Year End Checklist


With 2017 drawing to an end, most people are in the midst of winding down work projects, making holiday plans, and double-checking their Christmas lists.  Therefore, as the chaotic holiday season quickly approaches it is easy to put off financial decisions until after the New Year.  However, the final weeks of the year give you an excellent chance to make last minute tax related moves that may reduce what you own when tax filing time comes around.  After all, we would not want you to miss tax saving opportunities or pay unnecessary penalties.  We thought it would be timely to share with you a few financial moves you can consider making before the end of the year.

Required Minimum Distributions

If you are 70½ or older and own a Traditional IRA and/or an employer sponsored retirement plan such as 401(k), 403(b), or a profit sharing plan you must take a required minimum distribution (RMD) annually by December 31st.  The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy.  The penalty for failing to take the RMD is a hefty 50% of the amount that was required to be withdrawn.  There is a special one-time rule that allows those turning 70½ to defer their first RMD until April 1st of the following year.  However, by delaying your first distribution until April, you will be obligated to take two RMD’s in the same year, which would potentially increase your tax bill and may even push you into a higher tax bracket.

In 2015, Congress made permanent the law that allows people to make a tax-free donation of up to $100,000 from their IRA, so if you are 70½ or older, you can transfer your RMD to charity at any time.  The donation counts as your required minimum distribution but does not increase your adjusted gross income, which can be particularly helpful if you do not itemize and cannot deduct charitable contributions.  The money needs to be transferred directly from the IRA to the charity in order to be tax-free.  If you withdraw it from the IRA first and then give it to the charity, you can deduct the gift as a charitable contribution (if you itemize), but the withdrawal will be included in your adjusted gross income.  In addition, keeping some or all of your RMD out of your adjusted gross income could help you avoid the Medicare high-income surcharge or help make less of your Social Security benefits subject to taxes.

Tax Loss Selling

If you have investments with significant losses in your taxable accounts, selling them will let you offset capital gains from winning investments.  If losses exceed gains, you are allowed to deduct $3,000 a year in capital losses against your ordinary income.  Any additional losses can be carried forward to future tax years.  Keep in mind, you cannot re-purchase the same investment within 30 days before or after the sale or you will trigger a wash sale and the loss will be disallowed for tax write-off purposes.

Workplace Benefits

If you have an employer sponsored defined contribution plan such as a 401(k) or 403(b) through work, it is worthwhile to review what you have contributed so far this year.  These contributions are due by the end of the calendar year.  The maximum annual contribution for people under the age of 50 is $18,000, while people over the age of 50 can make catch-up contributions worth an additional $6,000; this gives older employees the ability to defer paying income taxes on up to $24,000.  In addition, some companies offer a matching contribution.  This is free money to the employee; the threshold to qualify for company-matching contributions differs between companies.  You may still have time to bump up your deferral amount in order to maximize your benefit.

Millions of Americans re-enroll in health plans during this time of the year; it would be worth your time to find out if your employer-provided healthcare plan offers a flexible spending account or FSA.  The FSA is a special tax-free account that allows you to contribute money that will pay for eligible medical related expenses that are not covered by your healthcare coverage.  The contributions are deducted from your income on a pretax basis, which lowers your taxable income.  Be sure to check with your company to find out the deadline for using the money so it does not go unused.  Some companies offer a grace period into the 1st quarter of the New Year; others offer a $500 FSA carry-over from one year into the next.  If your employer does not offer any of these provisions, then you will lose any unused funds at the end of the year.

College Funding

If you have children or grandchildren who have not started saving for college, you may consider contributing to a 529 plan.  Money saved in a 529 plan grows tax-free when used for eligible educational expenses.  Some states even offer additional tax benefits for residents who contribute to a plan in that state.  An added feature of a 529 plan is an IRS rule called superfunding.  For example, any money saved in a 529 plan is considered a gift for tax purposes. This means there are limits to how much one person can contribute; the annual gift exclusion amount is $14,000.  However, by superfunding you can pre-fund a 529 plan with up to five years’ worth of contributions or $70,000 at once.  Together, a married couple can open a 529 plan with $140,000.

Check Your Beneficiaries

You can check the beneficiaries on your account and life insurance policies at any time; it is important to conduct an annual beneficiary review of all your accounts.  Proceeds from brokerage accounts, retirement accounts, bank accounts, and life insurance policies go directly to the recipient named as a beneficiary, not according to names listed in a will or a trust.  For retirement accounts custodied by Fidelity, your annual summary in March or April (called a 5498) contains an addendum listing your beneficiaries.  This is especially important if you have had any life changing events in the past year such as a death in the family, a newborn child, or if you got married or divorced.

Planning For 2018

The end of the year is a great time to reflect on your spending and develop a budget for the new year.  Planning today will provide for financial security tomorrow.

Dan Krstevski, CFP®