By Kortney Christensen, CFP®, Senior Vice President, Director of Sales and Marketing
As the year winds down and you find yourself in the holiday hustle and bustle, our already hectic lives become even busier. Family gatherings, neighborhood parties, work functions, children’s school events and shopping — all compete for precious time. Despite the hectic holiday rush, it’s important to devote some time to essential end-of-the-year financial tasks. Here are a few money matters you should consider before heading into the New Year.
- Take a Look at Beneficiaries If you have had some changes in your life, such as a birth, a death, or a change in marital status, it’s important to review your beneficiary designations on items such as IRAs, 401(k)s and insurance policies. Beneficiary designations are easy to modify, but they are made permanent at death, so it is important to consider whether updates are necessary.
- Donate to a Charity If you are going to itemize deductions on your 2014 tax return, consider making a charitable contribution to a cause you believe in. The donation must be made to a qualifying organization by the end of the year. You can give cash or other items such as appreciated investments. It is nice to reap a tax benefit while supporting a good cause.
- Spend your Flexible Spending Account (FSA) A FSA allows you to set aside pre-tax money for unreimbursed medical, dental and other qualified expenses, with calendar-year “use-it-or-lose-it” deadlines. Employers can allow participants to carry over up to $500 in unused funds into next year. Check to see if you have a balance in your FSA and if so, develop a spending plan before it disappears. Some plans allow you to submit 2014 claims until March 2015, but check with your employer about your plan benefits.
- Contribute the Max to your Retirement Savings Plan If you haven’t reached the maximum contribution in your 401(k) savings plan through your employer, see if you can make a one-time pre-tax contribution through a payroll deduction. The 2014 contribution limit is $17,500 for 401(k)s plus an additional $5,500 catch-up contribution for individuals age 50 or older. Also consider contributing to a traditional or Roth IRA. For IRAs, the contribution limit is $5,500 plus an additional $1,000 catch-up contribution for individuals age 50 and older. Please check with your tax advisor about eligibility.
- Consider a Roth Conversion If you have a traditional IRA and expect your tax bracket to increase in future years, you might want to consider converting all or a portion of your traditional IRA to a Roth IRA before the end of the year. The amount converted to a Roth IRA will be subject to ordinary income tax this year, but earnings that accumulate are tax-deferred and distributions are income tax free after five years and age 59 ½. Depending on the amount you convert, you may be able to take advantage of paying income tax now while you are in a lower tax bracket.
- Review and Rebalance Investments Take a look at how your investments are allocated and decide whether it’s time to buy, sell, or leave well enough alone. As different segments of the market outperform and others underperform, you may need to make adjustments to ensure your portfolio is still in balance. Your financial advisor can help you determine if you need to bring your portfolio back in line with a diversified mix that is best for your situation.
- Harvest Your Losses Tax loss harvesting is a method of reducing your taxes by selling an investment that is trading at a loss. If desired, one way to maintain exposure to the market is to purchase another investment that is similar. In doing so you maintain the risk and return characteristics of your portfolio and generate losses that can be used to reduce your current taxes. To claim any losses against this year’s realized capital gains, you’ll need to sell your investments that have lost value by the end of the year.
- Review your Insurance Policies Although this may not be your favorite year-end activity, it is a good financial habit to review your insurance coverage in light of any changes that happened over the course of the year. Make sure you have the right amount of coverage, and are not paying for anything that you no longer need.
- Take your Required Minimum Distribution (RMD) If you’re over age 70½ or are the beneficiary of an inherited IRA, don’t forget to take your RMD before the end of the year.
- Make a 529 plan Contribution Money saved in a 529 plan grows tax-deferred and distributions for qualified education expenses are federally tax-free. Depending on your state of residence, contributions made to a 529 college savings plan may be tax-deductible.