Tax planning, progress checks, and asset protection should be part of your clients’ year-end financial checkup
October 31, 2016 — Financial housekeeping is kind of like regular housekeeping—probably not your favorite thing to do but you feel good when it is done.
Taking stock of your financial picture well before the end of the year allows you to make adjustments while you still have time to maximize the benefits of smart tax planning, investing, and retirement savings. Plus, you won’t get squeezed by end-of-the-year deadlines or overwhelmed by holiday activities.
Here are some important things to do—grouped into three categories: taxes, planning, and protection—to help make sure you are on track. Tip: Several of the tips below require logging in to Fidelity.com, so make sure you have your log in information handy and up-to-date.
Smart tax moves
Taking advantage of tax-saving opportunities may help you keep more of what you earn, for example, increasing contributions to tax-advantaged savings accounts.
Even if you contribute regularly to your traditional 401(k) or similar workplace retirement plan, see whether 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 2016—a potential $4,500 tax savings if you’re in the 25% tax bracket. And if you’re age 50 or older, you can contribute an extra $6,000, for a maximum contribution of $24,000.
If you contribute to a Roth 401(k), you won’t reduce your 2016 taxable income, but it’s still a good idea to see if you can contribute more and up to the max by December 31. Contributions are made after tax, with money that has already been taxed, but you generally don’t have to pay taxes when you withdraw from your account.1
For those without a 401(k) or retirement plan at work, you may be able to reduce your taxable income by contributing to a traditional IRA to save for retirement.2 You can contribute up to $5,500 if you are under age 50, and $6,500 if you are age 50 or older. You don’t need to have a job to contribute to an IRA, either. A nonworking spouse, as long as his or her spouse has taxable income up to the contribution limit, can contribute to an IRA. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to an IRA. Self-employed individuals can contribute up to $53,000 or 25% of eligible income, whichever is less, to a SEP-IRA.
If you have a health savings account (HSA), see if you are contributing the max: $3,350 for an individual and $6,750 for a family, plus an extra $1,000 if you are age 55 or older. An HSA has triple tax benefits. Your contributions are made with pretax dollars so you reduce your current taxable income, and withdrawals are federal-and state-tax free if used to pay for HSA-qualified medical and healthcare expenses.
- Learn more: Read Viewpoints: “The three A’s of successful saving.”
Donate to charity.
If you itemize deductions on your tax return, donating to a charity before the end of the year may help you lower your 2016 tax bill. But remember to get a receipt or have a canceled check for all contributions under $250. For non-cash contributions over $250, you’ll need a receipt that includes a description of the item and other details. If you’re looking for a simpler and more effective way to manage your charitable giving, you might consider a donor-advised fund, which offers additional tax planning and investing strategies.
- Learn more: Read Viewpoints: “Year-end strategies for charitable giving.”
Help reduce taxes on investment gains.
If you invest in stocks, bonds, or mutual funds in accounts other than an IRA or 401(k)—a non-retirement brokerage account for instance—you may be able to reduce taxes on any investment gains for distributions from mutual funds. Tax-loss harvesting might sound complicated, but the principle is fairly simple. Offset your realized taxable gains on your investments (capital gains) with realized losses (capital losses). That means selling stocks, bonds, and mutual funds that have lost value, to help reduce taxes on gains from winning investments. However, don’t undermine your long-term investing goals by selling an investment just for tax purposes. Tax-loss harvesting needs to be done by December 31.
- Tip: Check your year-to-date gains and losses for your Fidelity accounts (log-in required).”
Check your tax withholding.
Take a look at how much tax is being withheld from your paycheck, and determine whether it’s significantly more or less than necessary to meet your estimated tax liability for the year. Many people find that they’re withholding more than they need. While a big tax refund might seem like a windfall, it might be better to increase your take-home pay. You can adjust your withholding by submitting a new W-4 form to your employer.
- Tip: Use the IRS withholding calculator
Plan and Manage
A quick review of where you stand on short- and long-term goals can help ensure you’re stretching your current income and staying on track for the future.
Whether you’re saving for retirement, for buying a home, for paying for a child’s college education, or for another important goal, an annual status check will allow you to make adjustments. This year’s stock market swings may have changed your mix of stocks and bonds. Is your mix of investments (asset allocation) still in line with your goals? Are you on track with your goals? Do you need to save more/spend less? Have your circumstances changed? Did you experience (or anticipate) any life-events or family changes (e.g., job change, marital status, illness) that could have an impact on your financial situation?
- Tip: Monitor your progress with our Planning & Guidance Center (log-in required).
Keeping track of your investments and progress toward savings goals is easier when you have your money in one place. For example, people change jobs more than they did in the past, and often that results in having several 401(k)s or similar accounts. You could choose to transfer assets from old 401(k) plans into your new employer’s plan, if there is one, or you could consolidate your money in a rollover IRA, which may provide more investment options and flexibility. Be sure to consider all your available options, and the applicable fees and features of each, before moving your retirement savings.
- Learn more: Read Viewpoints: “Four reasons to consolidate accounts.”
Use up your flexible spending account balance.
If you have a flexible spending account (FSA) at work, find out if your employer offers a 2½-month grace period into the following year, to use the previous year’s money or a carryover of up to $500 to be used throughout the following year. Employers aren’t required to offer either option, in which case the “use it or lose it” rule still applies.
Protecting your assets can be as simple as keeping your beneficiaries up to date and staying on top of your credit report.
Life can come at you fast. Births, changes in marital status, and other life events make it necessary to stay on top of the beneficiaries named on your investment accounts. Out-of-date beneficiaries could cause your assets to be distributed in ways that you didn’t intend. While doing your annual financial review, take a few minutes to perform this important task.
- Tip: View or update beneficiaries on Fidelity accounts.
Document your wishes.
Estate planning isn’t just for the old or very rich. No matter your age, there are important things you can do. A basic plan includes a will, as well as instructions for what happens if you become incapacitated. Naming a health care proxy, establishing a “living will” regarding end-of-life medical care, and naming a power of attorney can help your loved ones understand your wishes. Talk to your family about your wishes, too. If you have aging parents, talk to them about their wishes as well.
- Learn more: Read Viewpoints: “Five steps to create an estate plan.”
- Tip: Store your important financial, legal, and personal documents with FidSafe.
Revisit your life insurance coverage.
For most families, life insurance is fundamental to financial security. In addition to protecting family members from a sudden loss of income, it may be a useful investment vehicle and estate planning tool, depending on your situation.
- Learn more: Read Viewpoints: “Four important questions to ask about life insurance.”
Check your credit report.
When it comes to your credit, what you don’t know can definitely hurt you. Being aware of what’s on your credit report is important whenever you’re considering a loan, or even renting an apartment. Equally important is checking your report for suspicious activity that could be an indicator of identity theft. Federal law requires each of the nationwide credit reporting companies—Equifax, Experian, and TransUnion—to provide you with a free copy of your credit report, at your request, once every 12 months.
- Tip: Get a free report from each of the three credit reporting companies here.
It’s worth it
Some of the things need to be addressed by December 31 and others are an important part of a year-end financial check-in. Most of them can be accomplished quickly, but the benefits can last a lifetime.
- Create or fine-tune a savings plan in our Planning & Guidance Center (login required).
- Open or contribute to a Fidelity IRA for 2016.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and are subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
1. A distribution from a Roth 401(k) is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death. A distribution from a Roth IRA is tax free and penalty free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death
2. For a traditional IRA, full deductibility of a contribution is available to active participants whose 2016 modified adjusted gross income (MAGI) is $98,000 or less (joint) or $61,000 or less (single); partial deductibility for MAGI up to $118,000 (joint) or $71,000 (single). In addition, full deductibility of a 2016 contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan, whose MAGI is less than $184,000 for 2016; partial deductibility for MAGI up to $194,000.