With less than two months left until the end of the year, now is the time for us to assess what financial moves we should make before December 31. We all know what happens when November and December come around, we have nothing but holiday parties, shopping, and time off with the family on our minds. There are several tax related decisions that could significantly reduce our tax liability for the current year. Beyond taxes, there are also some beneficial tips that can help our overall financial fitness.
1. Maximize your retirement contributions. When it comes to maxing out your 401(k), you still have time to increase your savings rate into employer-sponsored retirement accounts before the end of the year. Conversely, you might have already maxed out the plan for the year. If so, consider making contributions to your after-tax 401k or IRA, or otherwise saving/investing your increased pay check into a taxable account. Check your account online to see where you stand and change contributions accordingly.
2. Consider a Roth conversion. Crunch the numbers to see if a Roth conversion, either with your traditional IRAs and/or within your 401(k), makes financial sense this or next year. Converting a traditional IRA to a Roth IRA can be a good strategy, particularly if your other taxable income this year is lower than normal. Keep in mind that Roth conversions may add to your tax liability, and if so, at your marginal rate. A conversion, however, can be a good strategy for early retirees looking to get access to retirement funds more efficiently. Having both traditional IRAs and Roth IRAs give you what I like to call “tax diversification”. In years to come, you’ll have the ability, if you choose, to withdraw money from whichever retirement account provides you with the most after-tax income.
3. Take your RMD. Generally, you must start making withdrawals — required minimum distributions (RMDs) — from your IRA or retirement plan account when you reach age 70½ or if you own an inherited IRA account, before year-end. If you don’t take your RMD before year-end, there will be a hefty tax penalty: 50% on the amount you should have taken as well as the ordinary income tax! If you have multiple IRA accounts, calculate your total RMD and then take the RMD from the one that is most beneficial. This could require working with a professional who understands your tax situation. Note that if you’re still working after age 70½ and contributing to your 401(k) plan, or have a Roth IRA, you may not have to take an RMD from that account.
4. Donate to charity.
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5. Go back to the basics. The end of the year is also a good time to review some of the basics. Basics such as your yearly budget (are you staying on track and not overspending?), and the level of your emergency fund (hopefully you didn’t have to dip in to it). Also, review and rebalance your investments. If certain assets classes outperformed – it may make sense to take some profits off the table and adjust the asset allocation. And did anything in your life change – marital status? Employment status? Win the lottery? If so (and even if not), you may want to look over your insurance policies, wills, trusts and beneficiary designations, and make any necessary changes.
I feel confident that if you tackle these things before the bell rings in 2019 – you will feel much better about your financial health!