With only a couple of weeks left in 2016, it’s an ideal time to take stock of the past year and fine-tune your plans for 2017. While December can be a celebratory time of year as we enjoy the holidays and get caught up in the festivities, it can also be overwhelming in many ways. As the year draws to a close, we may realize that we have not accomplished all our goals and we frantically attempt to squeeze in a few last-minute projects before January 1st rolls around.
Since your wallet won’t be gathering dust this season, don’t let your financial strategies fall to the wayside. Here are ten critical financial steps to take before we enter a new year.
1. Make Extra Retirement Contributions
If possible, increase your contribution to your 401(k) by the end of the year to make the most of your retirement savings. Not only will this action reduce your tax bill but it will also increase your future savings. It’s a win-win for your finances!
Here are some nitty-gritty details to keep in mind: For 2016, you can contribute as much as $18,000 (or $24,000 if you are 50 or older). You may also consider contributing to a Roth IRA. For 2016, you can contribute as much as $5,500 (or $6,500 if you are 50 or older). Keep in mind that if your income is over $194,000 and you’re married filing jointly, you won’t be eligible to contribute to a Roth IRA.
2. Take Advantage of Your Medical and Dental Benefits
Have you been planning to get a root canal, blood work, or other medical or dental procedure? Now’s the time to take advantage of all your health care needs before your deductible resets. Dental plans, in particular, often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.
3. Check Expiring Sick and Vacation Time
Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, fit in a last-minute vacation, a staycation, or trips to the doctor to use up your time.
4. Use Your Flexible Spending Account
Like your health insurance benefits, you’ll want to use up your FSA (Flexible Spending Account) dollars by year’s end. Your benefits won’t carry over and you’ll lose any unspent money in your account at the end of the year. Check the restrictions for your account to see what the money can and cannot be used for.
5. Verify Required Withdrawals
If you’re retired, review your retirement accounts’ required minimum distributions (RMDs). An RMD is the amount the federal government requires you to withdraw each year from your retirement accounts, including 401(k)s, SIMPLE IRAs, SEP IRAs, and traditional IRAs, usually starting at age 70½. If you don’t, you may face steep penalties. To calculate your RMD, use one of the IRS worksheets.
6. Donate to Charities
If you made a charitable contribution in 2016, you might be able to lower your total tax bill when you file early next year. It could be especially advantageous if you donated appreciated securities to avoid paying taxes on the gains. Along with your other tax documents, find and organize any receipts you have from donating to charities, whether it was a cash donation, securities contribution, or another type of gift.
7. Consider a Roth Conversion
Roth IRAs are attractive because you don’t pay income tax when you withdraw funds in retirement. However, if you’re a high-income earner, you may not be eligible to contribute and instead invest in a Traditional IRA. If you have a Traditional IRA, you may have the opportunity to convert to a Roth IRA and save money on taxes in the long run. The deadline to convert to a Roth IRA is December 31st, so if you’ve been considering doing so, or wonder if it’s an appropriate option for you, talk to your financial advisor ASAP.
8. Discuss Loss Harvesting With Your Advisor
If you invest in bonds, mutual funds, or stocks in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses. Tax-loss harvesting can help you save on taxes, but you want to make sure the move also makes financial sense for your situation. Talk with your advisor about potentially harvesting your losses and if it makes sense for you. Should you determine tax-loss harvesting is appropriate, you’ll need to complete it by December 31st.
9. Set a Budget for Holiday Spending
Americans will spend nearly $1,000 this year on holiday gifts alone. During such an expensive time of year, a budget is a must to avoid overspending. Break down your spending and allocate a set amount of funds for everything you need this holiday season, including gifts (plus an individual budget for each person), food, transportation, postage, and gift wrap. Be realistic about what you can afford to spend.
10. Give Without Gift Tax Consequences
It’s never too early to start planning the legacy you want to leave for your loved ones without sharing a good portion of it with Uncle Sam. You may want to consider gifting. Each year, you can gift up to $14,000 to as many people as you wish without those gifts counting against your lifetime exemption of $5 million. If you’ve yet to gift this year or haven’t reached $14,000, consider gifting to your children or grandchildren by December 31st.
Have you taken care of these details throughout the year or do you need to catch up to make the most of your finances for the year? Do you want to start off on the right financial foot for the new year? I’d love the opportunity to offer you support along your financial journey. If you are interested in starting the year off strong, I encourage you to reach out to me for a year-end review by calling us today at 909-981-1720.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.