Working In The U.S. Temporarily? Here’s What You Need To Know About Retirement

January 04, 2024

We get many retirement benefits questions on our financial coaching line from professionals working in the United States but plan to return eventually to their home countries or take another ex-pat assignment. Frequent questions include: should I participate in my company’s 401(k) plan, and if so, should I choose to make a pre-tax, Roth, or after-tax voluntary contribution? In addition, how can I access my savings when I leave the US?

Get professional tax advice

If you’re a professional from another country working legally in the United States and do not have permanent resident status (e.g., a “green card”), the US taxation system can seem like a maze: one wrong move, and you’re stuck in a corner. Do not try and navigate this yourself. Instead, seek professional tax advice from a tax preparer experienced in ex-pat/non-citizen issues. You’ll need guidance on federal and state withholding, tax treaties, tax filing, benefits choices, and what to do when you leave the US.

Ask ex-pat colleagues first for referrals to a tax professional with experience working with people like you. It’s not expensive and could save you from financial and legal problems later. For a basic overview of types of US tax preparers, see How to Find a Good Tax Preparer.

What do I need to know about US retirement savings programs?

The US retirement savings system is made up of Social Security, defined contribution plans (401(k), 403(b) or 457), traditional pension plans (defined benefit), and individual retirement accounts (IRA and Roth IRA).

Social Security

This is the government-sponsored retirement system, similar to what’s often called a “public pension” in other countries. As a non-citizen employee, you will likely pay the same taxes as US citizens into Social Security and Medicare, which you will not recoup unless you continue to be a US resident. Your employer will also make contributions on your behalf.

If you do not plan to live in the US when you retire, you may or may not be able to receive Social Security income benefits. It depends on how long you paid into the system, your immigration status, country of residence, and whether you started receiving payments before leaving the US.

401(k), 403(b), and 457 plans

Most large employers offer employer-sponsored retirement savings plans, such as 401(k) and 403(b) plans. Employees may contribute a percentage of their gross pay each period to a tax-advantaged account. Frequently, the employer will match up to a set percentage of what you contribute or will sometimes make contributions regardless of whether you make your own contributions.

In addition, you’ll get to choose how your contributions are invested from a menu of mutual funds or other investment vehicles. You may also choose whether you contribute your money into a pre-tax (traditional), after-tax (Roth), or after-tax voluntary account. See tips below for determining what works for you.

IRA and Roth IRA

If you are considered a resident for US tax purposes (have US earned income, have a Social Security number, and meet the substantial presence test), you may open a traditional or Roth IRA. However, if you are a non-citizen and don’t plan to seek US citizenship or permanent residency, you may not be able to reap all the benefits of an IRA or Roth. If you’re eligible, you may contribute up to certain limits.

	IRA limit	IRA catch-up amount	401(k)/403(b) limit	401(k)/403(b) catch-up amount	SIMPLE limit	SIMPLE catch-up amount	SEP
2024	$7,000	$1,000	$23,000	$7,500	$16,000	$3,500	$69,000
2023	$6,500	$1,000	$22,500	$7,500	$15,500	$3,500	$66,000

Traditional pension plans

These are no longer widely available to new employees, but some larger companies and state/local government jobs still offer them. A pension may be fully funded by employer contributions or by combining employer and employee contributions. Typically, it takes 10-20 years to be “vested” in a pension, where the employee is eligible to receive a fixed monthly payout at retirement.

Should I enroll in my 401(k)?

Saving in your employer-sponsored retirement plan has multiple benefits, even if you don’t plan to continue working and living in the US later in your career. If there’s a match on your contributions, that’s like earning additional income. There’s the potential for tax-deferred or tax-free growth, depending on the type of contributions you make. Plus, you can’t beat the ease of contributions deducted automatically from your paycheck!

Always consider your future taxes.

For non-citizens making decisions about which retirement contribution type to choose, you’ll need to consider where you will be living when you withdraw the money, how old you will be when you plan to withdraw it, and whether you think you’ll be a US permanent resident or citizen at that time. If you still expect to be a non-citizen when you withdraw the money, note that you must file a US tax return in any year in which you have US income, including retirement plan withdrawals. According to the IRS, “Most U.S.-source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty. You may or may not owe that rate in taxes, but the funds will be withheld from the distribution regardless.

If you’ve overpaid through the withholding, you will get a refund after filing your tax return for that year. See this IRS US Tax Guide for Aliens for in-depth reading. Now, do you see why I say you need a tax advisor if you’re an ex-pat working in the US?

If by the time you withdraw the money, you have become a US citizen or a permanent resident but are living overseas, you won’t be subject to the 30 percent withholding. You will, however, have to file a US income tax return every year regardless of your income.

For U.S. citizens, check out this article about what you need to know about taxes while working and living abroad.

Pre-tax, Roth, or After-tax voluntary contributions?

The financial planning goal is to minimize taxes and penalties. Your company’s matching or profit-sharing contributions to your retirement plan are always pre-tax, so they will be taxed when you withdraw them. How much of your retirement contributions will be taxed depends on how you contribute:

Traditional pre-tax contributions are deducted from your taxable income, so you’ll pay less in income taxes today. Earnings grow tax-deferred for retirement. After age 59 1/2, you may withdraw them without penalty, paying US income taxes on whatever you take out. Before that, you may withdraw them only if you a) retire, b) leave the firm, or c) have an extreme financial hardship.

Roth contributions: Roth 401(k) contributions are made after-tax and grow tax-free for retirement if withdrawn 1) after 5 years and 2) after age 59 ½. Therefore, if you meet those requirements for distribution, your Roth distribution would not be included in your taxable US income. See this IRS tool to see if your Roth distribution could be taxable. However, your home country (or country of residence) could tax it, depending on the tax treaty with the US.

If your plan allows, you can leave the funds in the account until after age 59 ½. If you must take an earlier distribution after leaving the firm, you will only be taxed and penalized on the related growth and company contributions, not your original contributions. See this IRS Guide to Roth 401(k)s for more information.

After-tax voluntary contributions: Many employer-sponsored plans permit after-tax voluntary contributions above, or as a substitute for, Roth or pre-tax contributions. This will give you some flexibility, as you may withdraw those contributions at any time (although the growth of your funds will be subject to tax). If you plan to withdraw contributions after leaving the firm, taxation is similar to the Roth 401(k). Your retirement plan may also permit you to convert after-tax voluntary contributions to the Roth account, which could come in handy if you end up staying in the US, or roll them over to a combination of a traditional IRA and Roth IRA when you leave the firm.

On the downside, you typically won’t receive an employer match on voluntary contributions. Your original contributions can be withdrawn at any time tax-free, but any earnings or growth made in the account will be taxed when withdrawn. (That means gains withdrawn before 59 ½ will be taxed and subject to an additional 10 percent penalty.)

If you leave the US, are you required to take distributions?

If you leave to work and reside overseas, you would be able to take a distribution from your company’s retirement plan but are generally not obliged to take any until age 73. If possible, leave it to continue to grow, protected from taxes. Pre-tax contributions later distributed are included in your taxable income and, if taken before age 59 1/2, may be subject to an additional 10% penalty.

Ask for guidance

If your company offers a workplace financial wellness benefit, talk through the pros and cons of your choices with a financial coach. Your financial coach can help you understand the implications of your options, given your personal situation. Also, while you’re working in the US, don’t forget to use a tax advisor experienced in non-resident taxation., such as a certified public accountant or an enrolled agent. This is well worth the relatively low cost of getting good tax advice.

Commonly Used Tax Deductions

January 04, 2024

Income taxes are one of our largest expenses. They can also become one of our biggest financial planning stressors. While you can’t avoid paying taxes, you can try to minimize the total amount of income taxes that you owe. By paying less in taxes, you’ll have more money to save for your goals. The good news is that you can use popular tax deductions to help reduce your tax bill.

How income tax deductions work for you

Standard deduction amounts were significantly boosted when the tax law changed in 2018, which means your limited itemized deductions have a higher threshold to even be used. Many more people, especially married filing joint filers, are finding themselves using the standard deduction even if they have things like mortgage interest and property taxes. You choose which method to use, typically based on which one will lower your taxable income more.

Filing Status	2023 Standard Deduction	2024 Standard Deduction
Single	$13,850	$14,600
Married Filing Jointly	$27,700	$29,200
Qualified Widow(er)	$27,700	$29,200
Married Filing Separately	$13,850	$14,600
Head of Household	$20,800	$21,900

Additional Considerations:

The standard deduction is higher for those over 65 or blind; it is higher if you meet those conditions and your filing status is Single or Head of Household.
For the 2023 tax year, the standard deduction amount for an individual claimed as a dependent by another taxpayer cannot exceed the greater of $ 1,250 or the sum of $400 and the individual’s earned income, up to the regular standard deduction amount.
If your tax filing status is Married Filing Separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes income tax deductions, then the other spouse must itemize to claim any deductions.
Non-resident aliens must itemize deductions on their tax returns as they are not eligible to claim the standard deduction.

Most commonly used tax deductions

Here are some of the most commonly used tax deductions you may be eligible to use when attempting to minimize your taxes:

Mortgage interest deduction – Homeowners can deduct their mortgage interest (subject to mortgage limits) on Schedule A of their 1040 form. The limit for mortgage debt incurred after 2017 for deductible interest is reduced to $750K while existing acquisition debt of up to $1 million is “grandfathered”. No matter when the mortgage debt was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren’t used to buy, build, or improve your home.

State and local taxes (SALT) – You can also deduct up to $10,000 of state, local, and property taxes (or sales and property taxes if you don’t live in a state with income taxes). This is an aggregate limit and is $5,000 for married couples filing separately. The so-called “SALT limitations” underscore the importance of limiting state and local taxes as much as possible.

Examples of state and local taxes that can be itemized on a tax return include the following:

Withholding for state and local income taxes as shown on Form W-2 or Form 1099.
Personal property taxes
Real estate taxes
Estimated tax payments you made during the year
Payments made during the year for taxes that arose in a previous year
Extension tax payments you made during the year

Charitable donations – The IRS agrees that it is better to give than to receive, and they offer some helpful tax savings for giving (if you itemized deductions). There are deductions available for cash and household items donated to charities.

For charitable contributions to be deductible, they must have been made to qualified organizations. Contributions to individuals are never deductible. You may determine if the organization you contributed to qualifies as a charitable organization for income tax deduction purposes by referring to the IRS Tax Exempt Organization Search tool. For more information, see Publication 526, Charitable Contributions and Can I Deduct My Charitable Contributions?

Less frequent itemized deductions

Some other less frequently used tax deductions may apply to your financial situation. You can deduct medical expenses if they exceed 7.5% of your Adjusted Gross Income. The new tax laws eliminated other miscellaneous deductions from previous years.

Action Item: Not sure if you will be able to itemize deductions this year or next? Consider completing an estimate of your itemized deductions potential using a copy of Schedule A . If your itemized deductions exceed the standard deduction amount for your filing status you will want to itemize. If you are using the standard deduction amount, you can focus your tax planning efforts on reducing or deferring your taxable income.

Tax deductions that are no longer in place since 2018

Here are some of the tax deductions that the tax law change eliminated in 2018:

Moving expenses – It is no longer possible to deduct moving expenses when you relocate for a job or self-employment unless you are an active duty member of the military moving due to a military order.

Home equity loan interest for non-home-related use – Home equity loan interest cannot be deducted unless you used the loan to buy, build, or make significant improvements on your home (and the loan is secured by your home). This applies to home equity loans already outstanding used to consolidate debt or pay for other things. If you have outstanding home equity debt partially used to update or remodel your home, you can deduct only the interest attributed to the portion used to do the work.

Miscellaneous itemized deductions – The IRS no longer allows you to claim miscellaneous deductions on Schedule A that were previously subject to a 2 percent floor. Examples of these miscellaneous deductions include:

Investment fees
Unreimbursed employee business expenses
Tax preparation expenses
Safe deposit box rental
Certain legal fees

Alimony payments – Alimony (aka maintenance payments between divorced couples) is now non-deductible to the payor and considered non-taxable income to the recipient. Under the previous tax laws, alimony and separate maintenance payments were deductible by the payor and considered taxable income for the recipient.

Casualty and theft losses – Beginning with the 2018 tax year and through the tax year 2025, you can only deduct casualty and theft losses if they occurred due to an event officially declared a federal disaster.

Rolling Voluntary 401(k) After-Tax Money To Roth IRA

May 01, 2023

Using after-tax 401(k) contributions to execute backdoor conversions to a Roth IRA can be an effective strategy if you want to utilize these funds to retire early. When do employees think about executing this strategy? Consider the following factors:

You want to retire early
A large portion of your net worth is tied up in retirement accounts
Your work retirement plan allows for after-tax contributions to your 401(k) into a separate account
Your plan also allows in-service direct rollovers from the after-tax account to a retirement account outside of the plan
You have (or will have) savings or investments in outside retirement accounts that can help to supplement your early retirement

The Basics

At a fundamental level, after-tax Roth IRA conversions allow folks who retire early access to retirement principal without the 10% penalty typically assessed on early withdrawals from these accounts.

In a Roth IRA, you can access contributions anytime because you have already paid tax on the money. You can access the after-tax conversion basis directly rolled into your Roth IRA from your 401(k) without penalty as well. However, each taxable conversion has its own 5-year rule, and if you withdraw the funds within the first five years, unless you have a qualifying reason, the withdrawal may be penalized.

Investments in Roth IRAs have the potential to grow with the market, and earnings are distributed tax-free as long as you hold the account until the age of 59.5 or 5 years, whichever is longer. You may be able to withdraw from your Roth IRA if you have a qualifying reason to take the money out.

Early withdrawals are subject to Roth IRA ordering rules for distribution:

Contributions
Conversions (taxable then after-tax)
Earnings

Seek tax advice before any conversion so you understand the tax implications for your specific situation.

After-tax Contributions to Work Retirement Plans

Certain employer retirement plans allow employees to make three types of contributions:

Pre-tax/regular
Roth
After-tax voluntary

Employees can contribute up to $22,500 (plus a $7,500 catch-up contribution if over 50 years of age) to the pre-tax and/or Roth 401(k) portion of the retirement plan in 2023.

In addition, if your plan allows it and depending on if your employer contributes or not, you may be able to contribute up to another $43,500 to the after-tax voluntary bucket. The IRS aggregate limit of employer and employee contribution increased to $66,000 in 2023 for most workplace retirement plan accounts like 401(k)s.

Use the following equation to figure out how much you can contribute to the after-tax bucket in your retirement plan through work:

After-tax Contribution Equation
$66,000 is the IRS limit in 2023	Minus	Pre-tax and/or Roth Contribution$22,500 (+$7,500 if over 50 years)	Minus	Employer Contribution(Discretionary and/or Non-Discretionary)	Equals	Potential After-tax Contribution Allowable

In-Service After-tax Voluntary Conversion to a Roth IRA

Generally, when completing a 401(k) after-tax voluntary conversion to a Roth IRA, the conversion principal from a direct after-tax rollover is deposited into a Roth IRA, and earnings are rolled over into a Traditional IRA. However, earnings can also be converted to a Roth and tax paid.

When money is converted from the after-tax voluntary bucket of a 401(k) to a Roth IRA over a series of years, employees can build a significant amount of converted principal available to be accessed in early retirement that would otherwise likely be locked up until age 59.5. Though the conversion basis can be accessed, if conversion earnings are distributed before 59.5 and/or five years, whichever is longer, the gains are taxed and penalized.

Why can’t I access these converted funds in my Roth 401(k)? *

In most cases, pre-retirement pro-rata distribution rules apply to unqualified early distributions from a 401(k). If you have a Roth 401(k) and take an early distribution, it will most likely be a mix of taxable (with penalty) and nontaxable funds.

After-tax conversions work in Roth IRAs because distribution rules are ordered as follows:

Contributions
Taxable Conversions
After-tax Conversions
Earnings

How and when can I access money from a Roth IRA without penalty?

Always access your contributions penalty-free
Taxable conversions are penalty-free five years after the conversion
You can access the nontaxable conversion principal penalty-free at any time
Access earnings free and clear after 59.5 or five years, whichever is longer

Let’s say you are 30 years old and looking to retire before the age of 50. Having money in a retirement account that is accessible, without penalty, is important regardless of age. Each year for 10 years, you make after-tax contributions to your 401(k) of $10,000, which grow to $11,000 before you request an in-service conversion rollover of this money into a Roth IRA. You invest the Roth IRA for growth, and it earns another $10,000. That growth will be tax and penalty-free as long as you wait until age 59.5 and at least five years to withdraw the earnings. However, the basis that you have converted over the years from your after-tax voluntary 401(k) account can be taken out without penalty or tax, regardless of age.

Here is what happens if you decide to withdraw the entire amount prior to age 59.5:

401(k) Contributions and Gains
After-tax contributions to 401(k) – $100,000
Total gains realized on after-tax contributions – $10,000

Backdoor Conversion to Roth IRA
Basis converted to Roth IRA – $100,000
Growth converted to Roth IRA and taxed upon conversion – $10,000

Withdrawal from Roth IRA prior to age 59.5
Contributions (tax and penalty-free) – $0
Taxable Conversion (10% penalty if held less than 5 years) – $10,000
After-Tax Conversion (tax and penalty free) – $100,000
Gains realized after conversion to Roth IRA (taxable and 10% penalty) – $10,000

Important Notes

* There may be plan-specific rules. Please check with the administrator for your work retirement.

* There are always exceptions to the rules, so before conversion, please seek advice from a tax expert that will help you understand the conversion tax implications.

* There are different distribution rules for after-tax contributions made before 1987. Consult your tax advisor for more information.

* Conversions may affect net unrealized appreciation (NUA) treatment on employer’s stock positions.

Which Federal Tax Breaks Still Apply To College Costs?

May 01, 2023

When it comes to education, most financial planning centers around saving and investing for college. This focus makes sense because we’d all like to be able to cover our education expenses that way in an ideal world and not need to borrow a dime. But in the real world, that’s rarely the case.

Fortunately, parts of the tax code can help lift some of that burden if you know how to use them. As you can imagine, this is an area that we get a lot of questions about during the tax-filing season. So let’s take a look at some of these tax breaks and how you might be able to qualify for them.

The American Opportunity Credit (AOTC)

Since it’s a credit, you can deduct this one right off your taxes up to $2,500 (100% of the first $2k of eligible expenses and 25% of the next $2k) per student (you, your spouse, or a dependent) for up to 4 years of undergraduate tuition and required fees and materials, including books.

However, the credit phases out once your modified AGI reaches $80k for those filing single or $160k for joint filers. On the other hand, 40% of it is refundable for people who don’t earn enough to owe income taxes.

The Lifetime Learning Credit (LLC)

This credit is similar to the American Opportunity Credit, but it’s a little smaller. This credits up to $2k or 20% of the first $10,000 in expenses. That amount begins to phase out when MAGI exceeds $80k or $160k. These amounts will not adjust for inflation for the foreseeable future. It’s also a nonrefundable credit, whereas the AOTC may be refundable. The credit max of $2,000 is per tax return (per family) and not per student.

However, it’s more flexible since it’s not limited to undergraduate education. Thus, you can use it for graduate or qualified job-related programs or just a few courses you take here and there. Unfortunately, you cannot take Both credits for the same student in the same year.

Tuition and fees deduction

This deduction expired at the end of 2017 and was renewed retroactively in December 2019. So, if you had tuition and fees that were deductible from 2018 to 2020 that you didn’t claim (because they had not extended the law at that time), it’s worth looking into amending your tax return to request a refund.

No double-dipping

It’s important to point out that you can only use one of these tax breaks (assuming you qualify). These tax breaks also don’t apply if you’ve used funds from another tax-free account, like a 529 plan or Coverdell account. They also don’t apply if you’ve used other forms of tax-free educational assistance like Pell grants or Veterans’ programs.

In other words, there’s no double-dipping allowed. (This restriction doesn’t apply to funding sources that are generally tax-free, like loans or inheritances and gifts.) So the trick here is to withdraw money from a 529 or Coverdell account for no more than the amount of qualified expenses that aren’t covered by one of these other tax breaks.

Student loan interest deduction

The tax benefits don’t necessarily stop with the tuition bills. Suppose no one can claim you as a dependent on someone’s tax return. Your MAGI is also less than $85k or $170k joint (with phase-out beginning at $70k or $140k joint). In that case, you can deduct (without having to itemize) up to $2,500 of interest yearly on student loans that you’re legally obligated to pay. That last part means you can’t deduct interest for loans in your children’s names even if you make the payments.

Education is expensive and is rising faster than inflation. The good news is that we can offset some of that cost on our taxes. The bad news is that these breaks can be complex. So, unless you have a good tax preparer, you’ll have to take some time to understand them, which can be an education in itself. So why isn’t there a special tax break for that?

Employer Retirement Plan Backdoor Roth Conversions

January 13, 2023

One increasingly popular strategy we have seen is the backdoor Roth conversion through an employer’s workplace retirement plan. If your employer’s plan allows, this strategy will enable you to convert after-tax voluntary 401(k) contributions to a Roth 401(k). When is it a good idea to contribute to an after-tax voluntary 401(k) and convert to a Roth 401(k)? Here are some factors to evaluate if you are considering this strategy:

Your plan allows after-tax voluntary contributions, and you want to save more than the pre-tax/Roth 401(k) 2024 elective deferral contribution limit of $23,000 or $30,500 if you’re over 50 years old.
You have a fully-funded emergency savings account, a reasonable debt situation, and do not need the liquidity.
You make too much to contribute to a Roth IRA but still want to save Roth dollars for your retirement.
You don’t want the hefty tax bill of a taxable conversion of pre-tax to Roth.
And most importantly, you love TAX-FREE money for your retirement!

The Basics

At a fundamental level, converting after-tax voluntary 401(k) money to a Roth 401(k) allows employees to save significantly more, tax-free, for retirement.

You don’t get a current-year tax deduction for the money deposited after-tax and then converted to a Roth 401(k), but the funds grow and are distributed tax-free as long as you hold the account until the age of 59.5 and it has been 5 years since your initial contribution into the Roth 401(k).

After-tax Voluntary Contributions in Work Retirement Plans

Some employer retirement plans allow employees to make three types of contributions 1) pre-tax, 2) Roth, and 3) after-tax voluntary. After-tax voluntary contributions have already been subject to income tax.

Generally, employees can contribute up to $23,000 (plus a $7,500 catch-up contribution if over 50) to their pre-tax and/or Roth portion of the 401(k) in 2024. The combined annual IRS contribution limit is $69,000 in 2024 for most employer-sponsored retirement plans.Further, if your plan allows it and depending on whether your employer contributes or not, you may be able to make after-tax voluntary contributions above the basic limit.

It’s a good idea to work with your retirement plan administrator to find out exactly how much you can contribute (if the plan allows) to the after-tax voluntary account, but to get an idea, use the following equation:

After-tax Contribution Equation
$69,000 is the IRS limit in 2024	Minus	Pre-tax and/or Roth Contribution $23,000 (+$7,500 if over 50 years)	Minus	Employer Contribution(Discretionary and/or Non-Discretionary)	Equals	Potential After-tax voluntary Contribution Allowable

Backdoor Roth 401(k) Conversion

In addition to contributing to the after-tax voluntary portion of your 401(k), your company’s plan may allow you to convert this contribution to your Roth 401(k). You may be able to contribute up to $46,000 in 2024 of after-tax voluntary dollars and then convert all of it to your Roth 401(k)! That’s right – up to $46,000 growing tax-free for retirement. Some plans also allow you to roll this money outside the plan via a rollover to a Roth IRA.

What if my 401(k) Doesn’t Allow an In Plan Conversion?

If your plan doesn’t allow the backdoor option while working, you’ll have to wait until you separate from your employment. Typically, you can then roll after-tax voluntary contributions to a Roth IRA and after-tax voluntary earnings to a pre-tax Traditional IRA account, or you can convert the earnings and pay tax on that portion of the conversion.

Example

Henry has a great job as a software engineer. He earns a significant income and lives a simple life. He maxes out his pre-tax contribution to his 401(k), which is $23,000 in 2023, and his company contributes $9,500. Henry also contributes an additional $36,500 to the after-tax voluntary portion of his 401(k).

After-tax Contribution Equation Example
$69,000 is the IRS limit in 2024	Minus	Pre-tax and/or Roth Contribution $22,500 (+$7,500 if over 50 years)	Minus	Employer Contribution(Discretionary and/or Non-Discretionary)	Equals	Potential After-tax Voluntary Contribution Allowable
$69,000	–	$23,000	–	$9,500	=	$36,500

His retirement plan allows him to convert the after-tax voluntary contributions to his Roth 401(k). In fact, if his plan allows, Henry can set up his conversions to happen automatically as soon as he contributes his after-tax voluntary dollars. He continues to convert the money to his Roth 401(k), building up tax-free funds for retirement.

Conclusion

The 401(k) Backdoor Roth Conversion is an excellent opportunity to save more for retirement in your 401(k) than the pre-tax and Roth contribution limits will allow. It makes the most sense for those who already have a stable financial foundation and do not anticipate liquidity needs before retirement.

 Notes

* There are always exceptions to the rules, so before conversion, seek advice from a tax expert that will help you understand the conversion’s tax implications to your specific situation.

* There may be plan-specific rules. Please check with the administrator for your workplace retirement plan.

* There are different distribution rules for after-tax voluntary contributions made before 1987. Consult your tax advisor for more information.

* Conversions may affect net unrealized appreciation (NUA) treatment on employers’ stock positions.

Easy Income Tax Strategies

February 26, 2022

As always, I seem to owe a bit extra each year (that’s by design) when doing my taxes. This annual ritual has me thinking about which strategies might help me shave off tax dollars now and next year. Here are a few strategies that come to mind.

Contribute more to your retirement plan at work

Regardless of how Congress tweaks the tax code, there is a critical tool in most of our tax toolboxes. This tool is the ability to shelter some current earnings from income taxes. You can do this by making pre-tax contributions to a retirement plan at work (401k, 403b, etc.). Contribution limits increased to $22,500 per year in 2023. Annual catch-up contributions for workers aged 50+ are $7,500. Contribute at least as much as your employer will match. Aspire to increase your contribution rate to 10% or more of earnings over time.

Remember, if your goal is to minimize taxes NOW, make sure you select the pre-tax option and not the Roth.

Maximize your health savings account (HSA) contributions

An often-overlooked last-minute tax-saving strategy is to make more HSA contributions for the previous tax year. You have until April 15th to make the contributions. First, however, you must have been covered by a high-deductible health insurance plan during the year to qualify. Then, if you didn’t contribute the maximum, you may have some extra tax savings available. The maximum for 2022 is $3,650 for individuals or $7,300 for family coverage. The maximum for 2023 is $3,850 for individuals or $7,750 for family coverage. There is a catch-up contribution of $1,000 for those aged 55+.

Be sure to notify your HSA provider that you want them to code your contribution for the 2022 tax year. The IRS will include your contributions as an adjustment to gross income on your tax return. This works to lower your taxes for that year.

Make deductible contributions to a traditional IRA

This option is available if you are working but not covered by a qualified plan at work (e.g., 401k or 403b), or if you are participating in a plan and have income below certain limits.

If you don’t have a retirement plan through work or do but meet the income limits, you can deduct your contributions to a traditional IRA, and investments can grow tax-deferred until withdrawn.

Itemize & maximize deductions (if you still can)

Under current tax law, you may find it is just not worth it to itemize deductions. Thanks to recent tax reforms, the standard deduction amount has increased for everyone. The deduction is $12,950 for single filers ($13,850 in 2023) and $25,900 ($27,700 in 2023) for married couples filing joint returns.

Home mortgage interest has traditionally been a huge deduction for itemizers. You can deduct home mortgage interest on up to $750,000 of mortgage loans ($375,000 if married filing separately). You can’t deduct interest for home equity loans unless you used the money to remodel or improve your home.

If your itemized deductions are close to the standard deduction amount, itemizing might be better if you make charitable contributions. Some taxpayers are electing to “bundle” their deductions by pushing them to the next tax year. This way they can have larger amounts of itemized deductions every other year and take the standard deduction in-between years.

Make the most of flexible spending accounts (FSAs) for child and healthcare

A Dependent Care FSA (DCFSA) is a pre-tax savings account where you automatically deduct money from each paycheck BEFORE TAX. This gives you a pot of tax-free cash you can use to pay for childcare expenses during the year. Under current IRS rules, you can set aside $5,000 each year, regardless of how many children you have.

Similarly, if you anticipate having regular or one-time healthcare expenses, why not use some tax-free cash for those, too? Healthcare flexible spending account limits increased to $3,050 in 2023. The same contribution is applicable to limited-purpose FSAs restricted to dental and vision care services. You can use this along with health savings accounts (HSAs) tied to high-deductible health insurance plans.

Update your personal spending plan (a.k.a., “The Budget”)

I know; it seems like every financial topic is a reason to talk about budgets. Then again, staying informed and aware of your current and future spending plans will help you identify which dollars might represent additional tax savings. Specifying precisely how much you can afford to redirect to tax advantaged strategies will help you adapt to those pesky tax law changes and maybe even enjoy a few more dollars in your pocket.

3 Ideas To Help You Pay Less In Taxes

January 24, 2022

When it comes to tax strategies, sooner is better than later.

Disclaimer: Consult with a tax professional before taking action.

Let’s take a look at three easy tax strategies that might save you substantial amounts of money come tax time.

Give your paycheck a checkup

It is always a good time to double-check your W-4 withholding elections. However, checking as early as possible will help you plan the year better. You want to make sure you aren’t paying too little in taxes along the way or paying too much. The idea is to find a balance so you won’t owe the IRS penalties OR pay too much. That would be like giving the government an interest-free loan!

Fortunately, there are two free tools available online to help you calculate how much to withhold. Gather copies of your pay stubs and last year’s tax return. You will need information from these documents to use the IRS withholding calculator or the TurboTax W-4 calculator. Both of these tools will help you see how many withholding elections to select on your W-4.

Max out your traditional retirement plan contributions

This tried-and-true method of lowering your tax bill still works just fine. The more you contribute to a traditional (not Roth) retirement plan at work, the less taxable income you will have with every paycheck. The new annual contribution limit for 2023 is $22,500 for 401(k) and similar plans.

Older workers (ages 50+) can save up to $7,500 each year with an additional IRA catch-up contribution of $1,000. Another strategy is to contribute to your HSA if you are signed up for a health insurance plan that’s eligible.

Get your deductions in a bunch

Itemizing your tax deductions might no longer be your best strategy. The standard deduction is now practically double what it was before the most recent tax reform. There are also new limits on home equity loan deductions, miscellaneous itemized deductions, and other changes. Then again, it might be a good strategy if you are able to bunch your deductions.

How does this strategy work? The idea is to time certain deductible expenses so you squeeze more of them into a single year (e.g., estimated state income taxes, property taxes, medical bills, etc.). If the bunched deductions are larger than your revised, larger standard deduction, then bunch up your deductions and itemize. This might mean on alternate years you take the standard deduction one year and itemize the next. Lather, rinse, repeat.

There you have it. Three relatively easy ways to save money on taxes for the new year. Your tax professional may have other recommendations as well. Give him or her a call.

Is It The Right Time To Convert To Roth?

January 21, 2021

Are you wondering if you should convert your retirement account to a Roth by the end of the year? After all, there’s no income limit on IRA conversions. Many employers are now allowing employees to convert their company retirement plan balances to Roth while they’re still working there. At first glance, it may sound appealing. Earnings in a Roth can grow tax-free, and who doesn’t like tax-free? However, here are some reasons why now might not be the time for a Roth conversion:

3 reasons you might not convert to Roth this year

1) You have to withdraw money from the retirement account to pay the taxes. If you have to pay the taxes from money you withdraw from the account, it usually doesn’t make financial sense as that money will no longer be growing for your retirement. This is even more of a tax concern if the withdrawal is subject to a 10% early withdrawal penalty.

2) You’ll pay a lower tax rate in retirement. This can be a tricky one because the tendency is to compare your current tax bracket with what you expect it to be in retirement. There are a couple of things to keep in mind though. One is that the conversion itself can push you into a higher tax bracket. The second is that when you eventually withdraw the money from your non-Roth retirement account, it won’t all be taxed at that rate.

You can calculate your marginal tax bracket and effective average tax rate here for current and projected retirement income. (Don’t factor in inflation for your future retirement income since the tax brackets are adjusted for inflation too.) The tax you pay on the conversion is your current marginal tax bracket. However, the tax you avoid on the Roth IRA withdrawals is your future effective average tax rate.

3) You have a child applying for financial aid. A Roth conversion would increase your reported income on financial aid forms and potentially reduce your child’s financial aid eligibility. You can estimate your expected family contribution to college bills based on your taxable income here.

Of course, there are also situations where a Roth conversion makes sense:

6 reasons to consider converting to Roth this year

1) Your investments are down in value. This could be an opportunity to pay taxes while they’re low and then a long-term investment time horizon allows them to grow tax-free. When the markets give you a temporary investment lemon, a Roth conversion lets you turn it into tax lemonade.

2) You think the tax rate could be higher upon withdrawal. You may not have worked at least part of the year (in school, taking time off to care for a child, or just in between jobs), have larger than usual deductions, or have other reasons to be in a lower tax bracket this year. In that case, this could be a good time to pay the tax on a Roth conversion.

You may also rather pay taxes on the money now since you expect the money to be taxed at a higher rate in the future. Perhaps you’re getting a large pension or have other income that will fill in the lower tax brackets in retirement. Maybe you’re worried about tax rates going higher by the time you retire. You may also intend to pass the account on to heirs that could be in a higher tax bracket.

3) You have money to pay the taxes outside of the retirement account. By using the money to pay the tax on the conversion, it’s like you’re making a “contribution” to the account. Let’s say you have $24k sitting in a savings account and you’re going to convert a $100k pre-tax IRA to a Roth IRA. At a 24% tax rate, the $100k pre-tax IRA is equivalent to a $76k Roth IRA. By converting and using money outside of the account to pay the taxes, the $100k pre-tax IRA balance becomes a $100k Roth IRA balance, which is equivalent to a $24k “contribution” to the Roth IRA.

Had you simply invested the $24k in a taxable account, you’d have to pay taxes on the earnings. By transferring the value into the Roth IRA, the earnings grow tax free. This calculator helps you crunch your own numbers.

4) You want to use the money for a non-qualified expense in 5 years or more. After you convert and wait 5 years, you can withdraw the amount you converted at any time and for any reason, without tax or penalty. Just be aware that if you withdraw any post-conversion earnings before age 59½, you may have to pay income taxes plus a 10% penalty tax.

5) You might retire before age 65. 65 is the earliest you’re eligible for Medicare so if you retire before that, you might need to purchase health insurance through the Affordable Care Act. The subsidies in that program are based on your taxable income, so tax-free withdrawals from a Roth account wouldn’t count against you.

6) You want to avoid required minimum distributions (RMDs). Unlike traditional IRAs, 401ks, and other retirement accounts that require distributions starting at age 72 (or 70½, depending on your age), Roth IRAs are not subject to RMDs so more of your money grows tax free for longer. If this is your motivation, remember that you can always wait to convert until you retire, when you might pay a lower tax rate. Also keep in mind, Roth conversions are not a one-time-only event. You can do multiple conversions and spread the tax impact over different tax years if you are concerned about pushing your income into a higher tax bracket in any particular year.

There are good reasons to convert and not to convert to a Roth. Don’t just do what sounds good or blindly follow what other people are doing. Ask yourself if it’s a good time for you based on your situation or consult an unbiased financial planner for guidance. If now is not the right time, you can always convert when the timing is right.

How To Contribute To A Roth IRA If You Make Too Much

January 21, 2021

There are multiple reasons to contribute to a Roth IRA, but if you make too much money, the Roth may not seem to be an option. However, there are a few things to keep in mind before completely writing off the Roth IRA.

The limit is based on MAGI, not total income

One is that the income limits are based on MAGI (modified adjusted gross income). That means if you contribute enough to a pre-tax 401(k) or similar qualified retirement plan, you may be able to bring your MAGI below the income limits. (Here is a little more on MAGI.)

Income limits apply to contributions, but not to conversions

The bigger point here for people whose MAGI far exceeds the income limits is the fact that there is no income limit to converting a traditional IRA into a Roth IRA. This is the key that allows people who make too much money to put money directly into a Roth IRA to still participate.

How it works

You can simply contribute to a traditional IRA and then convert your traditional IRA into a Roth IRA. Anyone can contribute, regardless of income levels, but many people don’t because it’s not tax-deductible if you earn too much to contribute to an IRA and are covered by a retirement plan at work.

This is called a “backdoor” Roth IRA contribution. Since it’s really a conversion rather than a contribution, you may have to wait 5 years before you can withdraw the amount you converted penalty-free before age 59 1/2. You’ll have to file IRS Form 8606 to document the non-deducted contribution to the traditional IRA, which will offset the 1099-R form you’ll receive for the conversion.

If you already have a traditional IRA, beware the pro-rata rule

There is a potentially huge caveat to this strategy though. If you have other funds in a traditional (pre-tax) IRA already that you aren’t converting, you have to pay taxes on the same percentage of the conversion amount as you have in total IRA dollars that are pre-tax. That means you could end up owing taxes on the conversion even if all the money you convert was nondeductible and thus after-tax.

Here’s what I mean

For example, let’s say that you have an existing IRA with $95k of pre-tax money and you contribute $5k to a new IRA after-tax. Since 95% of your total IRA money is pre-tax (because it was already there before and presumably contributed pre-tax), 95% of any money you convert to a Roth IRA is taxable even if you convert the new IRA with all after-tax money.

In other words, the IRS looks at all of your IRAs as if they were one account and taxes your conversions on a pro-rata basis. In this case, you would owe taxes on 95% of the $5k you convert — basically you’d have $4,750 of taxable income. So you can still do it, and $250 would be converted without causing a tax effect. It’s just not a tax-free transaction.

One way to avoid the pro-rata rule

The good news is that there may be a way to avoid this. If your current job’s retirement plan will allow you to roll your existing IRA money into your existing employer’s retirement plan, then you’d be eliminating the need to pro-rate by no longer having an existing pre-tax IRA. If you move your IRA into your 401(k), then complete the “backdoor” transaction, the only IRA money you would have in this example would be the $5k after-tax IRA, so you won’t pay any taxes on the conversion since 0% of your total IRA money is pre-tax.

Still not a bad deal

Even if you can’t avoid the tax on the conversion, it’s not necessarily a bad deal. After all, you or your heirs will have to pay taxes on your IRA money someday. By converting some (or all) of it into a Roth, at least future earnings can grow tax-free. It’s probably not worth it if you have to withdraw money from the IRA to pay taxes on the conversion.

So there you have it. You can contribute to a Roth IRA one way or another as long as you have some type of earned income. Otherwise, you won’t be able to contribute to a traditional IRA either.

Is It The Right Time To Convert To Roth?

December 09, 2019

Are you wondering if you should convert your retirement account to a Roth by the end of the year? After all, there’s no income limit on IRA conversions and many employers are now allowing employees to convert their company retirement plan balances to Roth while they’re still working there. At first glance, it may sound appealing since the earnings in a Roth can grow tax free, and who doesn’t like tax free? However, here are some reasons why now might not be the time for a Roth conversion:

3 reasons you might not convert to Roth this year

Let’s take an example where you retire with a joint income of $125,900 in 2022. Because of the $25,900 standard deduction for married filing jointly, your taxable income would be no more than $100,000. Of your taxable income, the first $20,550 would only be taxed at 10%, and everything from there up to $83,550 is taxed at 12%. Only the income over $83,550 is taxed at the 22% rate. As a result, you would be in the 22% bracket but actually pay only about 13% of your income in taxes.

You can calculate your marginal tax bracket and effective average tax rate here for both your current and projected retirement income. (Don’t factor in inflation for your future retirement income since the tax brackets are adjusted for inflation too.) The tax you pay on the conversion is your current marginal tax bracket, but the tax you avoid on the Roth IRA withdrawals is your future effective average tax rate.

Of course, there are also situations where a Roth conversion makes sense:

6 reasons to consider converting to Roth this year

1) Your investments are down in value. This could be an opportunity to pay taxes on them while they’re low and then have a long-term investment time horizon to allow them to grow tax free. When the markets give you a temporary investment lemon, a Roth conversion lets you turn it into tax lemonade.

4) You want to use the money for a non-qualified expense in 5 years or more. After you convert and wait 5 years, you can withdraw the amount you converted at any time and for any reason without tax or penalty. Just be aware that if you withdraw any post-conversion earnings before age 59½, you may have to pay income taxes plus a 10% penalty tax on them.

5) You might retire before age 65. 65 is the earliest you’re eligible for Medicare so if you retire before that, you might need to purchase health insurance through the Affordable Care Act. The subsidies in that program are based on your taxable income so tax-free withdrawals from a Roth account wouldn’t count against you.

6) You want to avoid required minimum distributions (RMDs). Unlike traditional IRAs, 401(k)s, and other retirement accounts that require distributions starting at age 72 (or 70½, depending on your age), Roth IRAs are not subject to RMDs so more of your money grows tax-free for longer. If this is your motivation, remember that you can always wait to convert until you retire, when you might pay a lower tax rate. Also keep in mind, Roth conversions are not a one-time-only event. You can do multiple conversions and spread the tax impact over different tax years if you are concerned about pushing your income into a higher tax bracket in any particular year.

How Taxes Work On Assets You Inherit

May 02, 2019

The death of a loved one is often a very emotional and stressful experience. Doubts about finances can compound that stress. One common concern is understanding what is owed in taxes on the financial assets that are left behind. Consulting with an estate planning professional is best, but here are some fundamental concepts about taxes on inherited assets that can help allay your concerns.

Income taxes take a back seat

Most of us are familiar with the concept of income taxes. It is the tax on the income we earn on our jobs, and therefore, the tax we worry about the most. In helping one client deal with the death of her mother, she expressed fear that the value of her mother’s assets would be added to her income for that year, and therefore, would increase the amount she would have to pay in income taxes.

She was relieved when I told her that estate tax rules are different from income tax rules, and therefore, she was most likely not subject to income tax in this situation. Generally speaking, this is true of most things that you inherit.

Step-up in basis

In her mother’s case, most of the money she left behind in investments was subject to the step-up in basis rule. For instance, if her mom owned a stock that she bought at $5 and it grew to be worth $100 at her death, her daughter will inherit that stock at $100, and her cost basis would now be $100. That means if her daughter sold the stock at $100, instead of paying capital gains taxes on the $95 in growth that her mom would have paid, she would pay nothing in tax. Also, any growth from that point forward would not be taxed at income tax rates but at long-term capital gains rates. Despite recent legislative chatter about removing the step-up in basis rules, currently, no laws have changed.

Where income taxes show up

One major exception to this is assets in retirement plans like traditional 401(k)s and traditional IRAs. They are taxable at the income tax rate of the person who inherits the asset. This means if someone inherits a traditional IRA, withdrawals are taxable as income to the beneficiary who makes the withdrawal. In this case, you have multiple options on how to distribute the assets in order to control your taxation.

What about the ‘death tax?’

Federal estate taxes, sometimes called death taxes, are generally not a concern until the person who passed away has a net worth that exceeds a certain threshold. For 2022 that threshold is $12,060,000 per person. (Most spouses receive an unlimited exemption, which means no estate taxes if the money is going to your surviving husband or wife).

This federal estate and gift tax exemption excludes most Americans from having to pay Uncle Sam for money they are passing along to heirs upon their death.

Moving target

It is good to remain aware of the estate tax exclusion number because once an estate exceeds it, the tax rate is usually significantly higher than regular income tax rates. The exclusion is pretty high now, but it’s something that Congress likes to mess around with occasionally. As recently as 2001, the threshold was $675,000, and it affected a much larger percentage of Americans. When tax bills are passed, that number tends to move up or down depending on the political climate.

Not just federal

While the clear majority will avoid federal estate taxes, there could still be estate or inheritance taxes at the state level. Many states still have estate taxes, and the exemption levels may or may not be tied to the federal exemption.

That means that while the federal exemption is a little over $12 million, your state exemption may be much less. In addition, some states impose an inheritance tax, which heirs would have to pay. Like the federal estate tax, state transfer taxes are a moving target with several states rescinding their estate taxes in recent years to become more tax-friendly to retirees.

Talk to an expert

If you are dealing with the death of a loved one and you’re not sure about all of this, consulting with an accountant or estate planning attorney can be very valuable. If you are unsure where to find a professional, contact your employer’s financial wellness benefit or EAP, and they can often help you find the right person to advise you.

Avoid These Three Financial Pitfalls When Switching Jobs

May 01, 2019

For people who strive to put the maximum amounts away into accounts with annual limits such as 401(k)/403(b) plans and Health Savings Accounts, switching jobs mid-year requires some additional diligence to make sure you’re not going over.

Most company benefits departments will take steps to ensure you don’t go over the limit with contributions from your paycheck, but if you already made deposits to accounts at your prior job that year, your new job won’t automatically know to factor that in – you have to take steps to guard against that. (these issues can also arise if you have more than one job with benefits)

Keep track of your contributions in these 3 areas

Problem: over-contributing to a 401(k) or 403(b)

This issue sometimes doesn’t come to light until after the end of the year when you’re filing your taxes and your tax accountant or software points out that you put more than the annual limit into your 401(k)’s. It’s important to know that the limits are across all accounts, not per account.

401(k) & 403(b) contribution limits
	2022	2021
Amount you can put in via payroll	$20,500	$19,500
Additional if you’re age 50 or older	$6,500	$6,500

What to do if you over-contributed: First of all, it’s important that you act quickly – there is a deadline to fix this without incurring penalties, which is April 15th of the year following the over-contribution.

Send copies of both W-2’s to the plan administrator (aka the company that manages the 401(k) or 403(b)) where you wish to make the withdrawal as evidence of your over-contribution, then request that they send you the extra money.
You’ll receive a check for the amount you over-contributed, including any associated earnings.
You’ll also receive a Form 1099-R, showing the amount you withdrew.
Include the overage amount on your tax return for the year your over-contributed.
Include earnings, if any, on the tax return for the current year when you received the check.

For example, let’s say you over contribute by $5,000 and the administrator attributes $500 worth of growth to that amount – you’ll receive a check for $5,500 and include $5,000 on last year’s tax return to reflect the return of your deposit and $500 on next year’s return to reflect the income on that deposit.

As long as you do this by April 15th, you will avoid any penalties. Waiting until after could incur a 10% early withdrawal penalty or even 100% double taxation of the amount you over-contributed, so you’ll want to get this done ASAP.

Why you might intentionally go over and put yourself in this position: One reason you might intentionally over-contribute to your retirement when switching jobs is if your new job offers a better match than your previous job, and you’d be sacrificing some of the available match if you contributed less.

If that’s the case, you may decide to max out your new match, then withdraw from your old job’s account to reconcile it. If you’re planning to do this, you’ll want to wait until after you’ve successfully withdrawn your overage before rolling your old account into your new plan or an IRA.

Problem: over-contributing to Health Savings Accounts

There are several ways this can happen, especially if you switch mid-year into or out of an HSA-eligible plan. For example, if you had already put the maximum amount into your HSA before switching jobs only to find that your new job doesn’t have an HSA-eligible option, you may want to calculate the eligible amount and withdraw the excess before you file your tax return for that year.

Health Savings Account contribution limits

	2022	2021
Limit for individual	$3,650	$3,600
Limit for family	$7,300	$7,200
Additional for 55 or older	$1,000	$1,000

What to do if you over-contributed: As long as you catch this before you file your federal tax return (including extensions), you can simply request that the additional funds be returned to you, then make sure you include them in your income for the year they were contributed. Similar to retirement fund overage withdrawals, if there are any earnings attributed to the amount you over-contributed, those will also be distributed and taxed as regular income.

If you decide not to do this or miss the deadline, then you can leave the excess contributions in the HSA and pay a 6% excise tax on the amount over-contributed. Note that if you have your account invested for aggressive growth, you may find that paying the excise tax still leaves you ahead in the long run, but for the majority of people these days who simply use the savings account feature of HSAs, they usually opt to withdraw the excess rather than pay 6% tax on it.

Problem: over-paying into Social Security

This can happen if you have higher income or received a very large bonus that would take your total wages for the year over the annual Social Security withholding limit. Most people don’t know this, but you don’t pay Social Security on every penny you earn – it stops when you get to a certain limit. For 2022, that limit is $147,000 or $9,114 in tax.

Employers are required to withhold FICA tax according to the wages they pay you, so if you have more than one job during the year and your total wages exceed the limit, you’ll need to claim the excess as a credit against your income tax when you file your return. (IRS Publication 505 has more on this) If you only have one job and your employer made the mistake, then you should first try to get them to refund you the money and if not, then you’ll need documentation to file Form 843.

How’s Your Financial Life?

January 06, 2017

With today being my first post of 2017, it’s a great time to spend an hour or two over this weekend looking back at the year that was and looking forward to the year that is just starting. I have an annual tradition that I started long ago and will continue for as long as I am lucid. Feel free to use my annual process as a starting point, tweak it, and make it your own.

Each year, I put together a quick “How’s my financial life?” spreadsheet. I only need a few reference sources and in less than 30 minutes, I feel like I have a much clearer understanding of where I stand financially. Along the top of the spreadsheet, I list the year and on the vertical (Column A), I list the things I want to measure annually. Here are the things I measure and where I find the information:

Total Assets – I use this Financial Organizer. The goal is for this to increase each year. Tracking the dollar and percentage increases are things I’ve added to my simple spreadsheet over time.

Total Debt – This is also found on the Financial Organizer. The goal is for this to decrease annually and eventually get to $0!

Net Worth – This is simply the total assets minus total debt. An increasing net worth is my primary financial goal each year. This is another thing I track in dollar and percentage terms.

Annual Income – I use my last pay stub of the year. This is a number that should go up each year and if it doesn’t – that could be a warning sign. Or it could mean that you’ve happily retired or downsized your work stress level.

Estimated Mortgage Payoff Date – I pay a bit of extra principal with each payment and at year end, my mortgage company can calculate when the mortgage will be paid in full at my current level of extra principal payments. You can also build this yourself with an “amortization calculator.” (If you Google that term, you’ll find a bunch of them). This is important to me because when my mortgage is paid off, I’ll consider myself financially secure. At that point, my embedded cost of living will be property taxes, insurance, utilities, food and fun.

401(k) Balance and 401(k) Contributions for the Year – For the contributions, I need my last pay stub for the year and for the balance, I can either log on to the website of my 401(k) provider or quickly check Mint for my balance. Each year, I enjoy seeing the balance go up! (I wasn’t so happy with this back in 2008, though.)

Savings Balance – This is one I like to track in order to make sure I have an adequate emergency fund. I enjoy seeing it go up, although it took a big step backward last year because I used a chunk of savings as the down payment on a house. So while I wasn’t ecstatic when I saw that the balance went down, I understand why it did and will work to build it back in short order. I can check this balance in Mint while I get my 401(k) balance, so locating the info is the easiest part of the job.

Life Insurance Death Benefit – I check this each year to ensure that should this be my last year on the planet, my mortgage can be paid off, my kids’ college can be handled without loans and there could be something left over for them to have a little head start in life, along with a few of my favorite charities getting a few bucks to do the great work that they do. I have to check a file in my desk to make sure that my information is up to date. We had a change in benefits at work and I replaced one policy with another last year so this is a data point that is in flux.

Date of Last Will Update – This is another item that I need to look in my desk drawer files to confirm. Looking at it this year, I’m probably due for an update. The last update of mine was almost 10 years ago, right after my ex-wife and I separated. (It’s amazing how quickly a decade can fly by when you’re having fun!) Hitting the 10 year mark or a significant life change are my triggers for updating this important document, along with my powers of attorney and healthcare directives.

Those are the data points that I can put together in the time that it takes me to watch one college basketball game. (Hey, it’s nice to have a pleasant distraction while working on your financial life.) So pick a game to watch and get busy.