Pay down high interest credit cards.For many households, the best return on your money is to pay down credit card debt. Whether carrying balances at 12 percent or 22 percent, credit card debt is typically the costliest debt households have. Plowing excess cash into repayment of credit card debt is a double-digit, risk-free return because it reduces the outstanding balance and the resulting interest charges. This is a sound move now as credit card rates will only move higher over the next two years.
Use Bankrate.com's debt pay-down calculator to develop a custom, month-by-month plan for repaying your debt.
Begin or increase contributions to a workplace retirement program.While many employers have scaled back or suspended their matching contributions to workplace retirement plans, such as 401(k)s, this is not an excuse to suspend your own. Even if your employer is contributing at a reduced rate, it still represents free money. If they're not, the burden is on your shoulders.
Contributions not only reduce your taxable income now, but your investment goes to work immediately and grows without the headwind of taxes. The regular contributions made with each paycheck represent the best example of dollar-cost averaging, buying fewer shares when values are high but more shares when prices fall.
Another avenue is a Roth 401(k), in which your contributions are made with after-tax dollars but withdrawals in retirement will not be taxed, allowing you to keep your entire nest egg.
Make an IRA contribution.If you or your spouse has earned income, you are eligible to contribute to an individual retirement account. Those under age 50 can contribute a maximum of $5,000 and those 50 and older can contribute up to $6,000. You can open an IRA with a bank, credit union, brokerage firm or mutual fund, and invest the contributions as you choose. With an IRA, you can choose investments that aren't available in your workplace retirement plan, such as commodities, individual stocks or certificates of deposit, giving you access to investment options that result in a more diversified portfolio.
A traditional IRA offers tax-deferred growth, while a Roth IRA offers tax free growth of retirement savings.
Convert traditional IRA to a Roth IRA.The new year brings an attractive new opportunity. While the income limits restricting contributions to a Roth IRA remain, the income limit restricting eligibility to convert a traditional to a Roth IRA disappears. This means anyone wanting to convert some or all of their traditional IRA into a Roth can do so, regardless of income. It also means doing it in 2010 is especially appealing because the resulting taxes can be spread over 2011 and 2012. Even though the income limit on Roth contributions remains, you can contribute to a traditional IRA then immediately convert that traditional to a Roth IRA. This is a roundabout way of financing a Roth IRA, even if your income is too high to do so in a direct way.