Year End Tax and Financial Planning Ideas

TRICKS OF THE TRADE

“YEAR END TAX AND FINANCIAL PLANNING IDEAS”

Prepared by Michael Menninger, CFP

In many cases, individuals make unintended financial mistakes and don’t realize until it’s too late, or never at all. In this article, I present five financial issues to consider before year end.

Roth IRA Conversions -  In an article I previously wrote (that can be found on our website), I detailed the use of Roth IRA conversions as a long-term tax planning opportunity. By utilizing Roth IRA conversions, you will be taking advantage of historically low tax rates and ensuring that your retirement assets will grow and be distributed tax-free in retirement, when your tax rate may be surprisingly higher than today.

Maximizing Retirement Plan Contributions - The current limit for contributing to your 401(k) or 403(b) is $19,500, plus an additional $6,500 catchup at age 50 (note that other retirement plans may have different limits). If you wish to maximize your contribution, you should look at your pay stubs and see if you will reach your limit by year end. 

Foregoing Matching Contributions - Most companies will match your 401(k) contributions, but I have seen many folks unknowingly lose some of their company match. This may have been because the employee already reached their contribution limit before year end, because the company doesn’t match catchup contributions or because the employee simply isn’t contributing enough. Thus, it is important to fully understand your company’s matching program. After all, you don’t want to miss out on free money! 

Tax Loss Harvesting - Many people have investments in taxable accounts that are taxed on interest, dividends, and capital gains. Tax loss harvesting is a technique that investors often use, as they will intentionally sell investments in order to capture a capital loss, which can then be used to offset capital gains, or simply written off as a loss against income, (limited to $3,000 per year, but additional losses can be carried over to future years, so they are not lost). This is a technique that is often reviewed near the end of the year to help offset capital gains to reduce taxes. It is important to note that if you sell an investment for a loss, you cannot buy that investment back within 30 days, or the loss becomes disqualified, known as a “wash sale”.

 Withholding Enough Taxes - The government withholds taxes from each paycheck because it wants to collect income throughout the year. However, in the case where a taxpayer has additional taxable income from other sources (rental properties, IRA distributions, capital gains, business income, etc.), they may not be withholding enough for the IRS. In short, the IRS expects you to withhold enough taxes, or else they may assess a penalty AND interest. Thus, individuals and couples should ensure that they are withholding enough for taxes, which isn’t a very difficult calculation. If you are not withholding enough, then increase your Federal taxes withheld from your paycheck, or send money to the government in the form of quarterly estimated tax payments. Besides, nobody likes a surprise in April when they have to write a check to the IRS. We hope these ideas are helpful, and if you have any questions, please feel free to contact us.

Please note that neither Cetera Advisor Networks LLC nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney. In many cases, individuals make unintended financial mistakes and don’t realize until it’s too late, or never at all. In this article, I present five financial issues to consider before year end.