The countdown to New Year’s Eve is a good time to think about your financial picture
There are several steps you can take to get your finances healthier between now and December 31
Some ideas include starting a financial plan, trying to save on taxes, and building an emergency fund
New Year’s Eve is closing in quick, but there’s still time to consider some late-year money moves that might help improve your financial health once the calendar page turns.
Before the ball drops in Times Square and those annoying party horns start to give you a headache, consider taking a couple of hours to check and potentially execute the following five strategies for the year ahead. From creating a financial plan, to shoring up your retirement strategy, to last-minute tax-saving ideas, there’s plenty you can do to help get your wallet in better shape between now and the new year.
1. Create Your Financial Plan
Creating a financial plan is a common New Year’s resolution, but where to begin? It helps to break it down into bite-size parts.
Know your goals. The financial-planning journey begins with setting goals. What are you trying to achieve in the short term? How about the longer term? For instance, a savings account might be a good option if you need a chunk of money in less than a few years, and long-term goals like funding retirement or a child’s college education are often better suited for investing.
“Part of an effective goal-planning process is understanding your priorities,” said Keith Denerstein, director of investment products and guidance at TD Ameritrade. “Understand what matters most to you, and take stock of where you are with regard to what matters most.”
Focus on the big picture. Goal planning isn’t about resolutions for one year. Instead, effective goal planning takes a big-picture view of where you want to be in the future and works backward to help you understand what financial goals need to happen today, tomorrow, and next year. The idea is to use the new year as a touchpoint to mark where you are on the map and see what course corrections are required to reach your ultimate financial destination.
Don’t be shy about getting help. If setting up a plan still seems daunting, you can always set up a goal-planning session with a financial consultant who can help you start things off.
“When you sit down in person with a financial consultant, you get a view of your finances from someone with the experience of having helped others in the past,” Denerstein explained. “You learn things about your relationship with money, and you get real about what you hope to accomplish with that money.”
2. Put More Muscle into Your Retirement Plans
If you have funds in a retirement plan, consider how you can make retirement savings work harder in the new year either by increasing your contributions or by converting to a plan that might give you more tax savings.
For illustrative purposes only.
Can you contribute more? Contributions you make to employer-sponsored retirement plans and other tax-deferred retirement accounts are removed from your paycheck before taxes, which helps reduce your taxable income. If your employer matches your contributions, increasing your 401(k) contributions can help you avoid leaving free money on the table.
For 2020, the maximum 401(k) salary contribution for an employee is $19,500 for those under 50 and $25,500 for those 50 and older.
Conversion consideration. You might also consider converting your IRA to a Roth IRA. With traditional IRAs, contributions are typically made with pretax dollars and grow tax free. However, withdrawals are usually fully taxable. With a Roth IRA, money is contributed with after-tax dollars, allowing you to take “qualified distributions” that are tax free.
In general, a qualified distribution is one made after you turn 59 1/2 or under certain exemptions such as to buy a first home or if you become disabled. Also, Roth contributions are subject to a five-year holding period before they’re considered qualified for tax-free distribution.
The tax savings from an immediate reduction in taxable income should be compared to the alternative. Take a moment to calculate how much tax you’d pay on those funds versus the tax you may face on the gains when you withdraw the money in the future. You may find that a Roth could offer significant savings, so it might be worth converting your traditional IRA to a Roth IRA now. The deadline for a conversion is December 31.
You have until April 15, 2020 to make IRA contributions for 2019, but the sooner you get your money into the account, the sooner it can be invested. For the 2019 tax year, you can contribute a maximum of $6,000 to an IRA for 2019, plus an extra $1,000 if you’re 50 or older. Contributions must be cash, and the maximum applies to an individual, not each account. The IRS website provides more information on Roth deductions and contributions.
3. Try to Lower Your Tax Bill
Another year-end step is to explore ways to possibly reduce your tax burden through tax-loss harvesting or charitable contributions. And if you’ve set aside some money ahead of taxes to cover health care, don’t let it go to waste.
Harvest season. Any losers in your portfolio? Many investors have some duds, even in the best year. Although the main criterion for an investment decision should be the state of the investment, not the taxes, if you do have some stocks that dropped, it’s not too late to look into a possible tax savings before December 31.
Any losses from selling stocks, bonds, or mutual funds can be used to offset taxable capital gains. That means the lead-up to New Year’s could be a good time to look at your investment portfolio and see if you have any candidates.
The size of the potential benefit from tax-loss harvesting depends on your income level and the amount of your short- and long-term capital gains (minus any current losses that you may have already realized, or any losses carried forward from other years).
Don’t neglect your health. Be diligent about submitting your flexible spending account (FSA) expenses by December 31, unless your FSA allows you to roll funds to the next year (check with your employer). An FSA allows you to set aside tax-free money to pay for certain out-of-pocket health care costs. Typically, the funds are a “use it or lose it” proposition with a deadline of December 31.
Spending these funds doesn’t directly lower your taxes, but remember the purpose of the FSA is to provide tax savings when you contribute. If you don’t spend the funds, you lose not only the tax benefit, but the funds set aside as well. The good news is that FSAs can apply to a broad array of expenses, although the IRS can change what expenses qualify.
Go over your charitable deductions. If you make a charitable donation before December 31, you may be able to write it off on your 2019 taxes. This means that along with supporting causes you care about, you could gain a tax bill reduction.
If you have any tax questions, contact a reliable tax professional. You can also visit the TD Ameritrade Tax Resources center.
4. Take Care of the Little Things
Since we’re on the subject of charitable deductions, here’s something else to think over. Deductions might seem like a dry topic. But if it means you might save money on taxes, deductions are probably worth thinking through.
“Bunch” stuff together. Here’s an idea: If your total deductions don’t justify itemizing by exceeding the standard deduction, you might “bunch” those deductions, particularly in categories where you have to cross a minimum threshold.
Suppose you decide to bunch your deductions on alternating years. You’d take the standard deduction one year, and the next year, if you managed the timing of your purchases carefully, you’d likely surpass the standard deduction.
You can also bunch charitable contributions by increasing donations in the years you plan to itemize and decreasing them in the years you plan to take the standard deduction.
Don’t forget RMDs. Here’s another small step that we’ll bunch in with deductions even though it’s a separate topic: If you’re a retiree, there’s a deadline approaching. When you reach age 70 1/2, your required minimum distribution, or RMD, must be taken out no later than December 31.
You may delay taking your first RMD until April 1 of the year after you turn 70 1/2. If you delay your first RMD, you’ll have to take two that year: the first by April 1 and the second by December 31. Failure to take an RMD can be costly, as the IRS can assess a penalty of 50% of the amount not taken.
5. Prepare for Emergencies
When the car breaks down or a household appliance needs repair or replacement, it’s good to have cash on hand. Starting an emergency fund, if you don’t already have one, can be a good New Year’s resolution.
Decide where to store cash (not under the bed). Because an emergency fund needs to be liquid, it may be kept in a cash account or money market fund. Of course, the downside to quick access is a low interest rate, because these accounts have little investment risk.
Plan for big-ticket goals. Emergency funds can be there if you need a new dishwasher or if you lose your job, but they can also be used to build savings for any major life projects on the horizon, like that dream vacation, wedding, home renovation, or down payment on a new car. Once your savings are big enough to cover six months to one year of living costs (which many financial experts recommend), having a big-ticket goal in mind can help keep you disciplined as a saver.
Keep it separate. A recent Federal Reserve survey found that nearly 40% of Americans wouldn’t easily be able to come up with $400 in an emergency. That’s not a good financial place to be. So consider separating emergency funds from your investments, because you don’t want to have to face the unpleasant choice of either selling stocks or taking on debt if an emergency comes up and you don’t have liquid assets.
Do you have those financial plans in shape ahead of the calendar flip, or have you at least made a resolution? Well then, put on one of those funny hats and have a toast.
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