4 Financial To-Dos to Kick Off the New Year

Financial To-Do List for 2026 – Morning Star Discussion

Key Concepts:

• IRA (Individual Retirement Account): A tax-advantaged savings account for retirement.
• Roth IRA: An IRA that offers tax-free withdrawals in retirement.
• Backdoor Roth IRA: A strategy for high-income earners to contribute to a Roth IRA indirectly.
• 401(k): A retirement savings plan sponsored by employers.
• Safe Withdrawal Rate (SWR): The percentage of a retirement portfolio that can be withdrawn annually without depleting the funds.
• Dynamic Spending Systems: Retirement spending strategies that adjust based on portfolio performance.
• Standard Deduction: A fixed dollar amount that taxpayers can deduct from their adjusted gross income.
• Itemized Deductions: Specific expenses that taxpayers can deduct from their adjusted gross income.
• SALT (State and Local Tax) Deduction: The amount of state and local taxes that can be deducted from federal income tax.
• Tax-Efficient Asset Location: Strategically placing investments in different account types to minimize taxes.
• Municipal Securities: Bonds issued by state and local governments, often tax-exempt.
• Capital Gains Distributions: Payments made to mutual fund or ETF shareholders from the profits of sales of securities within the fund.

1. Retirement Savings Contribution Limits (2026)

Christine Benz highlights the importance of revisiting retirement savings contributions at the start of each year due to annual adjustments. For 2026, the IRA contribution limit increases to $7,500 for those under age 50 and $8,600 for those over 50, including an inflation-adjusted “catch-up” contribution. The “backdoor Roth” strategy remains viable for high-income earners, involving contributions to a traditional, non-deductible IRA followed by conversion to a Roth IRA.

For company retirement plans (401(k)s), the contribution limit is $24,500 for those under 50 and $32,500 for those over 50. A “super catch-up” contribution is available for individuals aged 60-63, allowing contributions up to $35,750 in 2026. Benz emphasizes that high-income individuals should aim to maximize contributions to these tax-sheltered accounts.

New Rule Regarding Catch-Up Contributions: A new rule dictates that catch-up contributions for high-income earners within 401(k) plans must be made to Roth accounts. Individuals should verify their employer’s plan details to ensure compliance.

2. Retirement Spending & Safe Withdrawal Rates

For retirees, Benz recommends reviewing spending from the previous year to assess budget adherence and portfolio drawdowns. Morning Star’s research on safe portfolio spending rates suggests a 3.9% initial withdrawal rate for a 30-year retirement horizon. However, Benz cautions against rigidly adhering to this guideline, as it may lead to underspending.

Dynamic Spending Systems: Co-author Amy Arnot’s research explores dynamic spending systems that adjust withdrawals based on portfolio performance. These systems potentially allow for higher initial withdrawal rates (up to 6% for a 30-year horizon) with adjustments based on investment returns.

Time Horizon & Spending: Benz stresses that retirees with shorter time horizons (e.g., 75-80 years old) can safely increase their withdrawal rates, potentially up to 7% annually, as their portfolio has less time to be impacted by market downturns.

3. Revisiting Itemized Deductions

Tax season presents an opportunity to re-evaluate the itemized deduction approach. The increase in the SALT deduction cap from $10,000 to $40,000 (due to legislation in mid-2025) makes itemizing more attractive, particularly for taxpayers in high-tax states like New York, New Jersey, California, Illinois, and Chicago. This change may necessitate more detailed record-keeping, especially for charitable contributions, to maximize potential tax benefits.

4. Portfolio Tax Efficiency

Benz advises reviewing portfolio tax efficiency during tax season, specifically when receiving 1099 forms detailing income and capital gains distributions.

Tax-Efficient Asset Location: The discussion centers on strategically placing investments in different account types. Income-generating assets (fixed income, cash) should ideally be held within tax-sheltered accounts. Municipal securities (money market funds and bond funds) are recommended for high-income earners seeking tax-exempt fixed income options.

For taxable accounts, the focus should be on tax-efficient broad market index funds and exchange-traded funds (ETFs) to minimize capital gains distributions.

Synthesis/Conclusion:

The discussion with Christine Benz provides a practical financial to-do list for the start of 2026. Key takeaways include maximizing retirement contributions within adjusted limits, carefully considering retirement spending strategies beyond the traditional 4% rule, re-evaluating itemized deductions due to the increased SALT cap, and optimizing portfolio tax efficiency through strategic asset location. The emphasis is on proactive financial planning and adapting strategies to individual circumstances and evolving tax regulations. Benz’s insights encourage a flexible and informed approach to financial management, aiming for both long-term security and a comfortable retirement lifestyle.