As the year comes to a close and work starts to wind down, there tends to be some down time when people aren’t working or traveling, which is a great time to address outstanding financial planning tasks. While tax returns don’t have to be filed until April 15th, and financial documents arrive after year end, here are a number of important topics to consider before the new year:
Bonuses – These are often paid out at the end of the year, and because they can account for a substantial amount of take-home pay, they can sometimes land you in a different tax bracket that your salary may have on its own. It’s important to celebrate victories while also putting some aside as savings which you can use to accelerate your financial goals. Additionally, you’ll want a plan for how to invest that excess cash to shorten the path leading to your goals.
Gifting to loved ones – During the holidays out of state family members often get together, and in-person conversations are a great time to discuss gifting among family members. At a certain age, some people choose to start actively passing on their wealth to their family by contributing to the future education of their children or grandchildren, which can be a highly valuable gift. New gift ideas can be a perennial issue after completing a wedding registry, making this a nice alternative.
Capital gain/loss harvesting – For those with variable compensation, you’ll have a clear view of where your calendar year total pay lands in December, so it can be worth evaluating whether it makes sense to realize long-term gains (if it happens to be a financially advantageous time to do so), or to realize losses and offset income that year.
Stock-based compensation – Many technology and biopharma professionals receive employer stock, and year-end can be a good time to evaluate portfolio concentration. For executives, it’s important to have a plan to monetize this stock periodically for tax mitigation purposes.
Charitable donations – The standard deduction on tax returns has increased considerably as a result of tax reform, and many people who may have previously itemized deductions may not be doing so now. “Bunching” charitable donations (i.e. a single lump sum for what they would have normally donated over several years) is a strategy some people employ in order to maximize tax deductions.
Retirement plan contributions – Pre-tax retirement account contributions not only defer taxation until retirement (when most people will be in a lower tax bracket), but can also in some cases be taken as a deduction against taxable income. If your employer makes matching contributions, be sure to contribute enough to receive the full amount.
Required Minimum Distributions – Beginning at age 59 ½, participants can begin to take distributions (withdrawals) from retirement accounts. And, once you begin taking distributions, or mandatorily upon turning age 70 ½, required minimum distributions begin. Failure to take these distributions leads to unnecessary (and severe) tax penalties, so it’s important to keep an eye on these accounts. This can also be the case with inherited IRAs, even if the person inheriting them isn’t retired, so it’s important to ask a professional for help.
Flexible Spending Account (FSA) – If you participate in an employer FSA plan, contributions are “use-it-or-lose-it” so be aware of deadlines. Employers can choose for their plan to allow a grace period of 2 ½ months following plan year end, or rollover a limited amount for next year (or neither, but not both). You will want to spend what you have contributed in order to avoid forfeiting that money.
Set aside a bit of time this holiday season so you can make sure your money is working just as hard as you are. At Paceline, we’re always happy to discuss any of these items, or any other financial questions that are on your mind. Contact us today for a free, no-obligation consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.