Published by Scott Ford
The last months of the year are always hectic due to the holidays, end-of-the-year projects at work, and, in terms of this year, a heated presidential election. While you likely have plenty on your plate, don’t neglect your financial strategies. Review these seven actions you should consider before January 1st.
1. Maximize Your Retirement Contributions
Tax-advantaged accounts are one of the most effective ways to save for retirement. Funds invested in a 401(k) plan grow on a tax-deferred basis (meaning no capital gains taxes are due annually on any investment gains). If you can, increase your contribution by the end of the year. For 2016, you can contribute as much as $18,000 (or $24,000 if you are 50 or older).
If you can’t reach the maximum, aim to contribute enough to receive your employer’s full match. Companies typically match $0.50 on the dollar up to 6% of your contribution. If this is the case for you, contribute at least 6%. If you want to avoid making larger payments at the end of the year next time around, consider increasing your contribution by 1% every quarter until you reach your goal.*
2. Review Your Gains and Losses
You may be able to reduce taxes on your investment gains, but you’ll want to evaluate your options before the new year. If you invest in bonds, stocks or other investments 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.
Known as tax-loss harvesting, this refers to the process of selling any stocks, bonds or other investments that have lost value to reduce your taxes on capital gains from prosperous investments. This can help you save on taxes but make sure the move also makes financial sense. Should you determine tax-loss harvesting is appropriate, you’ll need to complete it by December 31.
3. Rebalance Your Portfolio
At least once a year you should review your portfolio with your financial advisor and rebalance your investments. By rebalancing, you can take assets that are above your target percentage and buy what you need using the funds you receive from selling what you have too much of.
This review is also a great time to discuss your risk tolerance, time horizon, short-term needs, and long-term goals. Your objectives or circumstances may have changed, and your portfolio may no longer accurately reflect your roadmap. Your advisor can help you evaluate whether or not you’re still on track toward your goals and if you need to make adjustments.*
4. Donate to Charity
The end of the year is a great time to give to charity. For one, you have an opportunity to help those in need during the holiday season. And second, you can cut your tax bill if you itemize your deductions.
There are a few different ways you can donate to charity. Other than giving cash to a charity, you may consider donating highly appreciated stock to a donor-advised fund. A donor-advised fund (DAF) is a charitable account offered by sponsors such as financial institutions, community foundations, universities and fraternal or religious organizations. A DAF contribution is irrevocable and has fees and expenses which must be considered prior to investing. You can deduct the value of the investment as a charitable gift, and you avoid owing capital gains taxes. To do this, you’ll need to make sure you’re giving to a qualified charity. If you give cash or donate physical items, make sure you keep receipts for when tax season comes.
5. Decide What to Do with Your Bonus
If you’ll be receiving a bonus, it’s an ideal time to review your goals to determine how to use the funds best. You may determine it’s best to allocate it to your emergency fund, or you may choose to invest it. If you currently have debts, you may want to put it toward paying off your highest interest bearing loans. And, of course, you may instead decide to put it toward an upcoming expense, be it a car or family vacation.
However you decide to use the funds, spend some time evaluating the best way to use those resources, and consult your advisor if you need some advice.
6. Organize Your Taxes
April 15 may be months away, but it’s much less stressful if you start collection the information now. Some of the items you’ll need include:
- Job income forms
- Investment income forms
- IRA contributions
- Student loan interest
- Charitable donations
- Investment interest expense
If you’ve been paying estimated taxes, this is also a good time to review your payments, particularly if your income has significantly changed in the past year.
7. Revisit Your Strategies and Documents
Life is always surprising us and your goals and intentions can change within a year. Before 2017 arrives, review your financial plans and current documents in place. If needed, update your beneficiaries on your retirement plan accounts and insurance policies, and review your will.
Along with updating estate planning and insurance documents, review your financial plan and past year’s progress. Did you save as much as you intended? Do you need to catch up before the year’s end? Have any of your goals changed? If so, update your strategies.
Getting on the Right Foot
The end of the year can be overwhelming, but it’s important to start a new year off on the right foot. If you have questions about any of these financial actions or other opportunities for starting the new year off right, contact your advisor. We can review what you’re currently doing and evaluate areas for improvement.
Content in this material is general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
*Withdrawals prior to age 59 may result in a 10% IRS penalty tax in addition to current income tax. Investing also involves risk including loss of principal. No strategy assures success or protects against loss.
**Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
