While tax-efficient investing and maxing out tax-advantaged retirement accounts should always be top financial priorities, the start of every new year means there are new financial rules and trends to consider. Here are my insights on what’s coming down the road—and how to plan for them.
One of the most important things to prepare for in 2015, especially if you’re an individual expecting to earn more than $200,000, is higher taxes. These include the Net Investment Tax, which is an additional 3.8% surtax on investment income, as well as an additional 0.9% Medicare tax on wages. These changes took effect in 2013, but if you’re moving into a higher tax bracket next year, you may not realize that you could face them.
While you cannot ignore taxes, you can take steps to minimize their impact with smarter investment planning. Some strategies include using municipal bonds, tax loss harvesting, and maxing out tax-advantaged accounts.
As taxes show no signs of going away anytime soon, tax-efficient growth is more important than ever. Intelligent investing services, such as Betterment, provide tax-efficient investing features automatically.
Higher 401(k) Plan Contributions
Every year, the IRS revisits contribution limits for tax-advantaged accounts in order to account for inflation. The good news is that they are going up in 2015—which means you can save more in a smart way.
The biggest change is for 401(k) plans, where people under 50 can now contribute a total of $18,000 (an increase of $500). If you want to max out your 401(k) for the year with contributions on a monthly basis, plan to contribute $1,500 a month. The catch-up contribution limit also increases to $6,000 in 2015, for a total contribution limit of $24,000 for employees age 50 and older.
(Read more about 2015 tax law changes for retirement saving.)
More Bonuses, Fewer Raises
The good news is that more workers may receive bonuses in the coming year. The bad news is that the bonuses may be in lieu of salary hikes, according to a recent industry report. For savers, this means it’s essential to be proactive about putting this money into retirement accounts, whether that’s increasing their 401(k) contributions or putting the money into an IRA. (Read more about different retirement accounts to consider.)
And for those who do get a salary hike, the smart move is to direct increased earnings into savings and retirement, rather than boosting your lifestyle expenses. It’s much harder to cut back once you’ve increased your spending than to maintain your current spending limit and save for future costs, such as education, a home, or a car.
More Spending on Health
Whether you’re covered by an employer-sponsored health insurance plan or buying your own coverage through the Affordable Care Act, your own spending on healthcare is poised to increase next year.
The trend over the last several years has been for companies to adopt high-deductible plans, which puts more financial responsibility on consumers. That means individuals need to be proactive about setting aside savings ahead of time to ensure that these costs can be covered.
Health Savings Accounts, or HSAs, are tax-advantaged investment accounts that can be used to stash away money for medical costs—and any funds that are left over carry over year to year. Whatever you don’t spend on medical care by the age of 65 you can withdraw and use like any other money, which is taxed similarly to a traditional IRA.
You can only use these accounts if your health plan is considered a high-deductible plan (generally one with a deductible of at least $1,300 for individuals and $2,600 for families.) According to IRS guidelines for 2015, the maximum contribution for a family is $6,650 and $1,000 higher if a family member is 55 or older. For an individual, the limit is $3,350.
Interest Rate Changes
In the coming year, people are likely to be watching the Federal Reserve more closely than ever to see what will happen with interest rates—they currently remain at historic lows. But don’t assume you can guess what will happen; correctly forecasting interest rates with consistency is nearly impossible.
“People have been expecting rate hikes since 2009 and missed out on five years of yield because of it,” said Dan Egan, Betterment’s Director of Behavioral Finance and Investing. Egan noted that bonds tend to react unpredictably to rate hikes. For example, if some hike has been priced in, but it winds up being less than expected, bonds might rally after a rate rise.
So what does this mean for consumers? When it comes to purchases, it could still be a good time to get a low-rate mortgage and make a home purchase, if that’s one of your financial goals.
However, it also means staying the course with your investments. Reacting to interest rates is a form of market timing, and research shows that a buy-and-hold index-fund portfolio is the best bet over the long term.
This post originally appeared on Forbes.
More from Betterment:
- 2015 Tax Law Changes You Need to Know
- This Year Don’t Make Resolutions—Create Habits
- Your 2015 Tax Season Calendar
Betterment is not a tax advisor, and this article should not be considered personal tax advice. Contact a qualified tax advisor to understand your personal situation.