Check these financial to-do’s off your list before the clock strikes midnight.
The year is quickly drawing to a close, and that means you have only a small window to wrap up some crucial financial tasks. “We get bogged down in the holiday season,” says Michael Landsberg, member of the American Institute of Certified Public Accountants’ Personal Financial Planning Executive Committee. As a result, people may miss out on contributions that could cost tax savings or make costly mistakes such as overlooking minimum distributions for retirement accounts. With that in mind, don’t wait for the new year to tackle these nine important financial steps.
Max out your 401(k) contributions if possible.
You have until April 15, 2019, to make tax deductible contributions to IRAs and health savings accounts. However, contributions to traditional 401(k) plans must be made by Dec. 31 if you want to deduct them from your taxes in the spring. Using a bonus to make a one-time contribution is a smart move, says David Geibel, managing director and senior vice president for advisory firm Univest Wealth Management in King of Prussia, Pennsylvania. In 2018, workers can contribute up to $18,500 to a 401(k). Those age 50 and older are entitled to make an additional $6,000 in catch-up contributions.
Contribute to a 529 plan.
Parents with children may want to contribute to a 529 plan before the year is out. Money in these accounts can grow and be withdrawn tax-free for qualified education expenses. While the federal government doesn’t provide a tax deduction for contributions to 529 plans, many states do offer a deduction. However, to get the state tax deduction, you may have to make your contribution by Dec. 31.
Spend down your flexible spending account.
These accounts allow workers to put money aside tax-free for health or child care expenses and are funded through employer payroll deductions. In 2018, workers can contribute up to $2,650 to health FSAs or limited-purpose FSAs, which cover dental and vision services. Married couples filing jointly can put $5,000 in dependent care FSAs. In 2019, the contribution limit for health and limited-person FSAs will rise to $2,700. “Typically, these have a use it or lose it provision,” says Andrew Crowell, vice chairman of wealth management for financial firm D.A. Davidson & Co. in Los Angeles.
If you fail to use the money in an FSA by the end of the year, it reverts back to the employer. However, some companies give employees a grace period to spend their account balance; others may allow $500 to roll over to the new year.
Harvest losses from investments.
Investors can sell off stocks and funds that have lost value in order to offset any capital gains tax they may owe. To do so, the sale must occur by Dec. 31, and an investor can’t purchase the same or a substantially similar equity within 30 days before or after the sale.
“Tax (loss) harvesting is more critical this year than it has been in previous years,” says Julie Kelly, a certified financial planner and financial advisor with advisory firm Edward Jones in Durham, North Carolina. That’s because many mutual funds have posted significant capital gains distributions that are paid into an investor’s account and are taxable, Kelly says. Investors may end up owing a significant amount of taxes if they don’t harvest losses in other funds to offset the gains.
Take your required minimum distribution.
If you have a traditional 401(k) or IRA, you need to begin taking annual minimum withdrawals once you reach age 70 ½. Known as a required minimum distribution, or RMD, the amount is calculated with a formula that takes into consideration your age and the account balance. You may also have to take an RMD if you have an inherited IRA. The RMD has to be pulled out of your account by Dec. 31. “Otherwise, the penalties can be steep,” Crowell says. Failure to take an RMD could result in a tax that is equal to 50 percent of the required distribution amount.
Donate to charity.
The deadline for making tax-deductible charitable donations is Dec. 31. If you’re sending a check, it only has to be postmarked by that date. However, electronic payments and transfers have to be completed before Jan. 1. “If you want to gift stocks, you’d better get a move on that now,” Geibel says. Before making a contribution simply to receive a tax deduction, confirm that you’ll have enough deductions to warrant itemizing your return in the spring. “Keep in mind that the law has changed,” Geibel says. The standard deductions for tax year 2018 are $24,000 for married couples filing jointly, $18,000 for heads of households and $12,000 for single taxpayers or married couples filing separately.
Convert to a Roth IRA.
If 2018 was a low-income year and you have a traditional IRA, Landsberg says you may want to consider a Roth conversion. Roth IRAs don’t offer an immediate tax deduction, but they do grow tax-free and withdrawals in retirement are tax-free. That means they could provide greater overall tax savings than what is offered by a traditional IRA. Anyone can convert a traditional IRA to a Roth IRA. Since contributions to a traditional account were made tax-free, income tax will be charged on the converted amount. Therefore, it’s best to complete a conversion in a year in which your income – and tax bracket – is lower. Still, it’s important to be wary of converting too much and pushing yourself into the next tax bracket.
Rein in credit card spending.
With two weeks left before Christmas, there is still plenty of time to spend money for the holidays. “One of the challenges we have this time of year is racking up credit card bills,” Geibel says. Before the year runs out and your credit card balance hits its limit, put a pause on spending. Review what you’ve purchased so far and make a budget for the remainder of the holiday season if you don’t already have one.
Make an appointment with a financial advisor.
Even if you can’t squeeze in a meeting with a financial planner between holiday parties and family gatherings, Crowell suggests at least scheduling an appointment for a full financial review for January. Doing so can help you maximize your financial success in 2019 by identifying goals and setting spending strategies. It can be especially useful to retirees who are navigating how best to use their retirement accounts to pay for living expenses. “We’re having really deep conversations with clients right now about … cash flow needs,” Kelly says. A financial planner can help a retiree decide whether to pull money from an IRA, 401(k) or other savings account for the upcoming year as well as how to insulate investments during market volatility.
To recap, complete these nine financial to-do’s to set yourself up for success in the new year.
- Max out your 401(k) contributions if possible.
- Contribute to a 529 plan.
- Spend down your flexible spending account.
- Harvest losses from investments.
- Take your required minimum distribution.
- Donate to charity.
- Convert to a Roth IRA.
- Rein in credit card spending.
- Make an appointment with a financial advisor.
