By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
This time of year involves a lot of wrapping. With holiday spending in full swing and tax season on its way, you’ll want to include a financial wrap-up, too.
Doing this before the end of the year gives you the chance to make any necessary changes for 2017 and set yourself up for 2018. Year-end tax moves may be even more vital this year with the Tax Cuts and Jobs Act pending. I’m going to review some important financial items to wrap up before year end.
If you are still employed, you may be able to make additional contributions to your 401(k) retirement account. The maximum amount you are allowed to contribute to a 401(k) for 2017 is $18,000. This warrants a potential $4,500 tax savings for someone in the 25 percent tax bracket. If you are over 50, you are allowed to contribute an additional $6,000, making the maximum contribution $24,000. You won’t pay any taxes on the money you contribute, or the money it earns until you withdraw it. Please note: a Roth 401(k) contribution won’t provide a tax break this year, but your money will grow tax-free and be withdrawn tax-free in retirement. Either way, you are making steps toward your retirement goal.
If you don’t have a 401(k) through your employer, you may be able to save for retirement by contributing to a traditional IRA this year. This year, you are able to contribute up to $5,500 if you are under age 50 and $6,500 if you are 50 or older. Another added benefit is that you don’t necessarily have to be employed to contribute to an IRA. You may contribute to an IRA if you have a working spouse who has taxable income greater than your contribution amount. Alimony is also considered income, so an unemployed person receiving alimony may still contribute.
Is it an HSA you have? Check in with your plan administrator or HR. HSA contributions are treated to triple tax benefits. Your contributions are made with pre-tax dollars which reduces your taxable income and the earnings and withdrawals are free of federal tax if they are used to pay for qualified medical expenses. A great feature of this contribution is that this account does not operate on a use it or lose it basis, so what you don’t spend can be invested and has the ability to grow to help pay for future medical expenses.
During the year, it is helpful to keep track of your donations to charities in all forms. If you itemize your taxes, donations to charities from a taxable account can reduce your tax burden. Something to consider is a gift of appreciated securities that you have held for at least one year. This may entitle you to a tax deduction if you qualify and also helps to alleviate capital gains tax.
A meaningful gift to consider is a college savings contribution for your children or grandchildren. The gift tax exclusion is $14,000 for 2017. Annual gifting can be an important part of tax and estate planning. You should consult with your accountant to explore gifting options and their benefits to you.
If you are retired, it is important to make sure you have satisfied your required minimum distribution. Once you reach age 70 1/2, you are required to begin taking an RMD from your tax-deferred retirement accounts. These distributions must be taken by Dec. 31 each year. Failure to take your RMD will result in a tax penalty of up to 50 percent of the amount not taken.
Of course, it is important to also review your complete financial picture whether you are retired or not. For employed individuals, this is a great time to evaluate and review your goals. Whether your goal is retirement, buying a home, sending a child to college, or any other financial goal, an annual review will help to identify changes that can be made to stay on track to meet your goal. For retired individuals, it is a good time to review your income plan and investment strategy. A discussion with your financial advisor is beneficial to be sure you are on the same page and you can make them aware of any changes to your situation for 2018.
