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Your Annual Financial To-Do List
YOUR ANNUAL FINANCIAL TO-DO LIST
Things you can do before and for the New Year.
The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2010? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.
Think about adjusting or timing your income and tax deductions. If you earnings increased substantially, and you have the option of postponing a portion of the taxable income you will make in 2009 until 2010, this decision can bring you tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to extend further tax savings.
Max out your IRA contribution at the start of 2010. If you can, do it early. The sooner you make your contribution, the more interest those assets will earn. For 2010, the contribution limits are unchanged for both traditional and Roth IRAs: $5,000 if you are age 49 and below, $6,000 if you are age 50 and above. Remember that you can still make an IRA contribution for the 2009 tax year through April 15, 2010.(source)
While we’re talking about maxing things out, don’t forget your 401(k), 403(b) or Thrift Savings Plan if you are still working. You can contribute up to $16,500 to these plans in 2010, with a $5,500 catch-up contribution also allowed if you are age 50 or older.(source)
Consider a Roth IRA conversion for 2010 (see this Money Cents Newsletter for details). Next year, anyone may convert a Roth IRA. The $100,000 modified adjusted gross income (MAGI) ceiling that often prevented conversion in the past will be gone - forever. The MAGI phase-out limits for contributing to Roth IRAs will be $167,000 for joint filers and $105,000 for single filers in 2010, but if your MAGI will exceed those limits, you may still contribute to a non-deductible traditional IRA in 2010. Then consider immediately rolling it over to a Roth.(source)(source)
More good news: if you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This nice opportunity won’t be available if you make a Roth conversion in 2011.(source)
Another detail to remember: in 2009, withdrawals from a traditional IRA may be used to fund a Roth IRA. (This relates to the 2009 suspension of Required Minimum Distributions.) So even if you don’t want to convert a traditional IRA to a Roth account, you may still fund a Roth IRA using a withdrawal from a traditional IRA through the end of this year (provided your 2009 MAGI is $100,000 or less).(source)
Be sure to consult a tax or fee-only fiduciary financial advisor before you arrange a Roth conversion or make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.
Should you take a distribution from your IRA this year? It’s an interesting question. Barring an act of Congress, RMDs will be back for 2010. If you think taxes will be higher next year, you could opt to take a distribution before the end of this year to lower your IRA balance as of the end of 2009. As RMDs are based on an IRA’s value as of Dec. 31 of the previous year, taking a distribution in 2009 will reduce a 2010 RMD.(source)
Money & Happiness
MONEY & HAPPINESS
Does money actually buy a degree of happiness? In this recessionary economy, it is worth thinking about the effect money has on our lives. What role does money play in our happiness? Is that role overrated?
Most psychologists and sociologists will tell you that our happiness comes largely from social interaction. But studies indicate that there is a direct correlation between wealth and a kind of mental health.
As Pearl Bailey immortally quipped, “Honey, I been poor, and I been rich. And let me tell you, rich is better.” Having a well-paying job, being successful at what you do – these are definite cornerstones of self-esteem and contribute to happiness.
So is Warren Buffett happier than we are? The math is not quite that simple. American wealth grew remarkably in the late 20th century, but surveys found that Americans on average weren’t any happier than they’d been decades before.
A 2002 study by psychologists Edward Diener, Ph.D., and David Myers, Ph.D. documented greater happiness among residents of wealthy countries versus poor countries. But they found that once individuals in both types of nations gained the money to pay for basic creature comforts, happiness did not markedly increase along with wealth thereafter. A second 2002 survey by psychologist Tim Kasser, Ph.D., showed lower personal well-being in individuals who “bought into” messages of materialism and consumerism. (source)
Does spending money make people happy? It depends on the purpose. Perhaps you’ve heard of the “hedonic treadmill” theory, an economic theory which holds that the middle-class and the affluent exhaust themselves and diminish their happiness through endless pursuit of the latest material goods. Americans are proudly competitive, and can’t help but measure their wealth in relation to their friends and neighbors. We have to have more than the next guy.
Does spending money on others make people happy? Yes, according to the results of a study published in March in Science Magazine. Researchers took a sample of 600 Americans. They instructed 46 to spend a $5 or $20 bill on a particular day. Some were told to spend the money on others, and the study found that they were happier at the end of the day than the ones who spent the money on themselves. The study also tracked 16 workers who got profit-sharing bonuses, and observed that employees who gave a majority of their bonus to others ended up happier than those who spent it on themselves. In fact, the main forecaster of happiness was not the size of the bonus, but how it was spent. The Science study also discovered that spending more money on gifts and charity correlated with increased happiness. (source)
