The end of the year is less than a couple of weeks away, but there is still time to handle some important financial tasks. Taking care of the items below will help you to have a more confident and financially successful 2016.
Rebalance your portfolio. Your investment strategy should start with an asset allocation that’s based on your goals, risk tolerance and time horizon. At the end of the year, you’ll probably find that market fluctuations have upset the weighting of each asset class in your portfolio. Rebalancing, like tuning up your car, re-sets your investments to their intended state. If your goals or tolerance for risk have changed, end-of-year rebalancing is a good time to work with your advisor on adjusting your asset allocation.
Tax-Loss Harvesting. Rebalancing is a good time to identify securities you can sell at a loss in order to offset a capital gains tax liability. A simple example: Selling a stock position that has lost $1,000 allows you to erase the capital-gains tax liability on an investment that you sell for a $1,000 profit. You can use up to $3,000 a year in losses to cancel out gains on investment or ordinary income and roll over unused losses to future years.
Be charitable but smart. Consider giving appreciated investments rather than cash when you make charitable gifts this season. This allows you to minimize capital gains taxes while getting a tax deduction for the full market value of the donated investment.
Take required minimum distribution. You must take RMDs from 401(k)’s and traditional IRAs by December 31 or be penalized 50% of the amount that should have been withdrawn. The only exception: your first RMD, which you can delay until April 1 of the year that follows the year you turn 70½.
Use your FSA dollars. Money in a flexible savings account must be used by December 31 or you will lose it. One new rule does allow an employer to let you roll $500 or give you an additional two and a half months to use it—but that’s not required. A health savings account is different: Funds in HSAs don’t have to be used by yearend.
Beware of mutual fund distributions. Buying mutual funds in taxable accounts is hazardous this time of year. If you’re not careful, you could end up paying taxes on gains you didn’t earn. Most funds distribute their interest, capital gains and dividends to shareholders in December. Those who buy shares before then are subject to the whole tax bill even though they don’t receive the full payout. For that reason, it’s important to make sure a fund has already made its yearly distribution before you buy shares.
Max out retirement contributions. You can stay on track for retirement and save taxes by contributing the maximum to your tax-advantaged retirement accounts. For 2015, you can contribute up to $18,000 to your 401(k), plus a $6,000 catch-up amount if you’re at least 50. IRA's have until April 15th to contribute, but you can stash up to $5,500 in a traditional IRA, plus a $1,000 catch-up contribution if you're 50 or older. If you’re self-employed, you can deposit up to 20% of your income into a SEP-IRA, up to $53,000.
Review and update beneficiaries. A lot can happen in the course of a year, including births, adoptions, deaths, marriages and divorces. It’s important to review your beneficiary designations to ensure your assets, from retirement accounts to insurance proceeds, will go to the people you want to have them.
If you think you’re too busy buying gifts to check off these items, think of them as a gift to yourself—the gift of peace of mind. And remember that we’re here to help you with all of it