As the year comes to a close and work starts to reach a lull there is often some down time in December, and this is especially likely given limited travel plans this season. It also happens to be an ideal time to tend to painless (but time-sensitive) financial topics that many of us have been putting off.
Why is time of the essence? Each of these is tied to the tax code, so achieving tax benefits (and avoiding mistakes) requires you to take action before year end, with a handful of exceptions.
Here are some of the items you should consider:
Capital gain/loss harvesting – By December it’s likely that you’ll have a clear view of your income for the year, along with any large non-recurring tax events. That’s why it can be worth evaluating whether it makes sense to realize long-term gains in your portfolio (if it happens to be a financially advantageous time to do so), or to realize losses and offset income that year.
Too often, people take an “all or nothing” approach, whereas successfully harvesting gains is more about a gradual approach focused on finding balance between paying the lowest possible tax rate and selling at an attractive price (instead of solving for one at the expense of the other).
Stock-based compensation – For those who receive employer stock, year end is an ideal time to consider exercising stock options, address portfolio concentration issues, and develop a strategy to turn your stock into cash using a tax efficient strategy. With stock options, the timing of exercise and sale determines whether you pay lower capital gains tax rates, ordinary income rates, or trigger an AMT tax liability resulting from exercise alone.
Retirement plan contributions – Pre-tax retirement account contributions are great for most people because they defer taxation until retirement, when most people will be in a lower tax bracket. If your employer makes matching contributions, be sure to contribute enough to receive the full amount. Contributions to employer plans, like a 401(k), are deducted from payroll and have a year end deadline. For those who changed jobs, make sure you haven’t exceeded annual contribution limits to avoid being penalized for doing too much of a good thing.
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.