By Emily Brandon
There are some new developments that could help you save more for retirement in 2012, including a higher 401(k) contribution limit and better access to 401(k) fee information. Of course, your ability to save and invest will largely determine your retirement success. If you're aiming to improve your finances in the new year, try to incorporate a few of these tips into your retirement plan. Here are 12 ways to get better prepared for retirement in 2012.
Save $500 more next year. Consider resetting the automatic contribution to your 401(k) to include an extra $42 per month. The contribution limit for 401(k)s, 403(b)s, and the federal government's Thrift Savings Plan will increase by $500 in 2012, to $17,000. And workers age 50 and older will be able to contribute an extra $5,500 next year. "Always allocate a percentage to your retirement account from your paycheck before you spend, even if it is a tiny amount," says Elaine King, a certified financial planner and managing director of wealth planning at Lubitz Financial Group in Miami. "It is the discipline that counts."
Get a 401(k) match. If you're unable to completely max out your 401(k), aim to at least save enough to capture any 401(k) contribution match your employer offers. For example, if you earn $50,000 and your company offers a match equal to 3 percent of pay, your nest egg could get an extra $1,500 boost.
Maximize tax breaks for retirement saving. There are a variety of tax breaks for retirement savers. You can defer taxes on up to $17,000 in a 401(k) and $5,000 in an IRA in 2012. Those limits jump to $22,500 in a 401(k) and $6,000 in an IRA if you are 50 or older. Low-income savers whose modified adjusted gross incomes are less than $28,750 for singles, $43,125 for heads of household, and $57,500 for married couples may also be able to claim the Saver's Credit, which is worth up to $1,000 for singles and $2,000 for couples.
Put some of your savings in a Roth. Consider allocating some of your retirement savings to a Roth 401(k) or Roth IRA account, especially if you're young or in a low tax bracket. While you won't get an immediate tax break, Roth accounts give you easier access to your money before retirement and more withdrawal flexibility in retirement. The $100,000 income limit for converting a traditional 401(k) or IRA to a Roth was eliminated in 2010, which means almost anyone can allocate some of their retirement savings to a Roth account in 2012.
Scrutinize 401(k) fees. Those with 401(k)s will have access to more information about the costs and fees deducted from their accounts, thanks to a 2010 Labor Department regulation that goes into effect in 2012. Pay close attention to mailings from your 401(k) plan next year and use this information to minimize the fees you pay. "You'll be receiving a new type of quarterly account statement from your plan sponsor that details the actual dollar amounts charged against your account and mutual fund choices," says Mark Miller, a Reuters retirement columnist and author of The Hard Times Guide to Retirement Security. "The easiest way to determine if you're paying too much is by making an apples-to-apples comparison between a passive index fund in your plan -- say, an S&P 500 fund -- with the same fund offered elsewhere. If your plan's fund charges 75 basis points, but you could buy the same thing in an IRA for seven basis points, ask your employer why--nicely."
Avoid penalties during rollovers. If you roll money over from a 401(k) to another retirement account this year, make sure to avoid fees and penalties. The best way to do this is to have your former employer transfer the money directly to an IRA or your new employer's retirement plan. If you have the check made out to you, 20 percent of your account balance will be withheld for income tax and you could be charged taxes and penalties if you don't meet the 60-day deadline for depositing the money in a new account and replacing the withheld 20 percent.
Rebalance. Volatility in the stock market this year may have caused your current holdings to shift significantly from their target allocations. Rebalance your portfolio by using new contributions to purchase investments in underweighted asset classes or sell some investments that performed well until you reach your target allocation.
Take advantage of advice. You may be offered investment advice through your 401(k) or IRA plan next year. A new Labor Department rule will allow retirement plan administrators to provide investment advice to account holders in 2012. To prevent conflicts of interest, the rule requires that the advice be given by a financial professional whose compensation does not vary based on the investments selected or a computer model that an independent expert certifies as unbiased.
Remember required distributions. Traditional 401(k) and IRA account holders who are over age 70½ must take required minimum distributions from their retirement accounts each year. Retirees who fail to withdraw the correct amount must pay a 50 percent tax penalty on the amount that should have been withdrawn.
Reconsider your retirement age. Retirement at age 65 isn't for everyone. "For those who go through the income and expense review and find that they can't afford to retire comfortably, working a few extra years can really help," says Daniel Goldie, president of Dan Goldie Financial Services in Menlo Park, Calif., and coauthor of The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future. "This allows them to save more, gives more time for their investments to grow, and reduces the number of years they'll need retirement income. It can also allow them to delay taking Social Security, which increases their payment amount."
Save part of windfalls for retirement. Every once in a while we receive a windfall of extra cash, such as a bonus, tax refund, gift, or inheritance. Consider putting a portion of these lump sums aside for retirement.
Talk to someone who is retired. Find out what they wish they had done differently in the final years of their career and early part of retirement. "Resolve to meet up with a few former coworkers who've been retired for at least a year in order to learn from their real-life experiences," says John Nelson, a life planning coach and author of What Color Is Your Parachute? For Retirement. "What you learn may change the timing of your own retirement, and uncover things you'll want to explore--both before and after you retire."