If you’ve been to any big box retailers lately like I have, then you’ve noticed the shelves are already stocked with holiday items. As a financial advisor, that’s always a reminder for me to think about some financially savvy year-end moves to make in the next two months. With the holiday season and its chaos upon us, here’s a checklist for some financial housekeeping that can be addressed now—before you’re up to your neck in gift wrap, holiday parties, travel plans and home decorating. (For related reading, see: Why You Should Have a Roth IRA.)
Rebalance Your Portfolio
Take a look at your holdings for any winners or losers. If you've already booked large capital gains during the year, it may be a good idea to sell some of your losers to offset those gains. To make the losses less painful, you can also take advantage of tax-loss harvesting by reinvesting that money into similar securities—just look out for the wash sale rules and avoid buying investments that are substantially identical either 30 days before or after selling your securities. And be aware—options are included in the wash sale rules.
Do you have 401(k) accounts from old jobs? What do you do with all those statements? Because now is also a great time to consolidate and rebalance all of those various retirement accounts to get a clear picture of the holdings in your overall portfolio. How can you feel confident about your retirement planning if you don’t even know what you own in your accounts? Simplify by consolidating.
Watch out for Capital Distributions
December is the month that many mutual funds pay out dividends and capital distributions. If you own shares of a mutual fund on what's known as the ex-dividend date, then you are entitled to your share of the capital distributions that are paid out. Sounds good, right? Not so fast.
The downside is that the share price usually falls by the same amount when the distributions are paid, which means the net effect to you is zero. This is important because you pay taxes on the distributions, even though the fund is essentially just returning a portion of your purchase price. If you're planning to buy a mutual fund in December, it may be a good idea to find out when they're planning to pay out capital distributions so you can buy shares after that date. Check online, ask your advisor, or call the mutual fund company directly to find out those dates.
Max out Your 401(k) Contribution
If you still haven't contributed the maximum amount for the year to your 401(k) account—$18,000, or $24,000 if age 50 or older—increase those pre-tax contributions going into the end of the year to bring down your taxable income while also saving a little bit more money towards your retirement. At the very least, try to take full advantage of your employer's matching contributions. Otherwise, you're leaving free money on the table. (For related reading, see: 7 Lessons to Teach Your Kids About Money.)
Donate Appreciated Stock
If you own stock that has appreciated in value over time, it may be a good idea to donate some of those shares to one of your favorite charitable organizations rather than writing a check. Donating appreciated stock directly to a charitable organization means that you get to report it on your tax return at the market value on the date of the donation rather than the original cost. So a share that is worth $100 when donated directly means you report it on your tax return as a $100 charitable contribution—even though you may have paid $5 for it ten years earlier. If you sell it yourself and donate the cash instead, you'll have to report a long-term capital gain of $95.
Don't Forget About Required Minimum Distributions
This topic isn’t directly relevant to my Gen X and Millennial readers, but you may want to make sure that your parents and/or grandparents are aware of the rules concerning required minimum distributions. The important thing to know: once you're over age 70.5, the federal government requires you to take annual distributions from your IRA. So make sure to take your distribution before year-end! If you fail to do so in a given year, be prepared to write a check to the IRS for 50% of your calculated RMD as a penalty. That's right—if your RMD was $5,000 and you don't take it during the year, then you have to pay $2,500 to the federal government. Ouch!
Review Open Enrollment Options
Your health insurance benefits may have changed, so you should pay close attention to the costs and benefits of the various options offered by your employer.
Flexible Spending Accounts
If you have an FSA, you’re probably rushing to schedule appointments with doctors and dentists before year-end so you don’t lose out on those funds. There are FSAs that offer grace periods and money in accounts can sometimes carry over from year to year. Know your options.
Review Your Insurance Policies
It’s important to review your various insurance policies—health, life, home, auto, long-term disability, long-term care—to ensure that your coverage is adequate. If you’ve experienced a major event during the year, make sure to consider how it impacts your insurance plan. And don’t forget to consider adding disability insurance to your portfolio if you haven’t already.
Another consideration for entrepreneurs, business owners, or partnerships to ensure continuity in the event that something happens to you or another owner/partner: think about buy-sell agreements funded with life and/or disability insurance policies. This could save you and/or your family a significant amount of stress during a time of crisis. (For related reading, see: Don't Wait to Pay Attention to Your Finances.)
Update Your Spending Plan
Nobody likes to build a budget, but now is the perfect time to create a plan to track your money inflows and outflows. Work with a professional to create a realistic plan that’s designed for you and keeps you accountable throughout the year. If you want to build a budget and track spending on your own, check out Mint.com. You’ll be surprised to see where your money goes, and how much of it is going.
Review Your Beneficiary Information
If you’ve experienced a major life event during the year—marriage, birth of a child, divorce—then it might be time to review the beneficiary information on your insurance policies, IRA, and/or 401(k). Failure to update a document after a divorce or forgetting to name a beneficiary may deny future generations to their rightful inheritance.
Important note: Those beneficiary designations trump your will.
Establish or Replenish Your Emergency Fund
If you haven’t set aside six to 12 months of living expenses in a savings account, now is the time to start. Or maybe you had to dip into your savings during the year and need to top it off again. The holidays can get expensive, but having cash available on short notice to pay for unexpected costs like a new hot water heater or roof is something for which to be truly thankful. (For more, see: What Happens to Social Media When You Pass Away?)
Since the holidays invariably end up creating a certain amount of stress—like when you exceed your holiday budget—you may want to do yourself a favor and consider these smart year-end planning moves.