Ten vital tax, planning, and financial housekeeping things to do by year-endNew research from Fidelity Viewpoints. Visit fidelity.com
Surely, your clients want to feel on top of things and in control of their money. So, they should take the time to give those finances a year-end checkup.
Doing this before year-end gives them enough time to take steps to save on 2017 taxes and set up investments for success in 2018—without putting a damper on holiday cheer.
Sure, there are important financial housekeeping tasks that clients can tackle at any time of the year (see Year-round financial to-dos), like checking their credit reports or repricing their car insurance. But December 31 only comes once a year, and there are many key financial deadlines to meet before then.
Whether they’re currently working and saving for retirement, approaching retirement, or embarking on new post-retirement adventures, here are some core tax, planning, and financial housekeeping things to do by year-end.
1. Maximize contributions to tax-advantaged retirement savings accounts
See if you can boost your tax-saving next year in your 401(k), IRA, Roth IRA, and/or HSA.
Even if you contribute regularly to your traditional 401(k) or similar workplace retirement plan, see if you can contribute more and up to the max by December 31. You may be able to reduce your earned income by $18,000, the maximum you can contribute to a 401(k) for 2017—a potential $4,500 tax savings if you’re in the 25% tax bracket. If you’re age 50 or older, you can contribute an extra $6,000, for a maximum contribution of $24,000.1
And you won’t pay taxes on any money—or the money it earns—until you withdraw it.
If you contribute to a Roth 401(k), you won’t get a tax break this year, but your money can grow tax free and generally be withdrawn tax free in retirement.2 Either way, the more you contribute now, the better odds you have of reaching your goals.
You may be able to save for retirement and reduce your taxable income by contributing to a traditional IRA this year. In 2018, you can contribute up to $5,500 if you are under 50, and $6,500 if you are 50 or older. You don’t need to have a job to contribute to an IRA either. A nonworking spouse can contribute to an IRA up to the contribution limit, as long as his or her spouse has as much or more in taxable income. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to an IRA.
Self-employed individuals have even more options. Are you freelancing, or running your own business? With a SEP IRA, you can contribute up to $54,000 or 25% of your eligible income, whichever is less, before taxes. Like a traditional 401(k), the money can grow tax deferred, but is taxed as ordinary income at withdrawal.
HSAs can also be savings vehicles
If you have a health savings account (HSA) associated with a high-deductible health plan, see if you are contributing the max in 2018: $3,450 for an individual and $6,900 for a family, plus an extra $1,000 if you are age 55 or older. An HSA has triple tax benefits:3 Your contributions are made with pretax dollars, so you reduce your current taxable income; earnings are free of federal tax; and so are withdrawals, if they’re used to pay for qualified medical expenses now or in retirement. Plus, this is not a use-it-or-lose-it account; what you don’t spend can be invested, and will grow over time to help pay for future expenses.
Tip: If you are 50 or older, you could be saving more in tax-advantaged accounts, which can really add up. Read Viewpoints on Fidelity.com: 50 or older? 4 ways to catch up your savings.
2. Reduce taxes on investment gains
Tax-loss harvesting can help offset capital gains with losses from stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
If you invest in stocks, bonds, mutual funds, or ETFs in accounts other than tax-deferred or tax-exempt accounts such as an IRA, 401(k), or HSA—a taxable brokerage account, for instance—you may be able to reduce taxes on investment gains through tax-loss harvesting.
The idea is simple: Offset realized capital gains with realized capital losses. That means selling stocks, bonds, and funds that have lost value—and you don’t believe in anymore—to help reduce taxes on sales of winning investments.
Offset capital gains
In general, first consider ways to offset short-term gains on investments held for one year or less (which are taxed at the higher “ordinary income” rates) with short-term losses. Then apply short-term capital losses to long-term capital gains (held for more than one year and taxed at lower rates). Finally, match long-term losses with long-term gains. Working ahead of time with your accountant and financial advisor can help you identify the best candidates for this strategy before the December 31 deadline.
One warning: A “wash sale rule” is triggered when an investment is sold at a loss and the same or “substantially identical” investment is purchased either 30 calendar days before or after the sale. If a transaction is deemed a wash sale, any tax savings from tax-loss harvesting are recaptured.
No capital gains this year? You can use realized capital losses to offset up to $3,000 a year in ordinary income, which is taxed at the same rate as short-term capital gains and nonqualified dividends. If you still have unused capital losses, you can carry them forward for use in future years until you use them all.
Tip: For more details on tax-loss harvesting, read Viewpoints on Fidelity.com: 5 steps to help manage taxes on investment gains.
3. Evaluate your progress toward your savings goals
Year-end is a great time to see if your investments are still in line to help you reach your retirement, college, and personal savings goals.
Whatever you’re saving for—retirement, buying a home, paying for a child’s college education, or another important goal—an annual status check will help you identify adjustments you can make to stay on track.
What will 2018 bring?
Have your circumstances changed? Did you experience (or do you anticipate) any life events or family changes (e.g., job change, marital status, move, illness) that could have an impact on your financial situation? Do you expect to fund any major purchases next year? Shifts in your lifestyle or goals may require shifts in your financial plan.
Market changes may also mean you need to make adjustments. Did this year’s stock market rise leave you overly exposed to stocks? Did the pullback in bonds in the wake of Fed rate hikes leave you underexposed to bonds? Or maybe you have more cash than you want or need. Year-end is a great time to make sure your mix of assets is still in line with your goals and tolerance for market swings.
Perhaps most importantly, you’ll want to check on your progress toward long-term goals, like retirement. For a quick high-level check on your retirement savings, answer a few easy questions and get your Fidelity Retirement ScoreSMOpens in a new window. For a more in-depth analysis, go to the Fidelity Planning & Guidance Center, or meet with a Fidelity investment professional who can help you develop a tax-smart retirement plan.
Tip: To learn more, read Viewpoints: The guide to diversification on Fidelity.com.
4. Think about a 401(k) rollover or a Roth conversion
The tax-free benefits of a Roth IRA are well defined, but remember to consider the costs of conversion, the Medicare surtax, and gains on company stock in a 401(k).
If you’re interested in laying the groundwork for tax-efficient withdrawals in retirement, it’s smart to have a mix of traditional and Roth accounts. That way you can withdraw monies from taxable and nontaxable accounts, to keep your taxable income in the lowest possible tax bracket.
If most of your retirement savings have been contributed to pretax vehicles such as traditional 401(k)s, 403(b)s, or IRAs, your withdrawals will be taxed at ordinary income rates. If you have had some large capital losses this year, consider converting some traditional IRA or 401(k) money into a Roth IRA, where withdrawals in retirement are tax free.4 You’ll pay income taxes now on the converted amount, but you’ll pay lower taxes in retirement.
Tip: For more on Roth conversions, read Viewpoints: Roth IRA conversion: Eight things to know on Fidelity.com. If you are considering a 401(k) rollover, read Viewpoints: What to do with an old 401(k).
5. Consider charitable giving
Keep track of your donations to charities in all forms—and consider strategies that may qualify you for larger tax deductions.
If you itemize your taxes, donating to charities from a taxable account can reduce your tax bill. This is particularly true if you can contribute appreciated securities you have held in your account for at least a year. Doing so not only entitles you to a tax deduction (assuming you qualify), but also allows you to help eliminate the capital gains tax.
For non-cash contributions over $250, you’ll need a receipt that includes a description of the item and other details. Donations for the current tax year must be made by December 31. If you charge your gift to a credit card before the end of the year, it will count for this year, even though you might not pay the credit card bill until 2018.
Tip: You might also consider a donor-advised fund at a public charity, such as a Giving Account® from Fidelity Charitable®Opens in a new window, which allows you to contribute and take a tax deduction the same year. You can then recommend grants immediately or over time to virtually any IRS-qualified public charity.
6. Talk to your family about your legacy goals
In addition to a will, there are other documents that everyone should consider, to help protect their assets and help the family deal with both health and financial matters.
Estate planning isn’t just for the old or very rich—or just for year-end. But the holiday season often brings families together. That’s an opportunity to share your hopes, dreams, and legacy plans with your loved ones.
Regardless of your age, there are important things you can do. A basic plan includes a will, as well as instructions for what happens if you can no longer make decisions for yourself. Naming a health care proxy, establishing a “living will” regarding end-of-life medical care, and naming a power of attorney can help clarify your wishes. Talk to your family about your hopes too. If you have aging parents, talk to them about their requests as well.
Is there someone you can trust? Financial and medical powers of attorney are two different legal documents, and it may make sense for them to be held by two different people. In the case of designating a financial power of attorney, consider someone you trust wholeheartedly. This person will be opening your mail, contacting your banks, transferring your assets, and paying your bills, if needed. Your medical power of attorney (which may be called your health care proxy, depending on where you live) will make medical decisions when you are incapable of doing so.
Tip: Use the Fidelity Estate Planner® to get started on the estate planning process today.
It’s worth it
Wherever you are along life’s journey, these to-dos are important parts of a year-end financial checkup. Most of them can be accomplished quickly, and the benefits can last a lifetime. So get started now, and use the year-end to make tax-smart moves that can help set you up for a prosperous new year.
Tomorrow: Year-End money moves for clients who are already retired