If you’ve experienced a childhood on the planet Earth, you know that Santa has a list that helps him keep track of which children have been good (or bad) during the past year. Not only does Santa make a list, but even in the midst of presiding over North Pole operations during their busiest time of the year, he doesn’t just check the list once. No, he checks it twice.
For many of us, December is no different. Ok, well it’s a lot different—we don’t carry the burden of delivering toys to millions of children…or having to single-handedly consume all the cookies and milk left next to each fireplace. But, December is a busy time for just about everyone. And, even in the midst of the Christmas chaos, there’s an important list of year-end money maneuvers that, if applicable, could have a big impact on your finances.
1. Roth IRA Conversions
Due to IRS income limits, you may not be able to contribute directly to a Roth IRA, and your contributions to a Traditional IRA may be non-deductible from your income. However, there is no IRS income limit for a Roth Conversion.
A Roth Conversion occurs when funds in a Traditional IRA (where gains are tax-deferred until withdrawn) are converted to a Roth IRA (where gains are withdrawn tax-free). By doing this, a taxpayer can pay taxes on the Traditional IRA funds now and then move those funds to a Roth IRA.*
Why would you want to do this? Well, by converting to a Roth IRA and paying the applicable tax now, you may owe no future income tax on those funds (including any gains).** For example, if your income decreased in 2016 due to a job change, you may consider converting some of your Traditional IRA funds to a Roth IRA because you may be in a lower tax bracket (i.e. you may pay less taxes now than you might in future years). The deadline for conversions is December 31st.
There are some important caveats to this option, especially if you already have current assets in an IRA, so it’s best to speak with a financial advisor and tax advisor before you get too far down the road.
2. Max-Out Qualified Plan Contributions
If you have not contributed the maximum to an available 401(k) or 403(b), talk to your payroll department about increasing your contribution before December 31st. The maximum contribution for 2016 is $18,000. If you’re over the age of 50, you can also make an additional catch-up contribution of $6,000.
At the very least, it’s always a good idea to contribute enough to receive the full employer match. Don’t forget, you can also make IRA contributions in addition to your company retirement plan contributions.
3. Review Your Charitable Contributions
If you plan to itemize your deductions from taxable income, the deadline to donate to a qualified charity is December 31st. And, you have right up until that deadline, as donations paid by check are considered delivered on the day you mail them. When it comes to charitable giving, you may deduct an amount up to 50 percent of your adjusted gross income, however some limitations do apply. In addition to monetary donations, you might also consider donating highly-appreciated assets—stocks, bonds, mutual funds, etc.—to mitigate capital gains taxes. An easy way to do this is to set up a donor-advised fund, which acts like a charitable savings account.
4. Required Minimum Distributions (RMDs)
If you’ve reached the age of 70 ½, take RMDs on retirement accounts by December 31st. The minimum distribution rules apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, profit-sharing plans and other defined contribution plans.
Not every recommendation may necessarily apply to your financial position; but, just as it’s important to start each year with a renewed financial discipline, it’s equally important to finish strong by positioning yourself for future success.
About the Author:
Brian Remson is a CERTIFIED FINANCIAL PLANNER™ practitioner at Ferguson-Davis Wealth Management Group in Waco, Texas. A 2011 graduate of Baylor University, Brian currently serves as the past-president of the Waco Young Professionals and also serves as the Treasurer of Twin Rivers Homeowners Association. He enjoys coaching competitive swimming and spending time with his wife and their two children. You can connect with him on Twitter (@BrianRemson), his monthly blog post, or via email. You can learn more about Ferguson-Davis and their services by reading their Firm Profile.
*If you’ve already paid tax on your Traditional IRA non-deductible contribution, then a Roth Conversion may be a non-taxable event.
**Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a Traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.