Almost everyone is busy during the holiday season. It's tempting to just forget about your investments in December. But there are a few things you need to take care of before the end of the year:
Asset allocation. Risk tolerance and investment horizon can change quite a bit in one year. December is a great time to take a look at your portfolio and life situation to see if your target asset allocation needs to be updated. It is important to figure out a target asset allocation that you are comfortable with and stick with it through thick and thin. Finding a good financial advisor will also be helpful.
Rebalance. The stock market ran up tremendously in 2013. If you haven't checked your asset allocation lately, it probably deviated significantly from your target. The end of the year is a good time to rebalance your portfolio and bring your asset allocation back on target. Rebalancing will help you stick to your asset allocation target regardless of what the stock market does.
Sell some losers. Now is also a good time to sell some stocks that haven't been performing well. You can use the losses to offset your gain or even a portion of your earned income. Be careful that you don't run afoul of the wash sale rule, though. If you buy the same stocks within 30 days (before or after the sale), then you won't be able to take the tax deduction.
Maximize contributions. If you're not on track to max out your 401(k) contribution this year, December is generally your last chance to increase it. Don't forget about the Roth IRA as well. The last day to contribute to this year's Roth IRA is April 15, 2014, but I think it's better to get it out of the way this year and start 2014 with a clean slate.
The maximum contribution amount for 401(k)s and IRAs will be unchanged for 2014. If you haven't been able to take full advantage of your 401(k) and Roth IRA, then give your retirement funds a hand by raising your contribution next year.
Required minimum distributions. This one is only for people over age 70 1/2. Don't forget to take the required minimum distribution (RMD) from your IRA or 401(k) before the end of the year. The penalty for forgetting to take a RMD is quite expensive: a 50 percent tax on the amount not taken.
Enjoy the holidays. December is a great time of year to wrap up your finances. These five checkups shouldn't take too much time and they will be helpful in the long run. Let's get them out of the way so we can all enjoy the holiday season with family and friends.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.
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