What a surprise! We’re close to the end of the year already, and Christmas trees are sprouting up in the malls and stores. Before you become consumed with holiday preparations and Christmas shopping, don’t neglect the decisions you can make on your finances that can have a long-term impact if you act before the end of the year.
MAXIMIZE RETIREMENT CONTRIBUTIONS
Contributing to your retirement savings can both reduce your income taxes and enable you to take advantage of tax-deferred growth. If you have an employer-sponsored plan like a 401(k) or 403(b), you may be able to max out your contributions before the end of the year. The maximum contribution for 2019 is $19,000 ($25,000 if you are age 50 or older).
If you don’t have a 401(k) or 403(b), you can open or contribute to a traditional IRA or Roth IRA. For 2019, the maximum contribution you can make to your traditional IRA or Roth IRA (combined) is $6,000 ($7,000 if you are age 50 or older). Income limits may reduce how much you can contribute.
401(k)s, 403(b)s and traditional IRAs grow tax-deferred for most people. That means you don’t get a 1099 at the end of the year on the growth. Your retirement accounts enjoy maximum growth. You only get taxed later in retirement when you make withdrawals.
Roth IRAs go one step further. Even though you don’t receive a tax deduction on Roth IRA contributions, the growth is tax-free after you’ve held the account for 5 years or more. Withdrawals after age 59 1/2 are tax-free as well.
MAKE SURE YOU TAKE YOUR REQUIRED MINIMUM DISTRIBUTION
If you turned 70 1/2 this year, or were over age 70 1/2 at the beginning of the year, you have to take an annual Required Minimum Distribution from most of your retirement accounts. You don’t have to cash out all of your retirement accounts, just 4 to 6% for most people, based on your age. Your bank or financial advisor can calculate how much it should be. In most cases, this will be automatic, but we’ve seen some cases where the financial institution let it slip through the cracks.
Not taking your Required Minimum Distribution can have severe consequences. The IRS can penalize you 50% of what you should have taken. Be sure to follow up with your bank or financial advisor if you haven’t received your RMD by mid-December.
A couple of exceptions to the Required Minimum Distribution rule are Roth 401(k)s and Roth IRAs. These have no Required Minimum Distributions. In other words, you can leave the money in to grow as long as you want.
REVIEW YOUR INTEREST RATES
You might not have noticed, but interest rates have gone down this year. Last year, the average national mortgage interest rate was over 4.8%. Now, it’s as low as 3.6%. If you already have a home, you may be able to lower your mortgage costs if you refinance. Check with your mortgage loan company. They can crunch the numbers for you, and calculate whether refinancing makes sense for you.
If you are a prospective home buyer, lower interest rates might make it possible to afford the home you’ve been looking for.
REVIEW YOUR INVESTMENTS FOR LOSS-HARVESTING OPPORTUNITIES
If you have a properly-diversified investment account, it probably includes U.S. large companies and small companies, International large companies and small companies, Emerging Market holdings (like China, Latin America and India), real estate and bonds. They usually don’t all go up and down at the same time. This is a phenomenon you can use to save taxes.
Let’s say you want to make a distribution from one of your taxable accounts to take a vacation. If one part of your investment declined in value, it might make sense to sell some of that, and claim a capital loss. Simultaneously, you might sell some of another taxable holding that has a gain. The loss and gain can cancel each other out, and your distribution could be tax-free! Ask your financial advisor to look for loss-harvesting opportunities.
GIVE TO YOUR FAVORITE COMMUNITY ORGANIZATION, CHURCH OR TEMPLE
If you are charitably-inclined, and itemize expenses on your federal tax return, you might qualify for a tax deduction by donating to a charity. If you have appreciated investments, you can donate them directly, avoid paying capital gains tax, and get a tax deduction to boot!
If you are age 70 1/2 or older, you can write a check (maximum $100,000 annually) directly from your retirement account, using a strategy called Qualified Charitable Distribution. The distribution doesn’t touch your Adjusted Gross Income (and consequently doesn’t increase your Medicare premium or taxation on your Social Security benefits), you don’t get taxed on the distribution, and the charitable organization receives full value.
Some of the strategies above may help you reduce taxes and benefit your long-term finances. Consult with your Certified Financial PlannerÔ or CPA to see which ones might be appropriate for you.