Smart Money Moves Prior to Year-End

I love Christmas but I find Christmas-time stressful. Let’s face it, the world just seems to spin faster during December. We’re already busy with work and family and then we add a slew of fun things like holiday parties, office open houses, gift buying and decorating to our schedule. Who has time for all this fun?!

I’m sure you’ve seen and maybe even read end-of-year financial checklists. While well-intended, I’m sure, I laugh out loud when I read suggestions like, “compute all your expenses for the year in a spreadsheet and develop a budget for next year”, or “review all your estate planning documents to make sure they are up to date.” Yeah, right, I’ll get on that just as soon as I replace all the batteries in the smoke detectors and re-grout the bathtub.

So, in the spirit of the Holidays, here is my advice on what deserves your attention before the end of the year and, what is important, but can wait until January.

Spend a few minutes on these items now:

Taxes

Whether you suspect you will receive a refund or pay Uncle Sam in April, there are a few things you can do now to reduce your tax liability and help yourself in the process:

• Check if you have contributed the IRS-mandated maximum to your retirement plans – 401(k) or 403(b). The limit for those under age 50 is $18,000 per year, while those of us 50 and over can contribute up to $24,000 per year. Note to UK employees, you may contribute to a 457(b) plan in addition to your 403(b). So, if you’ve maxed out your 403(b) contributions you can also contribute $18k or $24k to your 457(b). That’s a great UK benefit.

• You may also contribute to an IRA or Roth IRA depending on your income and whether or not you have a qualified retirement plan at work. The rules can be a bit convoluted but you may be able to make a tax-deductible contribution to an IRA for $5,500 or an after-tax contribution to a Roth IRA for the same amount. For instance, if you have a 401(k) or 403(b) at work and your adjusted gross income (AGI) is less than $99,000 if married and less than $63,000 if single, you may make a tax-deductible contribution to an IRA. If your income exceeds those limits, consider a Roth IRA contribution if you are single and your AGI is less than $118,000 or $186,000 if married. (You can actually contribute to an IRA or Roth until April 17, 2018)

• If your income is too high to allow a tax-deductible contribution to an IRA and you don’t already have one, consider an after-tax contribution to an IRA and then converting the IRA to a Roth IRA. That move won’t decrease your tax liability this year but is a good long-term tax strategy for high earners who can benefit from tax-free earnings until the assets are withdrawn after age 59 ½.

• This is a great time of year to reduce your taxable income by making a donation to your favorite charity or charities. And, if Congress passes a new tax law these rules may change for next year, so take advantage now and help those who really need it. Lisa and I favor God’s Pantry Food Bank, the YMCA and, of course, the University of Kentucky.

• Tax loss harvesting is a tool that can also reduce your taxable income. If you own investment assets in a taxable account – not your work retirement plan or an IRA – you may sell assets that have declined in value during the year and 1) Use the losses to offset any gains realized from selling assets that have increased during the year; or 2) Deduct up to $3,000 in losses from your taxable income. You may also carry forward losses to future tax years. But don’t sell an asset just to get the tax deduction if you think the investment has potential for the future.

Focus on these items when you have time now or in January:

Did you meet your short-term financial goals for the year?

How did your investments perform this year?

Did you make progress toward your long-term financial goals?

I will discuss these in the Friday, December 15 Lexington Financial Planner blog post.