yourself up for a financially sound 2021.
1. If you haven't already, max out your 401k. The 2020 contribution limit for your 401k or 403b is $19,500 ($26,000 if you are 50 or older). You can update your contribution amount (or percentage of your paycheck) right now to reach this maximum contribution. You can then reset the contribution amount back to a lower amount for 2021.
Your interface may look different, but updating your contribution is as easy as hitting the “Change Contribution” or “Manage Contribution” button on the home screen of your 401k/403b and typing in a percentage (up to 90%):
2. If you have maxed out your 401k, max out your traditional or Roth IRA. It is very easy to set up an IRA with any major financial institution. You can contribute $6,000 to this account in addition to your 401k or 403b, or up to $7,000 if you're age 50 or older. Contribute what you can (you don't have to invest the limit), choose how to invest the funds, and watch the money grow tax free. You can make 2020 contributions through April 15, 2021, so you can keep pushing towards that $6,000 goal after the New Year, you can. Your future self will thank you.
3. As soon as 2021 starts, you can make 2021 IRA contributions. If you end up with extra cash early in the New Year, you can contribute the max to your 2020 IRA through April 15th and also add your 2021 IRA amounts.
4. Add to or start a 529 Plan for a range of educational expenses. These plans were originally designed to pay for college tuition and room and board, but were expanded in 2017 to include K-12 educational expenses, and in 2019 to include paying off up to $10,000 of student loan debt and covering apprenticeship programs. Another benefit is that the beneficiary of the 529 can be changed from one child to another if one sibling gets a scholarship or chooses not to go to college. On top of all this anyone can contribute to an established 529 Plan - instead of holiday cash from Grandpa, how about an investment in education?
Already maxed out your tax-advantaged accounts?
5. Donate to your favorite charity. According to the IRS, you may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. However, with the introduction of the CARES Act in 2020, eligible individuals who do not itemize deductions can deduct $300 of qualified charitable contributions as an "above-the-line" deduction.
6. Consider padding your emergency savings account. We recommend having 3-6 months of cash on-hand for emergencies. While savings account interest rates tend to be relatively low, you can open a high yield savings account to take advantage of slightly higher rates. We recommend Capital One or Marcus to earn a little more interest on your emergency fund.
7. Invest. If you've built up your emergency savings, maxed out your retirement accounts, and you still have money left over, it's time to invest. There are a number of ways to start investing, from little involvement on your end to hand-picking your entire portfolio. If you're just starting to dip your toe in investing, we recommend looking into a robo-advisor or picking a few index funds. You can also join us for Smart Sister Finance classes to learn about various investment vehicles, empowering you to make your own choices within an investment account. Interested in learning more? Schedule a Smart Sister Finance house party or workshop.
Grow that cash, sister!
Erin Dunne