The holidays have officially come and gone. Now that they are over, many of us find ourselves a few pounds heavier and a few dollars poorer. To end the year on a positive note, you should take advantage of this ideal time to go through an end of year financial checklist. Doing so before the year end can give you the opportunity to save on 2017 taxes and set up your investments for success in 2018.
It is important to revisit your goals and be sure you have a plan in place. Whatever it is you are saving for- whether retirement, paying for your child’s college education or another important goal- an annual status check will help you identify any adjustments that may be needed to stay on track.
First, Review Risk Exposure. Review your portfolio to ensure your overall risk exposure and allocations still align with your needs. Consider what 2018 will bring. If your circumstances have changed or if you anticipate any life events or family changes, consider the impact on your financial situation. Shifts in lifestyle or goals may require course corrections to your financial plan.
Then, Adjust Your Portfolio Mix as Needed. Market changes may also mean you need to make adjustments to your portfolio. This year has experienced a very strong stock market rise which could leave you overexposed to stocks. Or maybe you have more cash than you want or need. This is a great time to make sure your mix of assets is still in line with your goals and risk tolerance for market swings.
An easy way to save on 2017 taxes is to maximize savings to tax-advantaged retirement savings accounts which can be done in a variety of ways:
Use year-end bonuses to maximize contributions to retirement savings accounts. Use windfalls like year-end bonuses and profit sharing to maximize retirement savings. Many employers allow you to withhold some percentage from your bonus to contribute to your 401k.
Contribute to a Traditional or Roth IRA. If you have already maximized your 401k or if it is too late to contribute to your 401k for the year, you may be able to use profit sharing or bonus payments to fund an IRA or Roth IRA. The good news is you actually have until April 18th of 2018 to fund an IRA for 2017.
To save on 2018 taxes, see if you can boost your savings next year in retirement accounts and update your 401k contributions at work. A 1-2% increase in savings can have little impact on your monthly take-home pay but can actually have a big impact on your retirement nest egg over the long-term. Consider changing the amount of your contributions if you are already maximizing your 401k. The IRS raised limits to $18,500 (under 50) and $24,500 (aged 50 and over) for 2018.
You can also save on taxes by maximizing charitable giving:
Make charitable gifts of highly appreciated stock. This will fulfill your charitable intentions and mitigate current year income taxes. Rather than selling the stock and realizing capital gains, consider donating it directly to charity.
Donor-Advised Fund. If this was a big income year, consider setting up a donor-advised fund. If you are unfamiliar, a donor-advised fund is a simple, flexible and tax-efficient way to give to your favorite charities. You could make a large donation to a donor advised fund (of cash or highly appreciated stock) and get an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to any IRS-qualified public charity at a later time.
Qualified Charitable Distribution. If you are 70.5 or older, consider a qualified charitable distribution (QCD) to fulfill required minimum distribution (RMD) requirements. A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. A QCD counts toward your required minimum distribution (RMD) for the year, up to $100,000, and isn’t included in your taxable income.
Additional housecleaning items should you revisit at year-end include updating your beneficiaries. It is a good idea to revisit the listed beneficiaries on any accounts such as 401ks, IRAs, and life insurance policies and make sure they are up to date. This is especially important if you’ve had any life changing events such a marriage, divorce, births, or deaths.
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