Our thoughts this time of year might be on shopping, college football and getting ready for the holidays. The end of the year is also a great time to take care of some key financial issues. Here are six year-end financial suggestions to consider.
1. Rebalance your portfolio.
The stock market has been on fire for much of this year, likely leaving your portfolio overly allocated to equities if you haven't rebalanced lately. While it might be tempting to let things run, these gains may result in a riskier portfolio than you intended.
This is a good time to rebalance back to your original allocations. Be smart about it. Use tax-deferred accounts such as IRAs and 401(k)s to your best advantage. Donating appreciated investments to charity can help. You can also use new money to shore up underallocated portions of your portfolio to reduce the need to sell winners.
2. Use appreciated investments for charitable donations.
If you would normally contribute to charity, consider donating appreciated stocks, mutual funds, ETFs, closed-end funds, etc. The benefit of doing this is that you receive credit for the market value of the donated securities and you avoid paying the capital gains tax on the appreciation. Keep in mind that this only works with investments held in a taxable account. This is also not a good strategy for investments in which you have an unrealized loss. In that case, it is better to sell the investment, realize the loss and donate the cash.
3. Maximize your 401(k) contribution for the year.
If you aren't on track to do so already, consider changing your salary deferral for your last paycheck of the year to allow you to increase the amount contributed to your 401(k) for 2013. The limits for 2013 are $17,500 and $23,000 if you are 50 or older at any point in the year. You will need to act quickly and contact your company's payroll department or perhaps the plan's website to change the deferral amount. Also remember to change the amount back in time for your first paycheck of 2014. This strategy can also work if you are due a year-end bonus payable prior to year-end.
4. Review your 401(k) options.
This is the time of the year when many companies update their 401(k) investment menus by adding new investment options and replacing some funds with new choices. This often coincides with the open enrollment process for employee benefits and is a good time for you to review any changes and update your investment choices if applicable.
5. Establish a solo 401(k).
If you are self-employed and haven't done so already, consider opening a solo 401(k) account. The solo 401(k) can be an excellent retirement planning vehicle for the self-employed. If you want to contribute for 2013, the account must be opened by Dec. 31. You then have until the date that you file your tax return, including extensions, to make your 2013 contributions and take advantage of any tax deductions.
6. Take required minimum distributions.
If you are 70 1/2 or older, you are required to take a minimum distribution from your IRAs and other retirement accounts. Beneficiaries of inherited IRAs may also be required to take a required minimum distrribution, or RMD, if the deceased individual was taking RMDs at the time of his or her death.
It is important to take your distribution by the end of the year. Otherwise, you will be faced with a stiff penalty of 50 percent of the amount you did not take on top of the income taxes normally due.
If you turned 70 1/2 this year, you can delay your first distribution to April 1 of next year, but that means that you will need to take two distributions next year with the corresponding tax liability. Also if you are still working and are not a 5 percent or greater owner of your company, you do not need to take a distribution from your 401(k) with that employer. You do, however, need to take the distribution on all remaining retirement accounts.
For those who take required minimum distributions and who are otherwise charitably inclined, you have the option of diverting some or all of your distribution via a provision called the qualified charitable distribution, or QCD. The advantage is that this portion of your RMD is not treated as taxable income and may have a favorable impact on the amount of Social Security that is subject to income taxes for 2014 and other potential benefits.
With all of the items mentioned above, I recommend that you consult a qualified tax or financial advisor to ensure you take full advantage and don't run afoul of any of the associated rules.
Year-end is about the holidays, family, friends, food and football. It is also a great time to execute some final year-end financial planning moves that can have a big payoff and in the case of RMDs, save you from some hefty penalties.
Roger Wohlner, CFP, is a fee-only financial advisor at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans.
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