Fall is a busy time at home and in the office. You’re wrapping up the quarter at work, preparing for the holidays and ensuring your home is ready for the upcoming winter season. It’s also time to get serious with year-end financial planning. Prioritizing responsibilities can get tricky, but some items have hard deadlines or deserve immediate attention. End-of-year financial planning is one of those items.
Here are five items that you should include on your end-of-year financial checklist:
Max out your 401(k) contributions
Hit your savings goals. Most people prepare and save for retirement. Others can live off Social Security benefits alone or may have married rich. Retirement plans – 401(k), thrift savings, deferred compensation and others – can be excellent vehicles. They provide forced savings, convenience, matching employer contributions and tax benefits. If you’re in the 22 percent federal tax bracket, each $100 you contribute to your 401(k) plan only “costs” you $78 out-of-pocket with the balance coming from tax savings. Plans are subject to maximum funding limits, so be sure to check the rules.
What is more important to you: maximizing returns or minimizing risk? Prudent investors diversify asset allocation — how you “slice the pie” among asset classes such as equities, fixed income and cash — drives the risk-return characteristic of the portfolio. Assume the target allocation was a third to each. The assets will produce different returns over time and if left alone, the portfolio becomes unbalanced. Rebalancing can pay you big dividends. You’re reducing risk, selling high (trimming equities in this market) and buying low (adding to cash and or fixed income). Rebalncing helps you emotionally handle midterm elections and other uncertainties.
Review tax planning strategies
Trim your tax bill or avoid surprises. Your income may be higher from a good economy, selling a home or rebalancing your investments, or required minimum distributions (RMD) from an IRA. Are you eligible to fund a different type of retirement account? Will you contribute to charity or increase your donations? If so, would you donate appreciated investments or use your RMD in a special way to reduce taxes?
What are you going to owe in taxes? The Tax Cuts and Job Act represents the biggest change to the US tax code in more than 30 years. Most taxpayers will pay lower income taxes, but not everyone. Tax brackets are lower, fewer taxpayers might itemize (since the standard deduction roughly doubled), the personal exemption was eliminated, state and local tax deductions are capped to $10,000, and mortgage deduction may be limited. More dramatic changes were on the business side, including a 21 percent corporate tax rate, incentives to repatriate foreign assets and elimination of the corporate alternative minimum tax. And some business expense deductions are gone (i.e., tickets to sporting events) or harder to take (business interest and net operating losses).
Update beneficiary designations
Protect your loved ones and favorite organizations. A lot can happen between Thanksgiving and Christmas dinners, including your preferred heirs. Two popular stories illustrate the benefits of periodic updates, and being on your best behavior during the holidays.
The first is about Warren Hillman, who was married three times. He named his then-wife Judy as beneficiary of a $125,000 life insurance policy, divorced her and later remarried Jacqueline. Warren didn’t update his policy and died 10 years later. Ex-wife Judy filed for and received the $125,000. Widow Jacqueline sued in state court, and the case eventually went to the U.S. Supreme Court, which ruled in favor of the ex-spouse.
The other story is about a 17-year-old waitress named Cara. Bill Cruxton, an 82-year-old widower with no children, was a frequent customer. They became friends, she ran errands for him and helped him at home. He rewrote his will, naming her as primary beneficiary. Bill died later that year and left her half a million dollars.
Schedule medical and dental appointments
Take care of yourself. Schedule tests and procedures before the end of th year. It may save you insurance plan deductibles and co-pays that reset Jan. 1. Also, remember to use your FSA (flexible spending account) because unspent balances may be subject to a “use it or lose it” feature. (Note: HSA, or health spending accounts, generally allow balances to carry forward).
Make time to celebrate the arrival of fall with your family’s personal traditions but don’t neglect your end-of-year finances. Also, tax planning issues can be complicated, so be sure to contact your CPA or enrolled agent earlier rather than later. Trusted advisers are always available to help!
You can view this article on the Reno Gazette Journal.