10 Money Moves To Make Before The End Of The Year
With only a few weeks left of 2019, it’s time to get your finances in order. Throughout the year, there are ways to maximize your financial health. But as the year draws to a close, some might be left trying to catch up.
Here are ten money moves to make before the end of the year.
1. Maximize Your Retirement Contributions
If you ask any financial professional, nearly all of them will agree: Maxing out your retirement contributions is a smart money move that will set you up for success down the road.
Why is maxing out your retirement contributions important? Since contributions to a 401(k) are made with before-tax income, your monthly salary actually decreases each pay period—which means you’ll end up paying less in federal and state taxes. You’re paying less to the government each month and more to yourself (even though you can’t touch those funds until you’re 59 ½)—and you’re giving those funds time to compound and grow. Roth IRA contributions don’t reduce your taxable income, but regardless, having as much money as possible for life in retirement is one of the most important investments you’ll ever make.
Here’s how much you can contribute each year to the different tax-incentive retirement accounts:
- 401(k)s: Individuals can contribute up to $19,000 in 2019. This includes 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan.
- Individual Retirement Account (IRA): Individuals can contribute up to $6,000 in 2019.
If you’re aged 50 and older, the maximum contributions are bumped up a bit, known as “catch-up contributions.” Individuals who qualify can contribute an additional $6,000 to workplace plans and an additional $1,000 to IRAs.
Maxing out your retirement plans is a smart money move, but other financial goals should be taken into consideration beforehand. Make sure you have a healthy emergency fund and no high interest debt before funneling the maximum amount of money into your retirement accounts.
If you make a moderate to low income and can’t afford going without a few hundred dollars in your paycheck each month, at least make sure you’re contributing enough to take advantage of your company’s employer match, if it’s offered. Try and increase your contributions by one percent each year, if possible, to maximize your savings and overall wealth.
2. Check On Your Retirement Contributions for Next Year
Now that you’re set with your contributions for 2019, it’s time to start thinking about how to maximize them in 2020.
Retirement contributions in 2020 have increased. The maximum individuals can contribute to 401(k)s next year is $19,500. Those who are 50 or older can contribute an additional $6,500, totaling to $26,000. Contribution limits to IRAs will remain the same.
3. Max Out Your HSA
Health savings accounts enable individuals to put money aside for qualifying health expenses, tax free, for individuals who have a high deductible health plan. Using the money is also tax free. The main advantage of these accounts is the tax savings. Contributions are tax-deductible and distributions for qualified health expenses are tax-free.
For 2019, the maximum HSA contributions for individuals is $3,500 and $7,000 for family coverage. Individuals aged 55 and older can contribute an additional $1,000 to their HSAs this year.
Since HSAs roll over from year to year, one smart way to keep your taxable income low while beefing up the account is to take any year-end bonuses and funnel them directly into the HSA. Nora Yousif, CFP, vice president at RBC Wealth Management in Greater Boston, recommends individuals contact their employer to see if bonuses can be deposited directly into the account, rather than added to a paycheck and taxed.
Just like retirement plans, the limits for HSAs will increase in 2020. If you plan on contributing next year, you’ll want to adjust your total contributions to $3,350 for individual coverage or $7,100 for family coverage. Those who are 55 or older will still be able to stash away an additional $1,000.
4. Review Your Tax Allowances
Do you have any idea if your tax allowances are right?
The Tax Cuts and Job Act (TCJA) of 2017 changed the withholding amounts drastically for most consumers. The IRS says the changes affect a wide range of consumers, including parents, those who work two or more jobs, those with high incomes and those who completed itemized deductions on their 2017 tax returns.
In 2018, the Government Accountability Office (GAO) found that more than one-fifth of taxpayers, or about 30 million people, did not withhold enough taxes from their pay. Once tax time rolled around, this led to a flurry of confusion and frustration from consumers who didn’t get their usual cushy tax return. The problem was so stressful for individuals that the IRS waived its penalty for underpaying. To prevent more frustration in the future, take a close look at your tax allowances now—there’s no guarantee the IRS will be as forgiving this year.
In a perfect world, the right withholding would mean individuals would break even come tax time. They would neither owe money to the government or receive a tax refund. Those who value tax refunds should keep in mind that it means they’ve been giving Uncle Sam an interest-free loan throughout the year. Adjusting their withholding will mean more money in their pocket each month.
To check up on your tax withholding, use the IRS tax withholding estimator here.
5. Use Your FSA Funds
Flexible spending accounts are another way to pay for medical expenses with before tax money. Compare to HSAs, however, FSAs are much more restrictive and can only be used by individuals who have employers offering the accounts as a benefit. Money is contributed into these accounts tax-free and can be used tax-free. But they come with a strict “use it or lose it” rule that you’ll want to take seriously.
In 2019, the maximum amount individuals can contribute to an FSA is $2,700. Those funds typically follow a “use it or lose it” rule where only $500 can be rolled over into the next year (depending on if your employer allows rollovers.) This means if you contributed the maximum amount to your FSA, but only spent $1,000, you’ll be forfeiting $1,200.
If you still have money in your FSA to burn, keep in mind that those funds can generally be used for things like copays, deductibles, dental care and medical equipment like bandaids or eyeglasses if you don’t have an HSA. You can also cover the payment of these items and services for your dependents or spouse with funds from your FSA. If you have an HSA, then your FSA can only be used for vision and dental services.
6. Take Your RMDs
After individuals reach 70 ½, they must take required minimum distributions (RMDs) each year from certain retirement accounts. This is true of traditional IRAs, SIMPLE IRAs, SEP IRAs and retirement plan accounts like 401(k)s and 403(b)s. This is not applicable to ROTH IRAs.
RMDs are treated as taxable income. While that can mean a higher tax bill, not taking RMDs can have even more costly consequences. Those who don’t take their required distributions will be subject to a 50% excise tax on the amount not distributed.
If you’re over the age of 70 ½ and want to benefit from charitable giving, you can double dip. Individuals have the option to donate to charity directly from their IRAs and have it count toward their required minimum distribution. The money must be directly rolled over from the retirement account to the charity in order for it to count toward your RMD and remain tax free. This method is known as a qualified charitable distribution (QCD) and keeps your taxable income lower than if you were to take the RMD yourself. Individuals can donate up to $100,000 of traditional and Roth IRA distributions directly to qualified charities.
7. Bunch Your Charitable Giving
The TCJA nearly doubled the standard deduction amount, which means fewer people now benefit from itemizing tax deductions. In doing so, the tax advantages of charitable giving have lessened for many.
However, there is a strategy to help moderate-income individuals give to charity and still reap the tax benefits: Bunching.
Instead of making moderate annual contributions to charities each year, it can be more effective tax-wise to give them all at once.
For example, instead of making $3,000 in contributions each year, an individual can make one lump-sum payment of $15,000 to tide them over for the next five years. By combining it with other itemized deductions like real estate taxes and medical expenses, individuals will come out well above the standard deduction amount of $12,200, which will help increase their tax savings.
8. Use Your Annual Gift Exclusion
An annual gift exclusion is a great way to transfer wealth without having to pay taxes on the money. The 2019 annual exclusion is $15,000—meaning an individual can give $15,000 per year, to as many people as they want, without impacting their lifetime estate and gift exclusion (currently $11.40 million and rising to $11.58 million in 2020).
Using this annual gift exemption will reduce the value of a taxpayer’s gross estate over time. This will help the individual have a lower amount subject to estate tax—meaning more of their wealth stays with them, rather than being eaten up by taxes.
If you have kids or grandkids, consider contributing to a 529 college saving plan—it will count toward your annual gift exemption. If you and your spouse choose to donate to 529 plans, you can contribute $15,000 each—or $30,000 total, per child. Keep in mind there are maximum aggregate limits for these plans, meaning they cannot exceed the expected cost of the beneficiary’s education expenses.
These accounts can be used to pay for tuition and fees, books and supplies and up to $10,000 per year in tuition for K-12 schools, tax free, which makes them a great asset when it comes to planning for educational expenses. Any non-qualified distributions will be subject to taxes.
9. Maximize Your Savings
If you’re still holding your emergency fund in a traditional savings account, it’s time to switch—you’re missing out on interest earnings.
The current average national rate on savings account is 0.09%. That means for every $1,000 you have deposited, you’ll earn $0.90 in a year (that’s less than a dollar!).
If you want easy access to your money that’s growing with a high yield, consider a cash management account. These accounts have high interest rates (as much as 2% APY or more) and some come with the option to have a debit card tied to the account, giving account holders seamless access to their funds.
10. Prep Now for the Next Economic Downturn
The economy it at its peak. Wages are high, market returns are high and unemployment is low.
Yousif says individuals should start making moves now to better position themselves for a less-ideal economic cycle in the near future—because one is certainly coming.
“Yes, things have been going really well, but everything is a cycle,” Yousif says. “There are signs that a downturn is coming sooner rather than later. Now is a great time to prepare.”
To brace yourself for a recession, Yousif recommends analyzing your risk exposure and time horizon of your investments. The amount of necessary risk usually depends on an individual’s age. Someone nearing retirement in the next five years can’t tolerate the same amount of risk as a 25-year-old who has plenty of time—and more economic cycles—to weather between now and when they’ll need their retirement funds.
“Put more money into safety and get into a protective posture from the market,” Yousif says.
Source: Kelly Anne Smith of Forbes.com