With the end of the year approaching fast, it’s easy to get caught up in the holiday shuffle and overlook critical moves that can impact your long-term financial health. So the Personal Capital team put together a list of the four most important financial year-end must-dos to avoid common pitfalls and help you improve your financial footing.
1. Pay Uncle Sam Less.
If you’ve sold a few stocks during the year, odds are you now owe Uncle Sam a portion of the proceeds for capital gains tax. And even if you haven’t sold stocks, you may owe capital gains! If you own any mutual funds, it’s likely that they have sold shares and you’ll get a taxable realized gain distribution.
Unless you take advantage of an often overlooked tactic called tax loss harvesting.
In tax loss harvesting, you take the somewhat counterintuitive step of selling a security at a loss. These losses can be used to offset gains realized during the year. And if your net losses exceed net gains, you can deduct selling underperforming investments and write off the losses (up to $3,000) against taxable income. The rest can be carried forward into future years.
If you own any appreciated securities, there are other ways to minimize your tax bill.
First, you can gift your appreciated stock to family members in lower tax brackets, up to $14,000 a year. Second, you can also gift to charity and get a deduction on the stock’s fair market value. And third, if you’re well into retirement, you might consider slotting your appreciated securities aside to include in your will. Your heirs will then own it at the stepped-up basis.
Put another way: if you need to be thinking about your will, gifts, or charitable donations this year, consider using your appreciated securities to accomplish these.
2. Max Out Your 401k.
Tax-deferred accounts are a gift from Uncle Sam to your bank account.
Why? They enable you to invest and grow your money before you pay taxes – allowing growth to compound more quickly over time. And when you finally pay taxes, it is typically at a lower tax bracket. If your tax deferred account is employer-sponsored – like a 401k – it may also come with an “employee match,” which can double annual contributions. In addition, your 401k contributions reduce your tax bill by lowering your ordinary income.
Making the maximum contribution to tax-deferred accounts will lower your tax bill while simultaneously adding to retirement savings. If you have not made the maximum contribution ($17,500 for 401ks), there’s still time to take it before the year. If you’re not financially ready to up your contribution, it’s a great time to make it a goal to do so next year – even if it’s only a percentage point or two.
Now is the time to review your actual investments in your retirement accounts. Don’t fall into the trap of overlooking this part of your portfolio, just because it’s coordinated through your employer. What funds are in your 401k? And what are the fees? You can check with your provider, or use our 401k Fee Analyzer to find out. You could be paying high fees on your older plans – in which case you may be better off rolling those funds to an IRA.
And ultimately, retirement accounts also involve withdrawals. If you turned 70 1/2 this year (and we applaud you for finding and reading this blog, if you are!), you’ll need to take your first required minimum distribution (RMD) by April 1, 2014. If you’ve already made your first RMD, don’t forget to take your second withdrawal by the last day of this year.
3. Optimize your Investment Choices.
When was the last time you looked at your asset allocation?
Asset allocation is the most important part of your investing strategy. A proper, diversified allocation ensures that you’re maximizing the returns that you’re getting for the amount of risk that you’re taking. In fact, diversification has been called the only free lunch in investing.
You can protect yourself against unnecessary losses, maximize returns and limit volatility by making sure your portfolio is efficiently diversified. Even if you understand the math behind diversification, it’s not easy to calculate it on your own. Our new software feature, the Personal Capital Investment Checkup, is an easy (and free!) way for you to diagnose your existing portfolio allocation and gauge any changes you’d need to improve your portfolio.
As with taxes, taking time to optimize your asset allocation can help you avoid unnecessary losses – by maximizing returns for a given level of risk.
4. Get on the Path to More Savings.
Self-evaluation may be the hardest task on this list.
We’re not a fan of budgeting as it’s typically conceived – considering monthly checks on spending as an exercise in spurious decision-making. But a year can provide a sufficient amount of data to review and assess your progress.
Now’s the time to figure out if your 2013 savings were in line with your goals. If you’re a Personal Capital Dashboard user, you can use our Cash Flow tool on our Dashboard to view your spending, income and savings.
The Cash Flow tool also shows you a complete breakdown of your expenses. You may be shocked, for example, what percentage of your spending is going toward restaurants. It may be time to come up with a tighter dining-out budget, in that case, and think about how that “extra” money can be used in a more productive way.
Long-term financial health hinges on important short-term decisions. And it happens that a few important ones are concentrated at the end of the year.
Investing a bit of time in addition to your money will pay off both now and in the future, and set the foundation for greater overall wealth.