We know your schedule is packed right now: If you’re not trying to choose the perfect present, you’re probably scrambling to nail down final travel arrangements.
But there is one big to-do to add to your list—assessing your finances.
There are many smart money decisions you can make before the end of the year that will not only improve your finances in the short term but could ultimately help increase your net worth.
Get started with a free financial assessment.
Get started with a free financial assessment.
Remember: Every time you maximize your money, you create an opportunity to turn that found cash into investments or savings—giving you the potential to grow your wealth.
Sure, some of these things could have been done earlier in the year. But if you’ve gotten this far without checking these items off your list, now’s the time. “They’re just sound financial moves to think about,” says Tim Steffen, a certified public accountant with Robert W. Baird & Co., in Milwaukee.
Here are some year-end options to consider and discuss with your accountant or financial adviser.
1. Maximize Retirement Contributions
Although you can contribute to an IRA through April 17, 2017, for the 2016 tax year, your 401(k) or 403(b) account is calendar-year specific. If you have wiggle room to increase contributions—you aren’t contributing enough to get the full employer match, for instance, or you’re short of your goal—here’s your chance to play some catch-up. Because you must make deposits via payroll contributions, talk to your human resources department about how much you can reasonably add by December 31 (keeping in mind the 2016 contribution limit is $18,000).
“This is multipurpose because it will reduce your income but also help you in the long run in terms of your retirement planning,” says Adelina Kieffer, Chartered Financial Consultant® and a senior vice president at Bryn Mawr Trust in Bryn Mawr, Pennsylvania.
If it's too tricky for you to boost your payroll deductions for 401(k) contributions significantly by year’s end, or you don't have access to a 401(k), consider putting that money into an IRA (you can contribute up to $5,500 for 2016)—you may even be eligible for an IRA tax deduction.
There's also another type of tax-friendly contribution you can make by year's end that could help you in your golden years: If you have a high deductible health insurance plan, you might want to make a deposit to a health savings account (HSA). For 2016, you can put up to $3,350 into an HSA for individuals ($6,750 into an HSA for family coverage). HSAs roll over from year to year and can be used for medical expenses into retirement.
2. Run the Numbers on a Roth Conversion
If you’re in a lower tax bracket or if your income was smaller than usual this year, the timing might be right to convert some of your traditional IRA savings to a Roth IRA. You’ll pay taxes on the money you convert, but after that, the balance grows tax-free until retirement—and distributions will be tax-free as well.
“There are calculators available that tell you whether it makes sense for you, as it can often be very taxpayer-specific,” says Bill Smith, managing director of the National Tax Office at CBIZ MHM, in Bethesda, Maryland. While you can contribute to an IRA until April 17, a Roth conversion must happen by December 31 of this year to be counted in 2016.
So be sure to talk to your accountant or financial planner to evaluate this option, as every cent you’re not paying in taxes as a retiree is that much more money you have to spend.
3. Consider Paying Property Taxes in December
Many municipalities mail property tax bills at the end of the year and give homeowners until the end of January to pay. However, if you pay in 2016, you get the deduction in 2016—so it’s a matter of determining when the deduction is most helpful, says Steffen. If you received an income bump this year in the form of a bonus or big commission, you may want the deduction this year instead of in 2017.
4. Evaluate Your Investments
If you have investments in a taxable account, there may be some stocks or funds that haven’t done so well. “The stock market has done poorly over the last quarter or so, so we’re taking this opportunity to turn those lemons into lemonade and do some tax-loss selling,” says Howard Pressman, CFP®, of Egan, Berger & Weiner, LLC, in Vienna, Virginia. Go through your portfolio and identify any investments that have lost value, and consider whether you want to sell them. The loss can be used to offset any gains you’ve realized this year, or you can use some of the losses to offset up to $3,000 in ordinary income. “That’s an excellent opportunity,” Pressman says.
If you can swing it, make January’s mortgage payment by December 31, and you’ll be able to deduct that mortgage interest in 2016.
5. Put Debt on Auto-Pay
Do you have high-interest debt on a credit card or elsewhere? Make a plan now, at the end of 2016, that will help you knock out all your debt—or at least make a sizable dent in it—in 2017.
Set up automatic payments that come out of your checking account on paydays. If you’re reluctant to do so, consider that if you’re carrying a balance on a card charging 15% (the national average), paying it off is like getting a guaranteed 15% return on your money. “An automatic payment plan is always going to be a great idea because the money is gone before you ever get to see it,” Steffen says.
6. Make an Early Mortgage Payment
If you can swing it, make January’s mortgage payment by December 31, and you’ll be able to deduct that mortgage interest in 2016. In fact, some financial experts suggest making a mortgage payment every four weeks instead of every month—so you’ll fit in 13 payments every year instead of 12. “You’ll be surprised how much impact that will have on your mortgage over the long term,” Steffen says.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.