Tis the Season - A Year End Financial Checklist

Yep, it’s really December! Crunch time to knock out the last few items on your financial checklist. To help, we’ve put together some of the things to consider both prior to and shortly after the end of the year.

Before the ball drops:

Set a Budget for Holiday Expenses

I said it, the “b” word. Keeping within a budget can be a challenge, but doing so will help you avoid a financial holiday hangover. With spending on gifts at an estimated $900 per shopper, your own budget should be well within your means.

Make Charitable Donations

This one’s a no brainer. Help those in need while lowering your taxable income. For additional tax efficiency, use appreciated stock for your gifting plans. You can also receive a charitable deduction by donating household items and clothing.

Realize Losses

You’ve just feasted on your Thanksgiving harvest, now it’s time to harvest (realize) losses in your portfolio. If you have taxable capital gains, harvesting losses can help you lower or eliminate the taxes you owe. Use up to $3,000 of excess capital losses against your ordinary income and carry forward any losses beyond that amount indefinitely. If you’re replacing any sold positions keep in mind the wash sale rule.

Take Your Required Minimum Distribution

If you’re over age 70 ½ and have qualified retirement plans, forgetting to take your RMD can be a big mistake, possibly costing you a 50% tax! However, if your only retirement account is a Roth, relax and enjoy another glass of eggnog. Roth IRAs are exempt from the RMD rule.

Use the Gift Tax Exclusion

If you’re in the position to help family members or friends, have the need to lower your taxable estate, and the holiday spirit has you in a giving mood than consider making gifts before December 31st. The annual gift tax exclusion allows for gifts of up to $14,000 to any number of individuals without affecting your lifetime gift tax exemption. If you’re married, double your gift to each individual to $28,000.

Accelerate Deductible Expenses

Maybe you knocked it out of the park this year with your bonus, or as a business owner your revenue was through the roof. If you find yourself in a higher than normal tax bracket this year, consider prepaying next year’s deductible expenses prior to December 31st. For individuals this may include making next year’s charitable donations early or pre-paying estimated taxes. For business owners it could mean pre-paying annual subscriptions, rents, utilities, or any other number of expense items.

After the ball drops:

Replenish Cash Reserves

It’s recommended to stash three to six months of living expenses away in a cash account. If you had to dip into these savings for any emergency expenses or for this year’s retirement contributions make sure to bring your cash reserve back to an adequate balance. You can do this by liquidating investments or implementing a savings plan from your income.

Review Asset Allocation & Rebalance Portfolio

Mental note! This one is important. Schedule time with your advisor to discuss the risks in your portfolio. Stock valuations are at historical highs and bond prices will surely be affected by rising interest rates, likely creating an environment for choppy returns through 2016. You’ll want to be sure your investments are in line with your risk profile.

Make IRA Contributions

If you spent the better part of December wrapping presents and forgot to make your retirement contributions, don’t sweat it. The deadline to make contributions to individual retirement plans extends to the April 15th tax deadline (and to your extension deadline for SEPs and Keoghs/Individual 401k). January is also a great time to work with your advisor to set up an automated deposit plan. Automating your contributions on a recurring basis is both convenient and has the benefits of dollar cost averaging.

Increase Contributions to 401k

Hopefully, all your hard work this year earned you more than a pat on the back. Work a raise or bonus into your new budget and up the amount you are contributing to your 401k. Apparently, only 1 in 5 Americans are very confident they will have enough for a comfortable retirement.

Rollover Your Old 401k

Make that old company 401k that has been nagging you since you left your last job a part of your New Year’s resolutions. Rolling over into an IRA will greatly expand your investment options, give you more control of your retirement, and could possibly lower your investment fees. If you have an existing IRA, consolidating accounts will just make your life easier.

Update Beneficiary Designations

The good news is you probably won’t die in the coming year…but if you do you want to make sure your assets are transferred according to your wishes. Double check beneficiary info for all of your financial assets including life insurance, retirement accounts, bank accounts, other transferable assets, and make any necessary changes. This is especially applicable if you were recently married, divorced, or had children. Assets with a beneficiary designation transfer quickly and bypass the legal probate process, greatly simplifying the administrative burden on your loved ones.

Dust Off Your Estate Plan...Or Consider One

A well-designed estate plan is one that is malleable and can be updated as personal or external circumstances change. Reviewing your plan documents with your advisor each year will help you keep the plan up to date. If you don’t have a plan or don’t feel your financial circumstances require a plan at least consider the essential components such as a simple will, forms of will substitute (beneficiary designations), and financial and medical powers of attorney.

Happy Holidays and here’s to a prosperous New Year!

Michael Scheel

Profolio Investments Inc, 121 Newark Avenue Ste 544, Jersey City, NJ, 07302