Heed this advice to start 2015 on the right financial footing. Before the end of 2014, you should max out your retirement contributions and give to charity.
By Susan Johnston Dec. 2, 2014 | 11:34 a.m. EST +
The month of December often whizzes by in a flurry of gift buying, cookie baking and snow shoveling. But the final month of the year is also a good time to get your finances in order and prepare for the new year. With that in mind, here’s a look at end-of-year financial tasks to tackle:
1. Schedule a meeting with your financial planner or accountant. The end of 2014 or beginning of 2015 is a good time for a financial checkup. ” A financial planner can help someone segment and prioritize goals for 2015,” says Donna Nadler, a certified financial planner and senior partner at Capital Management Group of New York. “You want to look ahead.” If you use a tax accountant, consider checking in before Dec. 31 in case the professional suggests time-sensitive strategies like deferring income, which we’ll get to in a moment.
2. Donate to charity. Dec. 31 is the deadline for charitable contributions you plan to deduct from your 2014 tax return. Instead of donating cash, some people donate appreciated securities such as low-basis stocks or mutual funds to avoid capital gains tax. “If we transfer that security, there’s no tax to the client, and when the charitable organization sells it, there’s no tax to them,” explains Tim McGrath, a certified financial planner and managing partner at Riverpoint Wealth Management in Chicago. Not sure yet where you want your charitable contributions to go? If you set up a donor-advised fund, you could gift money to the DAF and get a tax deduction this year, but actually distribute funds to charity in the future, McGrath adds. (No, you don’t get another deduction when you donate that money in the future.)
3. Max out retirement contributions. You have until you file your tax return next spring to make a 2014 contribution to an individual retirement account (IRA), but 401(k) contributions are only deductible when made in the same calendar year. If you want to establish a retirement plan for 2014, the plan documents also must be signed and put into place in 2014, according to Nadler. The 2014 contribution limit is $17,500 for 401(k)s and $5,500 for IRAs (with an extra $1,000 catch-up contribution option for those ages 50 and older).
4. Use up FSA money. If you still have money set aside in a flexible spending account for health care expenses, see if you can order new glasses or schedule that dental work you’ve been putting off. Some companies offer a grace period into the spring or a $500 FSA carry-over from one year to the next, but Nadler says she doesn’t see this often. If your employer doesn’t offer these provisions, then you’ll lose any unused funds once we ring in the new year.
5. Check your beneficiaries. You can check the beneficiaries on your retirement accounts or insurance policies at any time, but it’s a good idea to do this at least annually. “I always encourage clients to review beneficiaries because someone may have died, or you may have gotten divorced,” Nadler explains. If you make this part of your year-end financial task list, then it will be easier to remember.
Here are some additional steps that only apply in certain circumstances:
1. Take your required minimum distributions. In the year following the year you reach age 70 ½, you must take required minimum distributions from your IRA by April 1. The penalty for failing to take RMD is a 50 percent tax on what should have been withdrawn, so “make sure if you’re 70 ½ that you calculate and take the appropriate RMD for the year,” stresses Dave Richmond, president of Richmond Brothers, a financial and retirement planning firm in Jackson, Michigan.
2. Defer income and accelerate expenses. Income that arrives in 2015 is taxable in 2015, so in some instances, it might make sense to delay that income to delay the tax bill. “I’ve had business owners that will wait to bill until next year,” McGrath says. “The bulk of these strategies are good for a small business owner, but it’s surprising how flexible a lot of corporations are. They might be willing to pay a bonus on the first of the year.” Those who want to reduce their 2014 tax liability may want to accelerate tax-deductible expenses (for instance, if your medical costs exceed 10 percent of your adjusted gross income in a single year) or prepay recurring expenses like property taxes before the end of the year.
3. Make 529 plan contributions. Money saved in a 529 plan grows tax-free when used for eligible educational expenses, and some states have additional tax benefits for residents who contribute to a plan in that state. McGrath reminds parents or grandparents to make 529 contributions, especially if they can reap a state tax break.
4. Consider a Roth conversion. An individual with a traditional IRA and low taxable income might want to convert that traditional IRA to a Roth IRA before the end of the year, Richmond suggests. “[The conversion to a Roth IRA is] going to be reported as taxable income, so we’d take advantage of paying that tax in a lower tax bracket,” he says.
5. Maximize your gift allowance. Those who are likely to leave an estate large enough to incur estate taxes might consider maxing out their gift allowance, which is $14,000 per person per year (meaning a couple can gift up to $28,000 per year to as many people as they want). “There’s no tax deduction, but it helps with their federal and state estate taxes that their state might have to be pay down the line,” McGrath says. Wealthy grandparents or other relatives can also pay college tuition directly to the institution so that money doesn’t apply toward the $14,000 gift allowance. There is no carry-over of gift allowances from year to year so gifts need to be made on or before Dec. 31.
6. Adjust your tax withholding. If you’ve gotten married, divorced or had kids in 2014, then you probably need to update your withholding with your employer’s human resources department. “A lot of times they need to adjust their W4,” McGrath says. “I would rather they have that money where they control it [than get a large tax refund].”