Tax-Related Investment Considerations Before Year's End

Be sure to look at your financial situation before the year ends, as some tax-advantage strategies end at midnight on Dec 31.



Before you pop the cork on the new year, there are a few things you should review to optimize your financial situation. Although most tax strategies only need to be acted upon before next April’s tax filing deadline, there are several important considerations that require attention before year’s end.

  1. Maximize funding to Employer-Sponsored Contribution Plans (401k, 403b, etc). While each employer-sponsored contribution plan may have slight differences, full-time employees can traditionally contribute up to $18,500 (in 2018) to their company retirement plan. Workers aged 50+ can contribute an additional $6,000 each year for a total annual contribution of $24,500. At a minimum, be sure you fund up to your company’s matching level or you’re essentially leaving money on the table. If you’ve contributed to these tax-friendly plans throughout the year, you may still want to see if you have assets available to contribute up to the annual maximum amount. Remember to also contribute towards other tax-advantage options your employer provides like an HSA and/or FSA, depending on your personal needs.
  2. Confirm you are contributing appropriately to your Employer-Sponsored Contribution Plans.
    Many employer-sponsored retirement plans allow contributions to be made in either a Roth or Traditional contribution manner. The major difference in these two options is how they are taxed. With Roth contributions, you contribute money post-tax (your income is taxed on your paycheck and then it’s contributed to the IRA), but when you take money out of your retirement plan, you get that money tax- On the other hand, if you make Traditional contributions, you’ll contribute pre-tax money, but when you tap into it after retirement, the money you withdraw is taxed. Most employer-sponsored plan contributions are made as Traditional (pre-tax); however, for most plan participants, it would be better for long-term finances to be contributed to the Roth. Remember, each person’s circumstances are different, so before you switch the way you contribute, consider checking with a financial advisor.
  3. Reduce tax consequences through direct charitable gifting.
    If you’re 70 1/2 years old or older, you’re obligated to take required minimum distributions (RMDs) from your IRA accounts. If you were born in 1948 or earlier, congress recently made permanent the ability for you to donate to your favorite charity via direct contributions to a charity of your choice. If you fit the parameters above and make sizable contributions to a qualified charity, this is unequivocally the best option at your disposal. There are specific requirements for how these gifted assets need to be withdrawn from your retirement accounts, so please contact your retirement advisor to walk you through the process.
  4. Consider bunching multiple years of charitable gifting. With recent changes to the tax-code, the standard deduction for taxpayers has doubled. This means most people won’t itemize deductions, so you may not get an additional tax deduction for charitable contributions. What you can do, however, is consider options for bunching charitable gifting amounts together – in other words, pool multiple years of charitable contributions into one particular year, which may help you exceed the standard deduction. While tax considerations should never be the primary force behind any charitable gifting, this bunching strategy can create greater tax efficiency.
  5. Gift to loved ones. An annual gift from you to any individual can be as much as $15,000 in 2018 without triggering any tax consequences for either you or the recipient. If you're in a financial position to help your beneficiaries financially, this may be a tax-efficient way to help out instead of an eventual one-time lump sum gift in the future when it may not be as helpful.
  6. Fund 529 College Education Savings Accounts. Each state has its own laws in place, but most provide excellent opportunities via 529 College Education Savings Accounts to allow anyone to contribute -- parents, grandparents, or someone else. This amount can be deducted from state income taxes if applicable. Most importantly, these contributions then grow tax-free with no future capital gains consequences as long as the assets are used for qualified education expenses (tuition, books, etc.). Recent tax law changes also now allow $10,000 per year to be used for education expenses which are incurred before college. If you have education-related expenses in the immediacy and live within a state that has state income tax-related deductions, you are failing to optimize your education-related costs if this strategy is not implemented.
  7. Make pre-payment and additional payment plans. Again, if you have a little extra money lying around at the end of the year, use it to pre-pay or make additional payments where possible. Make an extra payment on your mortgage, or, if you make estimated quarterly tax payments, get these payments in before the end of the calendar year to receive extra tax-related benefits.

The above list is not all-encompassing and should be discussed with a tax professional. For more investment-related advice regarding your financial situation, please contact your financial advisor.

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This article was originally written by 401k Advisors Intermountain and has been posted with permission.

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