It is the most wonderful time of the year, but it's also the most hectic time of the year with holiday parties, traveling, shopping, and tying up loose ends before the New Year. I thought for today's commentary, I'd discuss some investment and finance related issues to consider prior to year end. Year end planning is important every year, but it's especially important for 2013. A new tax code went into effect this year, which presents a number of opportunities and challenges as we head into tax season and the New Year.
The following 5 topics are some ideas to consider before the end of the year:
Donate to a charity:
Most people donate to charities because it's something they feel strongly about supporting, but it also is a great way to decrease your tax bill. Studies show that charities receive 40% of their contribution between Thanksgiving and the end of the year. Many of our clients have highly appreciated assets that they gift to charities throughout the year. There are also Donor Advised Funds that many people use that combine favorable tax benefits and the flexibility to easily support your favorite charitable cause when you want.
Consider selling investments that have lost value:
Many investors employ tax-loss harvesting as a strategy for reducing taxes on realized gains from appreciated investments. To claim losses, you'll need to sell your depreciated investments by 12/31 of this year.
Make an extra contribution to your 401k or open an IRA:
Even if you contribute to your tax-deferred retirement savings plan through work such as a 401k or 403b, take a few minutes to see whether you can maximize your contributions between now and year end. The maximum you can contribute to these accounts for 2013 is $17,500 if you're under 50, and $23,000 if you're over 50. If you aren't eligible for a retirement plan through work or if you want to contribute more to retirement accounts, consider making IRA contributions. If you're under 50, you can contribute up to $5,500 per year, and if you're 50 and older you can contribute $6,500 per year. Making contributions to these types of accounts is great for 2 reasons: 1. You are saving for retirement. 2. You reduce your taxable income for the year.
Review the beneficiaries on financial accounts and insurance policies:
This is something we do with our clients at least annually. It's very important to make sure that you have a designated beneficiary for each account or policy. It can be as important as writing a will, but less complex. It's especially important if you've had significant changes in your life such as births, deaths, or marital status. An important point to keep in mind is that retirement accounts pass directly to named beneficiaries, rather than being part of your estate. This can provide significant tax advantages for your heirs.
Take Required Minimum Distributions if you're over 70.5:
If you are over 70.5, the IRS requires you to take a distribution from your IRA or 401k. There is a steep penalty of 50% on the amount not taken in addition to the regular income tax on the amount that should have been withdrawn.
Not all 5 of these will be applicable to everyone, but these are some good tips for heading into the end of the year and issues that we work with clients on a day to day basis. Please contact us if you have any questions on the ideas I've mentioned.