end of year financial checklist

2018 End of Year Financial Checklist

This article will discuss 2018 year-end financial planning techniques that can be utilized before ringing in the new year. Taking the time to cross them off your to-do list will ensure you start 2019 off on the right foot! I hope you find my end-of-year financial checklist helpful!

1. Tax-Loss Harvest

Tax-loss harvesting can and should be done throughout the course of the year for maximum tax efficiency. However, year-end is a great time to review your portfolio and determine if you have any losses to “harvest”.

Tax-loss harvesting is a fancy way of explaining how an investor will sell securities that have losses in order to “capture” that loss for tax benefits. While it would be nice to never have losses in our portfolios, it’s a natural part of investing. Especially in a well-diversified portfolio, particular asset classes will perform well in one year, and others not so well.

If you capture losses, you can use those losses to offset capital gains, and if there are leftover losses, up to $3,000 in ordinary income. The benefit of this, is you’re reducing the overall tax liability that you would have otherwise had to pay on realized capital gains.

Lastly, if you wish to buy back the security that you secured a loss on, ensure that you don’t do so within 30 days before or after the sale. Doing so would initiate the “wash-sale rule”, which wouldn’t allow you to offset capital gains with the losses of the security.

2. Load 401(k) Contributions

Consider increasing your contribution amount before year-end or maxing out your 401(k). If you don’t need the extra cash and have all your shopping taken care of, it’s always beneficial to your future self to stash away more cash for long-term investment.

Or, if you’re expecting a pay increase into the new year, be sure to also increase your savings/investments. For example, if you receive a 3% pay increase, increase your 401(k) contributions by at least 1%. This will ensure you don’t succumb to the “lifestyle creep”, where you’re increasing spending without also increasing savings and investments.

3. Spend FSA Dollars

If you have an FSA (flexible spending account) be sure to spend the money. If you need to schedule a dental appointment, need new glasses, or have prescription medications you can use the funds for, do so before year-end. FSA’s are a use-it-or-lose-it account for medical expenses and you don’t want the money just going to waste. You may have a grace period to use the funds into the new year or a small carryover amount, but be sure to check with your specific plan.

4. Roth IRA Conversions

If your income is too high, you may be unable to contribute to a Roth IRA. Fortunately, you do have the option of converting pre-tax IRA funds to post-tax Roth funds.

The process of doing so is known as a Roth IRA conversion. There are a few things to consider prior to initiating a Roth conversion. 1) You’ll be taxed on the converted amount. Because IRA funds are pre-tax contributions, when you convert to a Roth IRA, you’re initiating a taxable event. Therefore increasing your tax liability for the year. 2) Once the conversion takes place, it’s set in stone. Prior to 2018, conversions could retroactively be undone, therefore tax planning wasn’t as imperative. However, starting in 2018, conversions cannot be undone and therefore investors MUST be sure they want to initiate the conversion prior to doing so.

You may ask, why would I want to increase my tax liability? Having money in an after-tax account gives you more flexibility in retirement, especially if you believe you’ll be in a higher income tax bracket down the road. You’re essentially “betting” you’ll be in a lower income tax bracket today and would rather pay taxes now than you will be in the future where you’ll potentially pay more in taxes. Consider consulting with a tax adviser before making any decisions around a Roth IRA conversion.

5. Charitable Contributions

If you donate to charity or would like to consider doing so in the near future, there are also important tax benefits to consider.

One such tool is a donor-advised fund. Donors are able to lock in charitable donations for the year without having to determine which charity to actually donate to. The funds allow the individual to invest the donations as well and make grants in the future. You can donate either cash or securities to fund and receive a tax benefit. One strategy to consider for charitably inclined people is to donate highly appreciated securities. That way you’re meeting your charitable goal, ridding yourself of a highly appreciated security (and therefore exposed to a lot of capital gains taxes), and reducing your current year tax liability if you itemize your taxes.

Another advantage of donor-advised funds is they’re a great way for families to start learning about giving. Together, the family could participate in contributions and in making decisions about which charities to grant money to.

Companies that offer donor-advised funds often have different minimums, investment options, donor services, and fees, so be sure to do your research and find one that fits you and/or your family best.

6. Set your Goals for 2019

Goal setting is a powerful practice. Taking the time to focus, think, articulate, and ultimately write down goals is a proven strategy to help you achieve them. Whether it’s financial, health-oriented, or relationship-oriented, setting your goals into the new year will set you up for a successful 2019!

If one of your goals for 2019 is to get a holistic, thorough, financial plan in place, schedule a free consultation today!

Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED PRIVATE WEALTH ADVISOR®, CERTIFIED EXIT PLANNING ADVISOR®, BEHAVIORAL FINANCIAL ADVISOR™ designee and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!

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