While you’re often exhorted to optimize every aspect of your financial life at the end of each calendar year, you might not have the luxury of time to pack it all in, especially with holiday related tasks and fun competing for your attention. For example, while you’d ideally rebalance your portfolio with an eye toward identifying tax-saving opportunities by year-end, what’s really important is identifying any tax-saving opportunities; the rebalancing piece can be pushed into next year if need be.
To help you manage your financial to-dos, I’ve separated the truly time sensitive ones from those that, while in the category of nice to do, can be put on the back burner until you have the time to attend to them.
Must Dos Before Year-End
Must Do 1: Take Required Minimum Distributions When you think about which financial task, if skipped, would carry the biggest repercussions, taking required minimum distributions from IRAs and company retirement plans by year-end has to go at or near the top of the list. Any RMDs that you should have taken but did not are subject to a 50% penalty, as well as the usual ordinary income tax that’s due. I love the idea of tying RMDs in with a broader review and rebalancing effort. But if you’re time-pressed, you could take your RMDs from whichever holdings have appreciated the most over the past several years or since original purchase (and therefore could be the most overvalued). Alternatively, you could extract your RMDs from whichever holding has been worrying you the most, whether it’s the fund with a new manager or the stock that you’re concerned could be overvalued.
Must Do 2: Make Charitable Contributions Although you can make charitable contributions any old time, you’ll need to contribute by year-end if you want your gift to count on your tax return for 2017. There’s nothing wrong with writing a check to charity and deducting it, but making charitable contributions from your portfolio can boost your tax benefits even more. If you’re inclined to donate from your taxable account, steering highly appreciated securities to charity is a way to benefit charity, earn a tax deduction, and remove the risk and tax burden of that asset from your portfolio. By contributing to a donor-advised fund, investors can contribute cash or appreciated securities to the fund (and remove the risk and tax burden of those appreciated assets), earn an immediate deduction, then take their time distributing those assets to charity. Finally, RMD-subject investors can steer a portion of their RMDs, up to $100,000, directly to charity, thereby fulfilling their RMD obligations while also reducing adjusted gross income.
Must Do 3: Make Sure You’re Funding Your Company Retirement Plans to the Max You have until your tax-filing deadline to make contributions to IRAs and health savings accounts for the 2017 tax year, but year-end is the deadline for 401(k), 403(b), and 457 contributions. Check your latest paycheck for your year-to-date contribution amount relative to the maximum levels of $18,000 for those under 50 and $24,000 for those 50-plus. If you can swing it, you can increase your contributions in the year’s last few paychecks to hit or get closer to the limits. After-tax 401(k) contributions may also be of interest for high-income earners looking to build their tax-advantaged savings; for 2017, total 401(k) contributions, including the standard pretax/Roth contributions as well as Roth, can go as high as $53,000 for 2017.
Must Do 4: Engage in Tax-Loss Selling/Tax-Gain Harvesting Given how strong the stock market has been, telling investors to scout around for tax-loss sale candidates rings a little hollow this year. Mutual fund investors may be hard-pressed to find losers unless they’ve been very unlucky with their timing and/or investment selections. Individual stockholders may find it easier to unearth holdings that are trading below their cost basis. With stocks enjoying widespread gains, a more realistic strategy for investors who are in the 10% or 15% brackets for income tax is tax-gain harvesting. Such a strategy may also be valuable for investors who know they will be in a higher tax bracket down the line (and therefore would benefit from increasing their cost basis now) as well as for investors who have large realized losses elsewhere in their portfolios that they can use to offset the gain. There’s nothing inherently time-sensitive about tax-gain harvesting, except that as the year winds down you likely have a better sense of what your tax bracket will be and whether such a strategy is potentially lucrative. You may also want to conduct tax-gain harvesting in dribs and drabs so that the gains don’t push you into a higher tax bracket.
Must Do 5: Wring the Most from Your Company Benefits Package Open enrollment for employee benefits typically runs in the last few months of the year. Even if you’re happy with the elections you currently have, your menu of choices – and what you pay for them – are likely to have changed, so it’s valuable to review. High-deductible health plans are popping up on more and more benefits menus, along with companion health savings accounts. While many employees worry about the out-of-pocket outlays associated with the HDHP versus a traditional healthcare plan such as a preferred provider organization, the HDHP/HSA combo can be a good fit for higher-income folks with few health issues. That’s because HSAs are triple tax-advantaged – pretax dollars go in, the money compounds tax-free, and qualified withdrawals are tax-free, too.
Don’t Rush It While it’s valuable to prioritize the preceding tasks as 2017 winds down, the following tasks could reasonably be pushed into 2018 if you’re time pressed.
Fund an IRA, HSA to the Limit While company retirement plan contributions must come in by year-end to count for the 2017 tax year, you have a few more months to contribute to your IRA and HSA for 2017. Of course, ideally you’d make your contributions as soon as possible to get that money working for you. But if you don’t have the funds at the ready, or aren’t sure what to invest in, waiting a few months isn’t going to make or break your plan. If you’re lucky enough to receive a bonus in the first months of each year, steering a portion of that windfall to one of these accounts can be a good strategy.
Check Up on and Rebalance Your Portfolio Here’s the big task that investors are encouraged to undertake before year-end. But unless you’re retired and subject to RMDs or need to shake some cash out of your portfolio for next year’s living expenses, or you have big tax losses (or gains) you’d like to realize before year-end, there’s no good reason to put the pedal to the metal on this one.
Paul Staib | Certified Financial Planner (CFP®), MBA, RICP®
Paul Staib, Certified Financial Planner (CFP®), RICP®, is an independent Fee-Only financial planner. Staib Financial Planning, LLC provides comprehensive financial planning, retirement planning, and investment management services to help clients in all financial situations achieve their personal financial goals. Staib Financial Planning, LLC serves clients as a fiduciary and never earns a commission of any kind. Our offices are located in the south Denver metro area, enabling us to conveniently serve clients in Highlands Ranch, Littleton, Lone Tree, Aurora, Parker, Denver Tech Center, Centennial, Castle Pines and surrounding communities.
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