The end of the year is always a happy time for most people. Holiday parties, family gatherings, a slower time at the office. With a little planning and action now, you’ll be able to enjoy all those parties without worrying about financial items on New Year’s Eve. Below is a list of what to look:
Review your 401(k) contributions: If you participate in a 401(k), the maximum contribution limit this year is $18,000; if you’re age 50 and older the maximum contribution is $24,000. You can contribute up to the limit until Dec. 31. If you want to contribute more money to your 401(k) you’ll need to contact your company’s payroll department and ask what steps are needed to increase your deduction starting with your next paycheck. If your employer allows a lump sum contribution you many want to redirect some or all your year-end bonus into your 401(k).
Take your required minimum distributions: Once you reach age 70-and-a-half you are required to take a distribution from your IRA, 401(k), and other types of retirement plans by Dec. 31 (except for the year you turn 70-and-a-half, when you’re given an extension until April 1 to make your first withdrawal.) However, you don’t need to take payment from your current employer’s 401(k) while you’re still working. Penalties are quite large if you miss the deadline — the amount not withdrawn is subject to a 50 percent excise tax. If you haven’t taken your required payment yet, contact your financial advisor or 401(k) administrator and take the distribution before the deadline. Also, owners of IRA accounts over age 70-and-a-half can make contributions directly to charity from their IRA. This is a powerful planning tool because it allows taxpayers to make charitable contributions (up to the $100,000) from their IRAs directly to a charity and to exclude that amount from income. Remember, no taxes will be paid on the distribution, and the income tax charitable deduction is not permitted for this amount.
Make the most tax-effective charitable gifts: Making a gift before the end of the year can increase deductions if you itemize your deductions. Consider gifting highly appreciated stock instead of selling the stock and donating cash. If highly appreciated stock is donated, you get a deduction for the full value of the contributed stock but avoid paying capital-gains taxes on the increase in value since you’ve owned it.
Check the deadline for withdrawals from your flexible spending account: Many flexible spending sponsors require people to spend all the funds in their account by Dec. 31 or forfeit whatever money wasn’t spent. So check to see if there is a balance in the account before the end of the year and make that doctor or dentist appointment, or buy those new glasses you may have been putting off. Flexible spending funds can also be used for many over-the-counter items like contact lens solution, pain relievers, diaper cream, medical devices like walkers and wheelchairs, and a host of other items. Under IRS rules, an employer may offer participating employees more time through either the carryover option or the grace period option to spend their funds. Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year — for example, an employee with $500 of unspent funds at the end of 2017 would still have those funds available to use in 2018. Under the grace period option, an employee has until two-and-a-half months after the end of the plan year to incur eligible expenses — for example, March 15, 2018, for a plan year ending on Dec. 31, 2017. Remember, employers can offer either option, but not both, or none at all.
Contribute to a 529 college-savings plan: For most people, 529 accounts are an excellent strategy to save for college tuition. They allow the beneficiary of the account can use the money tax-free for college tuition, room and board, and fees. In some states a state income tax deduction is available for your contribution. Most states require the contribution be made by Dec. 31 in order to get the state tax deduction.
A little year-end planning could put you on the path towards solid retirement and college planning and might help you save on your taxes. Take a few minutes to review your financial plan before the end of the year to see if you can take advantage of any of these year-end strategies.
Anthony N. Corrao is an independent advisor with Corrao Wealth Management. For more than 25 years he has helped families with their financial goals by developing financial, educational, and retirement planning strategies. He can be found at www.corra
Securities offered through First Allied Securities Inc., A Registered Broker Dealer. Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, A Registered Investment Adviser.
