There is no gift that says “I love you” like a lower tax bill in April. Between all the holiday parties and batches of eggnog, there are some financial tasks to check off your list before Dec. 31. In addition to a gift of time, it is probably one of the more important gifts to give.
◗ Contributions to Indiana 529 plans. Time required: five minutes, 20 if you need to open an account.
In order to qualify for the Indiana tax credit, accounts need to be opened and funded by Dec. 31. I had one client wait too long to get his account open and funded. Procrastination is expensive.
If you have anyone in your life who has college aspirations and has not set up a 529 plan, start one. Go to www.collegechoicedirect.com and open an account online. If you have a plan and haven’t made your 2019 contribution, you have until the end of the year.
◗ Required minimum distributions, or RMD. Time required: less than 30 minutes.
If you are over 70-1/2, you are required to take money out of your retirement account before Dec. 31. I’m starting to get a little panicked—we still have one client who has not decided how much of his RMD is going to charity and how much he will include in income.
I don’t hit the eggnog until all our RMDs have been distributed. Most brokerage firms and custodians have cut-off dates well before the end of the year. If you fail to take your RMD by Dec. 31, you will be assessed a 50% penalty on what was not distributed. Ouch.
◗ Flexible savings account, or FSA. Time required: varies.
With the advent of the health savings accounts, FSAs are not as prevalent. The flexible savings account has a “use it or lose it” feature. If you have not used all the funds contributed by the end of the year on qualified medical expenses, you will forfeit the balance. If you need to gather receipts to submit or make a doctor appointment, this can be time-consuming.
◗ Review your 401(k) contributions. Time required: 10 minutes.
Many 401(k) plans now come with an auto-enrollment and an auto-escalate feature. Review the amount you are contributing and increase by 0.5% to 1% until you are saving at least 10% of gross pay. Ideally, 20% of income will go to savings and debt reduction.
If this is your only investment account, rebalance existing funds to match the investment allocation of new money. For example, if your contributions are invested 40% in a bond fund and 60% in a stock fund, but your current investments are 20% bonds and 80% stocks, it’s time to rebalance. Most retirement plans have a function to set existing balances to a given percentage, so you don’t have to worry about dollar amounts.
◗ Review your withholding rate. Time required: 10 minutes.
If you owed a big tax bill last year or received a big refund, it might be worthwhile to review the amount you are having withheld from your paycheck. Another option to lower the amount due is to make estimated tax payments.
◗ Consider other strategic moves. Time required: at least three hours.
Taking a coordinated, multi-year approach to portfolio and tax management is not just for the “wealthy.” For example, rebalancing your portfolio might trigger capital gains. If you gift stocks, your allocation might be off. Additional income might make more of your Social Security income taxable. I would encourage you to find a CPA or financial adviser who has expertise in tax planning to assist.
For an investment of 30 minutes to several hours, you might be able to save yourself money or headaches at tax time. Now that’s a gift worth giving.•
Hahn is a certified financial planner and owner of WWA Planning and Investments in Columbus. She can be reached at 812-379-1120 or firstname.lastname@example.org.