As the year comes to a close and work starts to wind down, many people find themselves with some extra free time, making it the perfect time to tackle those lingering financial planning tasks. Even though tax returns aren’t due until April 15th, the end of the year is an opportune time to make adjustments to your financial plan. Here’s why you won’t want to wait until the new year:
Bonuses – If your compensation structure includes a bonus, it’s likely to be paid out at the end of the year. Bonuses can be a considerable amount of money, and can even push you into a different tax bracket than your salary alone would put you in. It’s important to ensure that you’ve got a plan for that money since you’ll want to maximize your returns rather than leaving large sums of money sit idle.
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. In combination with your existing tax professional, a registered investment advisor (RIA) can help you develop a strategy to share wealth with loved ones.
Capital gain/loss harvesting – This is an especially important year to be mindful of your capital gain/loss harvesting given broad changes in the tax code. Near year-end when you have a reasonably clear view of your total compensation, 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.
Charitable donations – The standard deduction on tax returns has increased considerably this year, and as a result many people who may have previously itemized deductions may not be doing so now. In some cases, people are considering “bunching” their charitable donations (i.e. a single lump sum for what they would have normally donated over several years) 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.
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.
So be sure to take some time this holiday season to make sure you’re making the most of your money. 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.