The end of the year is a good time to reflect and wrap up loose ends, especially when it comes to your finances and investments. These steps may help as 2019 nears.
1. Update your goals
Your financial plans should align with your objectives, so consider whether your short-, medium- and long-term goals have changed. Are you expecting a job shift in the coming year or a new addition to your household? Could medical expenses be in your future? Any lifestyle change that could potentially affect your financial outlook should be reflected in your financial strategy.
2. Review your money management
It’s important to figure out where your money went (and how much you saved) throughout the year. What you discover may surprise you and may help you with your 2019 budget, so you can do a better job with your spending and saving activity. Consider this simple equation:
INCOME – EXPENSES = SAVINGS
Savings over time can grow wealth.
3. Consider income tax changes
The 2017 Tax Cuts and Jobs Act brought tax changes to many US citizens.
- Check your tax withholdings. The tax law could affect how much an employer is withholding on behalf of an employee. In some cases, too much or not enough may be withheld. Confirm that the amount of taxes being withheld from your paycheck is appropriate in light of the new tax law. If you need to adjust it, you may need to submit a new W-4 to your employer.
- Maximize retirement contributions. As of 2018, you can contribute a maximum of $18,500 to a 401(k) and $5,500 to a traditional or Roth IRA.1 If you’re 50 or older, those amounts go up to $24,500 and $6,500. You have until December 31 to maximize contributions to employer-sponsored plans. Traditional and Roth IRA contributions for a given calendar year can be made until that calendar year’s tax-filing date (April 15, 2019). If you’re getting a holiday bonus, consider putting all or some of that toward retirement, too. Your future self will thank you.
- Consider whether to take income before or after you’ve earned it. Deferring income into 2019 may be a good idea for taxpayers who expect to be in a lower tax bracket next year. Taking payment in 2018 for work you will do in 2019 may make sense for those who expect to be in a higher tax bracket next year. Employees may find it difficult to defer salary and wages into next year, but if self-employed, you might have more flexibility. Talk to your tax advisor about whether you should employ any strategies to defer income by delaying billing your clients until after the New Year, to push those earnings into the next year.
- Accelerate your deductions. The idea is to bunch your tax deductions into the year when they can be most effective in offsetting the taxes you owe. The change in the tax law means the standard deduction is considerably higher this year than it had been. That will mean some people who usually itemized may no longer benefit from doing that. But if you expect to itemize or are close to the threshold to itemize, you might consider bunching your medical expenses and/or charitable contributions in one year to get over that threshold to itemize.
Medical expenses are only deductible if they amount to a certain minimum percentage of your Adjusted Gross Income. For 2018, that minimum is 7.5 percent and in 2019 it increases to 10 percent. So it might be worth it to move any deductible medical expenses into 2018 if you are going to itemize. That means your medical bills will be less burdensome since you can deduct more of the costs when you file your taxes. If your income was especially high this year, talk to your tax advisor about ways you could add more deductions.
The holiday season is a perfect time to give to an organization that’s meaningful to you. You have until December 31 to make a charitable donation that will count toward your tax deductions for 2018. One alternative to giving cash is donating appreciated securities, which relieves you of the capital gains tax burden. Note: If you’ve owned the security for less than a year, your tax deduction is limited to what you paid for the stock, not its present-day value.2
Your tax advisor can guide you and give you information about when it makes sense to itemize and when the standard deduction will be most helpful.
4. Rebalance your portfolio
Talk to your advisor about selling equity or fixed income securities with significant losses. Realized losses can be offset against any realized gains, helping to minimize your tax impact. Once you’ve decided how to handle any losses you’re holding, take a broad view of your portfolio. Review overall performance for this year and talk to your advisor about what level of risk you will be comfortable with as you head into the new year. You’ll also want to ensure you are on track toward any long-term financial goals. Rebalancing won’t necessarily generate higher returns, but it can reduce your exposure to market risk.
5. Spend your Flexible Spending Account (FSA) funds
In many cases, unused money in your FSA will be lost at the end of the calendar year. That’s up to $2,650 a year per individual, as of 2018. An IRS change in 2013 let employers decide whether to allow employees to carry over up to $500 in the new year. Make sure you know your company’s policy before using (or losing) your FSA funds.
6. Take any required minimum distributions (RMDs), if you’re 70 ½ or older
Once you reach a certain age, you are typically required to start taking withdrawals from your traditional IRA, 401(k) and other defined contribution plans. You’re also required to pay taxes on the resulting distribution. The minimum distribution amount—which can be calculated with the help of your advisor and using worksheets from the IRS—must be taken by December 31 (or, if taking RMD for the first time, by April 1 of the year after you turn age 70 ½). If you neglect to do this in time, you may face up to a 50 percent tax penalty on the RMD amount you were supposed to withdraw.
Acting on these steps before the end of the year may help your long-term bottom line and, more importantly, give you peace of mind. SunTrust is here to help you on your journey to financial confidence and to support you as you prepare for the new year.