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5 Best Ways To Maximize Savings In The New Year - Plan Ahead!

Writer's picture: Bridget Sullivan Mermel CFP(R) CPABridget Sullivan Mermel CFP(R) CPA


Learn the 5 best ways to maximize savings in the new year! In this episode, Bridget and John discuss five important financial actions to take at the start of the year to maximize savings and improve financial health:


1. Maximize 401(k) Contributions: ensure you're contributing the maximum allowed to your 401(k). For those aged 60-63, there's a new catch-up contribution limit of $11,250, making it an ideal time to review and adjust contributions.


2. Contribute to Health Savings Accounts (HSAs): If you have an HSA, it's a great time to make contributions. HSAs offer tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses, making them a powerful savings tool.


3. Consider I Bonds: With current inflationary pressures, I Bonds are highlighted as a great option. They offer inflation protection and competitive interest rates. Bridget shares her positive experience with easy access to the funds, making I Bonds an attractive savings vehicle.


4. Max Out Roth IRA or Backdoor Roth Contributions: Roth IRAs are valuable for tax-free growth, so contribute the maximum allowed. For 2025, the limit is $7,000 for those under 50, and $8,000 for those 50 and over.


5. Review Your Tax Withholding: John emphasizes the importance of reviewing your paycheck withholding early in the year. By looking at your previous year's tax return, you can ensure that you're withholding the right amount from your paychecks, avoiding surprises come tax time.


Be proactive about your finances early in the year and seek professional advice if needed in order to maximize savings in 2025 for a stable financial future!


Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com




TRANSCRIPT:


Bridget: Hey John, it's the beginning of the year. It's a great time to think about am I maxing out all the different savings plans? In this episode we're going to talk about five different things you can check to make sure you're saving the maximum amount possible in the best places. Hi, I'm Bridget Sullivan Mermel and I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer, I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we jump into financial hygiene for the new year, I want to remind everybody to hit that subscribe button to help other people find this information on YouTube. And with that, let's jump in. Bridget. I tend to think a lot about the year-end things—stuff to get done before it's too late—but I love this idea of what do we do now that we're at the beginning. Being proactive is probably a much better stance, so I'm looking forward to hearing what's on your list today.


Bridget: I actually learned this from clients: get it done at the beginning of the year. January is a great time to just make sure it's all checked off your list. So the first item is make sure you're maxing out your 401(k). And so, this is an interesting one because there's a new opportunity this year, which we did a whole episode on.


The new opportunity is that people between the age of 60 and 63 (and I gotta proudly count myself one of them) can contribute even more this year. And so, make sure you check the maximum contribution. And we're just gonna talk about this for 401(k). For younger people, it’s $23,500. For people between 50 and 59 and older than 64 plus the catch-up contribution is $7,500. And if you're in the magic area, 60 to 63, the catch-up contribution is $11,250.


John: What I really love is how simple it is. You don't have to think about anything except for one number and the other 17 numbers we got to remember with this thing😊


Bridget: Exactly. I'm not going to talk policy. So that's the situation. You want to check with payroll to make sure that it's correct.


John: Yeah, that's great.


Bridget: So, that's our first one. The next savings opportunity I like is an HSA, Health Savings Account, and if you've got one of those plans, it's a great time to make a contribution. Some people just have their health savings account contributions taken out of their paychecks. But a lot of people just make a contribution one a year. And so, this is a great time to do that. If you got the cash in hand, put the money on your HSA.


John: There’s one thing it's easy to overlook. HSAs are great pre-tax. You get a nice tax deduction for it. Everybody knows that, or at least a lot of people do. But then one of the things you forget about is that it isn't subject to social security and Medicare tax; it avoids FICA tax. So you get a little bit of tax bump there. And when you take it out on the other end, to the extent that you have medical expenses, it's tax free. So it’s kind of like 401(k) tax deductible going in—tax deferred—and then tax free on the other ends. It's like a Roth IRA and 401(k) or IRA combined.


Bridget: It's the best kind.


John: I just wanted to point that out. It's like, “Oh, yeah, HSA.” Hang on a second. Let's just think about that one. That’s really important.


Bridget: Yeah. HSAs are gold. They're in a category all by themselves for taxability.


John: That's awesome.


Bridget: Okay, for number three, I'm going to put in I bonds. And we'll talk a little bit more, because we've already talked at length about I bonds. Right now, they're paying about the same as a local bank would pay on a CD. However, the fixed rate is very attractive, and I like I bonds anyway because it’s easy to take out, I know it's safe, and there's inflation protection on it. I just like them as a vehicle, particularly in this stage of my life.


John: Yeah.


Bridget: Does that make sense?


John: Yeah.


Bridget: It's a great time of life to have more cash around.


John: Yep. That's great. And to the extent that somebody's concerned about inflation (we're not going to get into political views here), if inflation comes back because of different taxation and things that go on, then you’re prepared. Over the last year or year and a half, inflation's not been a big deal, and rates have gone down on I bonds. If it comes back, having that fixed rate, which I think is 1.2% or 1.3% plus inflation makes a difference. Those I bonds are a thing for today, of course, but it's also a play for the future. If you're concerned about that, that's one thing to really take a look at.


Bridget: And the other thing I found is that once I got it set up, it was easy to get the money out. So, you have to have it in there for a year, but I've used some of mine that I put in during the high inflationary times. And so, I just wanted to mention that. It was as easy as getting money from my high interest savings account. And that was one of my concerns.


John: Okay, that's great.


Bridget: So Roth or Backdoor Roth. That's my number four.


John: Yep.


Bridget: You'll know which one you're eligible for. This year the maximum if you're under 50 is $7,000. After 50, it’s $8000. So those are my things. Try to get those checked off your list, then you'll be good to go with the extra savings for the year.


John: Yeah. As you were saying these things, I was thinking, “Yep. That makes sense. Yep, that makes sense. Yep, that makes sense.” A lot of this, I think, applies to people in those higher earning years, maybe, north of 59 or into your 50s. You're maxing out 401(k)s. That's one of the big deals there. You’re maxing out HSAs. And of course, if you're not maxing both of those out, what's right for you is specific to your situation, so we can't tell you what to do. And then Roth IRA, Backdoor Roth IRA again are great options if we're looking to pack some pretty good money away. So that's really the focus of a lot of these things.


And it’s the same thing with I bonds. They're a great vehicle. There're some limitations. But if I'm trying to pack money away, these are some great things. And I just had a conversation recently with somebody about how do I save more money? And I'll just take a step back. It doesn't have anything to do with financial hygiene but remember to put your goals first. What are you trying to accomplish? Do you need to save more? And if you don't, then maybe you should think about spending some. But if you need to save more, all the things you listed, Bridget, are the same things I'd think about.


The other thing I have for people who aren't at that spot or sort of across the board is looking at what the withholding is on your paychecks while you're still working. And we haven't done the 2024 tax return yet. We're recording early in 2025. We don't know what it looks like. So it's not about the tax return necessarily, but you can look back at your 2023 return or when you get your 2024 return done, you can see. And what I like to look at is that line that says, “What was my total tax?” It used to be line 60 before they changed the forms a long time ago. But what is my total tax? If my total tax was $20,000, probably withheld from my checks throughout the year, and my income was $200,000, then my effective tax rate is something like 10%.


And if I paid $20,000 in taxes and my income was something like $100,000, then I'm paying like 20% in tax. Yeah, you got to do a little math, but it’s really simple math. And I'll take a look back and say, “Okay, for the last couple of years, Bridget, it looks like your tax compared to your wages were about 20%.” If that's the case, then I want to look at our pay stub here early in the year and say, “What was my income for this pay period? And what did they withhold for federal taxes?” If I made $4,000, did they withhold about 20%? And it doesn't have to be exact, but, boy, it can be surprising. And you and I both do tax planning for clients.


I usually tend to do it at the end of the year, which is great for making decisions about things. But throughout the year, we've had folks who go, “Oh, something changed in withholding,” and you didn't pay attention to it because you're just getting your paychecks, and suddenly you're way behind or way ahead on the other side. You go, “My typical tax is only 10%, and now it’s withholding 20%. I don't need to get a big refund.” But that can be one where it's just an eyeball sort of thing. To kind of know, in general where you’re going to be for the year is one thing that we found to be pretty helpful for folks over time.


Bridget: I think that's a great idea.


John: Cool.


Bridget: Sounds like a great time to wrap it up. So those are five tips for how to maximize your savings and financial situation at the beginning of the year. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients. We would love to hear from you if you want to reach out. But if you're looking for an advisor in your local area, we're both members of the Alliance of Comprehensive Planners. If you want to find an advisor that thinks in a similar fashion to us, you can check out acplanners.org.


Bridget: Please subscribe.

 


At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.


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