When you look back over the previous 12 months, you might be surprised at what may have changed for you, whether in terms of the economy at large, your individual finances, or your personal circumstances.

That’s why the end of the year is a great time to reflect and to prepare for the year ahead. Maybe you want to pay off debt, start a charitable endeavor, build a financial plan, or diversify your investments. Whatever your goals are, Alhambra Investments is here with ways to help you maximize your savings, minimize your tax bill, and stay on track with your financial goals.

Use this year-end financial checklist to help you start the year on the right financial foot.

Review Your Risk Tolerance and Investment Strategy

It’s rather common that your risk tolerance, and therefore your investment strategy, can change over time. Evaluate your risk tolerance honestly. Has your risk tolerance changed due to market conditions?  Have there been any life changes (marriage, divorce, health complications, early retirement) that require your investment plan to move in a different direction? Do you have new goals and objectives? If that’s the case, make sure your portfolio allocations are in line with your current time horizon and risk tolerance.

If you don’t already have one, contact us today to for a financial planning assessment, where we will review your current financial plan or goals and provide our analysis on the state of your preparation, planning gaps, and unrealized wealth opportunities.

Tax Loss Harvesting

No one wants to pay more taxes than necessary and harvesting capital losses to offset any capital gains is one way to do that. Even if you can’t use all the losses this year, excess losses are carried forward to be used in future years.

You might be reluctant to sell an investment you really like. But keep in mind the Wash Sale Rule from IRS Code section 1092. It allows you to sell a position at a loss, deduct the loss, and buy back the same investment after 30 days. Buy it back in less than 30 days and the deduction is not allowed. The risk is if there is a major move in that investment during the 30-day period.

Charitable Contributions

Charitable contributions are a great way to integrate personal giving and tax planning, such as donating appreciated securities, private interests, restricted stock or using donor-advised funds. Using qualified charitable distributions from your IRA can also be part of that plan.

Charitable contributions can be made through December 31. You can donate directly to a charity, or if you want to have more control, you can set up a Donor Advised Fund. You make an irrevocable contribution and receive a tax deduction that year. You can decide later when and to what charity you want to give money.

You can also consider giving assets with large capital gains. You won’t have to pay capital gains tax, and if you itemize, you can deduct the full value of the appreciated assets, up to 30% of Adjusted Gross Income (AGI). Generally, for other donations your deduction is limited to 50% of AGI, unless you only give cash, in which case the limit increases to 60% of AGI. The limits are reduced for donations to certain organizations, such as private foundations.

Bunching Charitable Contributions

Almost 90% of American taxpayers take the standard deduction because it’s larger than the amount of their itemized deductions, which includes charitable donations. But consider bunching charitable contributions. If you plan to donate the same amount of money each year, you can “bunch” the donation into a single year and increase your potential deduction for that year.

Let’s say you give $15,000 every year to charity. That contribution plus all your other itemized deductions don’t add up to the standard deduction, so you can’t deduct the $15,000 gift.

But, if you make the $15,000 charitable contribution for this year and next year, $30,000, then your itemized deductions may exceed the standard deduction. In that case you can itemize and deduct the charitable contribution.

Max Out Retirement Plan Contributions

The maximums change from year to year for 401(k)s, IRAs and Simplified Employee Pensions (SEP). You might even be eligible to contribute to a 401(k) and an IRA or SEP. And don’t forget the catch-up contributions for people age 50 and older.

Review Your Healthcare Savings Accounts

If you have a high-deductible health plan (HDHP) and are not enrolled in Medicare, you may qualify to make tax-free contributions to a health savings account (HSA). HSA funds can be withdrawn tax-free to pay for qualified medical expenses. There are maximum contribution limits for individual coverage and for families. As with retirement plans, the maximums change every year. There is also a catch-up contribution to HSAs for those 50 and up.

If you have a flexible spending account (FSA) at work, check the remaining balance. Some plans allow you to roll unused funds into next year. But if your plan doesn’t have a rollover provision, use the remaining funds before the end of the year. Don’t leave money on the table.

Convert Your Traditional IRA to Roth IRA

In retirement, having access to tax-free IRA distributions can be a benefit. One way to accomplish that is converting some or all of your Traditional IRA into a Roth IRA. But a conversion is taxable and you will have to pay ordinary income taxes on the conversion amount but no early withdrawal penalties. Talk to us or your tax professional to see if it makes sense for you.

Review Your Tax Withholding

Changes in your number of dependents, income, and marital status can affect how much tax you owe. A review will tell you whether you should adjust your W-4 withholding from your paycheck. The IRS tax withholding calculator can help. It may be too late for changes to your withholding this year, but you can get it in place for next year.

Required Minimum Distributions

If you’re 73 or older, your RMD must be withdrawn from your Traditional IRA by December 31st. If not, the IRS penalizes you, and that creates a whole set of problems you don’t want to deal with.  If an RMD is missed the excise tax is 25 percent, potentially reduced to 10 percent if corrected quickly.

Check Social Security Benefit Projections

Social Security is an important part of retirement income for many retirees. It should be included in every financial plan. That’s why it’s a good idea to check your projected benefit amount and see if adjustments should be made to your retirement plan.

Review Your Budget

Look back 12 months. Did you stay on budget or did you spend more than you planned? If so, why? Did you save as much as you projected or did you get off track? Were you able to pay off debt or did unexpected expenses increase what you owe? Regroup. Refocus. Set your financial goals for next year.

Plan for Large Expenses Coming in the Next 12 Months

What big expenses are coming up next year—a wedding, divorce, birth of a child, starting college, or opening a business? Will you be having major dental work or surgery? What about home repairs or buying another car? If you’re aware of something big, you can begin to plan now rather than take the big hit all at once.

Get a Free Copy of Your Credit Report

End the year knowing that your credit score is the best it can be and there are no mistakes or false entries because of clerical errors or identity theft. You’re entitled to one free copy of your report from each of the credit reporting agencies every year. You can get a copy of your report from Equifax, TransUnion, and Experian by going to annualcreditreport.com

Review Insurance Policies

Review your existing policies—life insurance, homeowner’s or renter’s insurance, auto insurance, and health insurance. Ask these questions:

  • Does the original reason you needed coverage still exist or should you look at other insurance products?
  • Do you need more or less insurance in the coming year?
  • Do your deductibles need to be adjusted?
  • How do your insurance policies fit into your budget for the year? What changes do you need to make?
  • Are you getting the best price for your insurance products?

Doing some comparison shopping may turn up better premiums or better coverage.

Check Your Beneficiaries

Has anything changed this year like marriage, divorce, the birth of a child or grandchild, or the death of one of your beneficiaries? Have you changed your beneficiaries because of those events? If not, it’s time to review.

For example, let’s say you’re divorced and got remarried this year. You didn’t change the beneficiary designation on your retirement accounts to your new spouse. If you die, your ex-spouse gets the money, and wouldn’t that cause some problems?

Your Will is not the final authority when it comes to accounts where you named a beneficiary. It’s the beneficiary designation form you filled out and signed when you set the account up. So, check anything with a designated beneficiary:

– Life Insurance policies – Don’t forget policies through your employer

– Annuities

– Traditional IRA

– Roth IRA

– Inherited IRAs

– 401(k) account at your current employer

– 401(k) accounts at previous employers

– 403(b) accounts

– Deferred Compensation Employer Plans

– 457 Government Plans

– Health Savings Accounts

– 529 Education Savings Plans

– Transfer on Death (TOD) accounts. These can be at banks, investment firms, savings and loans, or any financial institution.

– Pensions

Filling out a new beneficiary designation form and signing it is easy, it doesn’t take much time, and it protects the ones you love.

Review Legal Documents

Laws can change just like your personal situation. So, review Wills, Trusts, Powers of Attorney, and the various healthcare documents to ensure that they’re up-to-date with current law. If you’ve moved to another state since your legal documents were created, you should check with an attorney to see if your documents are in line with the laws of your current state of residence.

There are probably lots of other things you’d prefer doing than going through a year-end checklist. But it’s the best way to keep your financial house in order.

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.