Information About Some Ways to Reach Your Financial Goals

The last few weeks of the year are often a mad rush so we thought this would be a good time to share a checklist of important items to consider well before the calendar year ends. They’re all related to your investments and finances, so that you can reach your goals and dreams faster.

1. Review Retirement Accounts: Are You on Track?
You could increase the funding of your IRA and company retirement plan like a 401(k) or 403(b). Returns generated in IRA and 401(k)/403(b) accounts compound tax-free over their entire life. Avoid taking distributions prior to age 59½, otherwise a 10% early withdrawal penalty may apply.

401(k) and 403(b) accounts allow individuals younger than 50 to contribute $18,000 each year, and individuals 50 and older to contribute $24,000. Some plans allow workers to make additional contributions of after-tax money. For those under 50, the maximum is $53,000. Doing so does not reduce your taxable income, but taxes are deferred on any earnings that the after-tax money makes. Later, some people roll these contributions into a Roth IRA so the money would then grow tax-free.

Traditional and Roth IRAs allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Even if you earn too much to contribute to a Roth IRA directly, it may be beneficial to you to open a traditional nondeductible IRA and convert it to a Roth. There is no income limit on traditional nondeductible IRAs or conversions.

2. Start Tax Planning
Review your taxable and non-taxable accounts to ensure they are optimized for tax efficiency. Evaluate if you should delay purchasing mutual fund shares until 2017 to avoid taxes on brand new investments. If you have foreign bank accounts, make sure you comply with FATCA and FBAR (forms FinCEN 114, 8938, 8621, etc.). If you have forgotten, you may look into the Offshore Voluntary Disclosure Program (OVDP) or streamlined procedures.

The federal income tax rates on long-term capital gains and qualified dividends are 0%, 15% and 20%. High-income individuals can also be hit by the 3.8% NITT. It is still lower than the top regular tax rate of 39.6% (43.4% if the NITT applies). Holding on longer to your appreciated securities can lower your taxes. Owning them for at least one year and a day is necessary to qualify for the preferential long-term capital gains tax rates.

Selling the right shares may also lower your taxes. It may be beneficial to you to sell shares that have been held a year or less rather than those held longer. Selling recently purchased shares at little or no gain may be better than selling shares held for more than one year if that sale would produce a significant gain. In that case, you should notify your broker as to the specific shares you want to be sold. Finally, you can also invest in tax-free securities.

3. Rebalance Portfolio
Make sure you have rebalanced your portfolios to keep them in line with your goals, time horizon and risk tolerance. Market movements may have thrown off your portfolio balance between stocks and bonds.

David Swensen, the Chief Investment Officer at the Yale Endowment, in his book Unconventional Success: A Fundamental Approach to Personal Investment performed an analysis that showed optimal rebalancing could add 0.4% to your annual return.

4. Harvest Capital Losses
Maybe it is time to sell some funds, ETFs or stocks to generate some capital losses? Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss.

Find out if you have any loss carryovers from prior years to be applied against capital gains (from sale of funds, ETF, stocks in your taxable brokerage accounts). If your current year’s capital losses exceed your capital gains, you have a net capital loss. You can use up to $3,000 of that loss ($1,500 if you are married filing separately) to offset other taxable income such as your salaries, wages, interest and dividends. If the capital loss is more than $3,000, you can carry over the excess and apply it against capital gains next year.

5. Check Emergency Fund
Don’t forget to establish or tune up your emergency fund. It is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. This is also a good time to set aside money for the next year’s cash needs.

6. Review Insurance Policies
Do you have a life, disability, long-term care or an umbrella insurance policy? Make sure you and your loved ones are well protected if something happens to you. Your life may have changed (birth, marriage etc.). If you do have enough coverage it is also a good time simply to review the different types of coverage you have. Whole life or variable universal life policies may help you reduce your taxes.

7. Contribute to Health Spending Account
Did you maximize your contribution to your healthcare HSA? The interest and earnings in this account are tax free. The maximum contribution for 2016 is $3,350 for an individual and $6,750 for a family ($1,000 catch up over 55). The contributions are tax deductible and withdrawals are non-taxable if they are used for medical expenses. Over the age of 65 you can withdraw funds at your ordinary tax rate if the distribution is not used for unreimbursed medical expenses.

Fidelity Investments estimates that a 65-year-old couple retiring will need $220,000 for health care costs in retirement in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay those bills. If you don’t have an HSA, make sure that you have spent the entire balance in your Flexible Spending Account.

8. Take Required Minimum Distribution
If you are age 70 1/2 or older, remember to take your required minimum distribution to avoid a potential 50% penalty.

9. Contribute to 529 Plan
Did you contribute to your 529 educational plan for yourself or your child/children? You can contribute $14,000 per year (annual gift tax limit) for each parent or you can pre-fund accounts in a single instance up to five years’ worth of contributions, $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000.

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.

10. Determine Net Worth
Add up what you own (home, car, savings, investments etc.) and subtract what you owe (mortgage, loans, credit cards, etc.). This will allow you to track your progress year to year. It may also give you some incentive to save more and create a better budget for next year.

11. Check Credit Score
Go to annualcreditreport.com and request a free credit report from each of the three nationwide credit reporting agencies. You’re entitled to one free report from each agency every 12 months.

12. Check Beneficiaries
You can check the beneficiaries on your financial accounts or insurance policies at any time, but it’s a good idea to do this at least annually.

13. Update Estate Plan
New baby? Newly married or divorced? Make sure your beneficiary designations reflect any changes. Don’t yet have an estate plan? Make that a new year’s resolution. Estate planning may include updating or establishing a will or trust that can help avoid public disclosure of assets in probate.

14. Maximize Business Deductions
You may want to increase your participation in passive activities since the rules prevent taxpayers from deducting losses from business activities in which they do not “materially participate.” To meet the material participation standard, there are some tests (e.g., spending more than 500 hours per year in day-to-day operations, performing substantially all the work in the activity, or completing more than 100 hours per year and more than anyone else). It may be very beneficial if you’re expecting a loss from your activity.

15. Spending and Automated Savings: Look Ahead
Did you review your budget and set up automated savings? You may have started the year with a clear budget, but did you to stick to it? Fall can be a good time of the year for your financial checkup and to reflect on your spending and develop a budget for next year.

It is also a very good time to put whatever you can on autopilot Bills, recurring payments, even savings – the more you can put on auto-pay now, the easier your financial life will be next year. With this year’s facts and figures in front of you, it will be easier to plan and prioritize your expenditures for next year.