5 Financial Moves to Consider Before the New Year
With the end of the year rapidly approaching, finding time for a thorough year-end inventory of your finances may be difficult. However, putting it off until after the New Year could cost you. Here we have compiled a list of several strategies that will help you realize hard-dollar savings on next year’s tax liability and prepare you for financial success in 2019.
1) Maximizing Contributions to Tax-Advantaged Retirement Accounts
Even if you make regular contributions to a retirement plan, check and see if you have met this year’s maximum contribution limit. The 2018 401(k) limit is $18,500. If you are over 50, you are afforded an additional $6,000 catch-up contribution, reducing your taxable annual income by $24,500.
If you contribute to an IRA, the under 50 maximum is $5,500 and the over 50 is $6,500. With an SEP IRA, you can contribute the lesser of $55,000 or 25% of your eligible income. And unlike other retirement accounts, the contribution deadline for these accounts isn’t until the 2019 April tax deadline, so you have some additional time if you wish to continue contributing for a few more months.
You may also want to consider a Roth IRA conversion if you have endured any considerable capital loss this year. In this case, you will convert a portion of your traditional 401(k) or IRA funds into a Roth IRA. Although you will be charged income tax on the converted amount this year, you will be able to leverage that realized loss to offset taxes due. An added bonus is that withdrawals from Roth IRAs are tax-free, lowering your taxes due in retirement.
2) Defer Income and Increase Business Expenses
For many business owners on the threshold of a higher tax bracket, deferring income and accelerating business expenses at the end of the year can be just the ticket to staying below the bar. For example, there may be certain 2019 costs you can pay for in advance that will still count against this year’s deductions, such as insurance policies or medical expenses.
If your business uses a cash method of accounting, you can defer billing for your products or services until after the first of the year. If your business runs on an accrual method, try and delay shipping products or providing services. Deferring payments and increasing business-related spending are common end-of-year practices that help business owners mitigate their tax exposure.
3) Consider Charitable Contributions
Donating to charity may be the best-known and most philanthropic way to reduce your taxable income. Unfortunately, as Senior CFP Board Ambassador Jill Schlesinger, CFP® points out in this article regarding this year’s Tax Cuts and Jobs Act (TCJA) changes, “The tax law is expected to reduce the marginal tax benefit of giving to charity by more than one-quarter in 2018, but if you give one lump sum representing your gifts for the next few years, you may recapture the tax benefit. One easy way to accomplish this is by establishing a donor advised fund (DAF), which allows you to make multiple years’ worth of donations up front.”
A DAF, or Donor Advised Fund, is an investment account set up for the purpose of supporting your favorite IRS-qualified public charities. They are becoming increasingly popular because they allow for tax-free growth over time as well as immediate tax deductions.These are also helpful if you want to make contributions for this year, but haven’t yet decided on a recipient. Consult your advisor to see if you would benefit from contributing to a DAF fund.
4) Employ Tax-Loss Harvesting to Offset Capital Gains
Tax-loss harvesting can best be understood as balancing a scale—one harvests capital losses to offset the taxes owed on capital gains. Specifically, this means selling stocks, bonds, and funds that have decreased in value to help reduce the taxes you will be paying on investments that have shown significant growth. If you haven’t accrued any capital gains this year, but have incurred loss, you can use a maximum of $3,000 a year to offset your ordinary income (if you are single or married and filing jointly). Also, any capital loss remaining can be carried into future years to offset those gains.
5) Evaluate Your Progress and Make Adjustments as Necessary
The end of the year is not only a time to evaluate your past year’s performance, but to ensure your portfolio is still in alignment with your future financial goals. Have you experienced any major life changes over the past year that have changed your financial situation, such as marriage, divorce, moving, or a promotion? Are your estate planning papers up to date with the correct beneficiaries? More often than not, major lifestyle changes warrant adjustments in your financial plan to keep you on track to reach your goals.
If you aren’t sure that your finances are in order for 2019, we welcome you to schedule a complimentary consultation call with us at Century Wealth Management. We look forward to hearing from you.