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Clean Your Financial House for the New Year

Nov 30, 2017 | 5 min read | by Sheila Olson

Key Takeaways

  • There may still be time to minimize your 2017 tax burden with retirement contributions and gifting.
  • Now is a good time to review your investments and consider rebalancing your portfolio, offsetting any realized gains with capital losses.
  • Financial priorities change from year to year; don't forget to adjust your budget to meet your goals in 2018.

 

As December rolls around, it's easy for money management tasks to take a back seat to the excitement of holiday plans. But year-end is a great time to give your finances a careful once-over to make sure you're on track to maximize your tax savings and reach your financial goals in 2018.

Whether you're early in your career and building wealth, fine-tuning your plans as you approach retirement or looking forward to your post-retirement adventures, there are things you can and should do before December 31 to tidy up your financial picture. Here are a few things to consider as the year winds to a close.

 

 

1. Max out your retirement contributions

In 2017, you can sock away $18,000 in your 401(k) or other employer-sponsored retirement plan, plus an additional $6,000 in catch-up contributions if you're age 50 or older.

If you don't have an employer-sponsored plan, you may still be able to tuck away $5,500 ($6,500 for those age 50 and up) in a traditional IRA--an option that's also available to a non-working spouse.

If you're freelancing or self-employed, your limits are even higher: Up to $54,000 or 25% of your qualifying income, whichever is less, if you have a SEP IRA. If you don't, there's still time to set one up to take advantage of the tax benefits for 2017.

Now is also a good time to look over the investments in your retirement fund to make sure they're performing as expected and well-aligned with your financial goals. You may need to rebalance your investment portfolio to make sure you stay on track.

 

2. Consider converting some cash to a Roth

From a retirement income perspective, it makes sense to have a good mix of traditional and Roth IRAs, so you can manage withdrawals in a way that keeps you in the lowest possible tax bracket. Unlike withdrawals from traditional IRAs, which are taxed as ordinary income, Roth IRAs offer tax-free withdrawals in retirement.

 

Year-end is the perfect time to go over your spending and savings patterns to see if any changes need to be made.

 

You'll need to crunch the numbers to see if a Roth conversion, either within your 401(k) or from a traditional IRA, makes sense this year. Keep in mind, money you convert to a Roth IRA will be treated as a normal distribution, so you'll need funds to cover income tax on that amount. If you're in a lower tax bracket this year, perhaps due to a gap in employment or other life event, this may be the right time to make a conversion.  

 

3. Offset capital gains with capital losses

Tax-loss harvesting is a complex name for a simple idea, which is simply selling off stocks and funds that have lost value to offset gains from the sale of winning investments. If you hold investments outside your tax-exempt or tax-deferred retirement accounts, you may want to look at your sales this year to see if you can lower your tax burden by selling off some poor performers.

Even if you haven't realized any capital gains in 2017, you can still use realized capital losses to reduce your ordinary income by up to $3,000.

Talk with your financial advisor or accountant to help you narrow down the best investments to unload to take advantage of tax-loss harvesting if you have capital gains.

 

4. Plan ahead for education expenses

With a 529 plan, each parent and grandparent can contribute $14,000 per year tax-free to be used for educational expenses. In addition to federal tax savings, 34 states offer state income tax deductions for 529 contributions. If you've had a windfall this year, you can also take advantage of up to five years of gift tax exclusions to set aside up to $70,000 in a 529 plan in a single year.

With average private college costs at over $60,000 per year, it's never too soon to start saving for a child's college degree.

 

5. Make sure you're adequately insured

Have you grown your family this year? Bought a house? Launched a new business? The insurance coverage you had at the beginning of the year may not be adequate for your needs in 2018.

Check to see if your life insurance policy adequately protects your spouse and children, and that you have sufficient liability coverage on your home and car; depending on your assets, you may need an umbrella liability policy. You may also need extra coverage if you use your home or car for business purposes.

And if you've declined any additional coverage through your employer such as disability insurance, for example, make sure those decisions still make sense for you and your family in the upcoming year. If you've struck out on your own, you may need a disability policy to protect your family in case you're unable to work.

 

6. Fine tune your budget

Year-end is the perfect time to go over your spending and savings patterns to see if any changes need to be made. Review your service bills, such as wireless and cable, and see if you can get a lower rate, and look for savings by bundling your insurance policies with a single carrier.

Check the balances in your long- and short-term savings accounts; if you're not hitting your savings goals, look for ways to economize so you can get there in 2018. It's not too early to start thinking about next year's vacation and establishing a savings plan to pay for it without going into debt. Having a positive goal in mind is a good motivator for sticking to your savings plan.

 

7. Think about your legacy goals

Estate planning isn't something reserved for the very old and very wealthy; there are things you can do at every stage of life to make sure your family's hopes and dreams are realized.

Start with the basics:

  • If you don't have a will, draw one up. If you already have one, make sure it's up to date.
  • Consider naming a health care proxy to make medical decisions on your behalf in the event you aren't able to make them for yourself.
  • Talk to your aging parents about their wishes for end-of-life care and encourage them to get the appropriate legal and financial documents in order.

     

If you are planning to make any cash gifts to children or grandchildren this year, keep in mind the annual gift tax exclusion amount for 2017 is $14,000; you can give that amount to as many individuals as you like. You can also make additional gifts for medical, dental, and tuition expenses that do not count toward the $14,000 limit as long as you make those payments directly to the provider.

 

What you can do next

Make time before year-end to give your finances a thorough once-over and take affirmative steps to set yourself up for a prosperous new year. Since everyone’s circumstances are different, consider speaking with your financial advisor, legal or tax professional regarding your personal circumstances.

 

Sheila Olson is a Charlotte-based freelance writer specializing in investing, personal finance, entrepreneurship, and retirement planning. She is a regular contributor at Investopedia and writes frequently for the banking and consumer credit industry.

 

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