While finances are on our minds year-round and there are certain tasks to tackle throughout the year, many important financial deadlines arrive on December 31.
There’s no time like the present to review your assets. Regardless of where you are in your career, several money moves you make today can set you up for greater success.
The following suggestions are meant to be educational. Everyone’s financial situation is unique and any decisions should be tailored to your individual needs.
Evaluate Goals and Progress
You certainly don’t need to wait until the end of the year to do this, but it’s a good time to sit down and reevaluate your financial goals and where you are in reaching them.
There is a plethora of questions to ask yourself, all unique to your circumstances. Are you saving enough for retirement? Are you anticipating any major life changes (i.e. a new house, new job, relocation, marriage, etc.)? How well did you do this year financially? Did you save enough? Did you budget properly?
Figure out where you see your life going in the next few years and if you’re on the right track to get there. And if not, what adjustments can help you to catch up.
Add to Retirement Savings
Even if you contribute to your workplace retirement plan with every paycheck, you may want to contribute more in order to get to, or as close to, the max before Dec. 31. For 2019, the contribution limit for employees was raised from $18,500 to $19,000.
Putting as much money into your retirement serves two purposes. First, it means securing more money for your long-term future. Second, the increased funds taken out of your paycheck will reduce your taxable earned income, which could potentially save you thousands of dollars in taxes.
This works only if you have a regular 401(k), since contributions to that type of account are pre-tax. If you contribute to a Roth 401(k), you won’t get the tax break now, but you may still want to add to it so more money can grow and be withdrawn tax-free.
Consider Converting to Roth IRA
Depending on your short-term needs, converting any pretax retirement accounts to a Roth IRA may be a good idea. Roth funds get taxed now but not when they are withdrawn in retirement. Your current take-home pay will take a marginal hit. But if you can afford it, converting to a Roth IRA is the most tax-efficient in the long run.
Conversion is also a good idea if your taxable income is lower this year than usual, maybe from a gap of employment. If this is the case, you may be brought down to a lower tax rate. That means you’ll pay less taxes on any Roth IRA funds then you would have in a normal year.
The deadline for converting is Dec. 31.
Check for Better Interest Rates
According to the Federal Deposit Insurance Corporation, the national average interest rate on a savings account is just 0.09. However, some top-yielding savings accounts are much higher.
You may also want to consider a certificate of deposit in order to get an even higher return. A CD works similarly to a savings account in that you put money into a bank, and it grows with interest. However, as opposed to a savings account, you cannot take the money out until the term length is completed without acquiring a penalty. The tradeoff is that CDs offer higher interest rates.
Make Preventative Health Care Appointments
If your health insurance plan comes with a deductible that you’ve already surpassed this calendar year, it would be a good idea to pencil in any preventive medical tests and doctor visits.
This is especially true if you have a high deductible that you may not meet each year. If any of those procedures could be done now, you’ll save money by having insurance cover it this year, rather than paying for all or most of it next year when your deductible resets.
Spend Your Flexible Savings Account Money
Unless your company allows for a grace period or rollover option, you will need to use the money in your flexible savings account by Dec. 31 or you will lose it. You can use these dollars on countless items including contact lenses and solutions, first-aid kits, pregnancy tests and many more.
Consider Donating to Charity
Aside from the obvious philanthropic aspect, if you itemize your taxes, charitable giving can be beneficial by reducing your tax bill. All donations must be made by Dec. 31. If you pay a monetary gift by credit card before the end of the year, it will count for said year, even if you pay the bill after December 31.
Even if you haven’t experienced a major life change this year, it’s always a good idea to double check the beneficiaries listed on your retirement, savings and insurance accounts. Make sure the beneficiaries align with your estate documents. Many people assume their will overrides all other beneficiary designations. This is not the case. The person listed as the beneficiary on each account will get ownership, regardless of what your will says.
Take Your Required Minimum Distributions
Once you reach age 70½, you must withdraw your required minimum distributions each year. If you do not, the IRS can levy a 50% tax penalty on the amount not taken by the deadline. You do not need to wait until December of each year to take your RMD. Instead, calculate your RMD for the year, then decide how much you’d like to take at predetermined intervals throughout the year.
Review and Plan
Looking back on how you spent your money this year can help you make any changes for the following year and create a proper budget. Maybe you need better mechanisms, such as a separate savings account. Maybe you’re spending too much on your cellphone provider and you should look for another one with a lower cost. A good budgeting app can also help you create, and stick to, your budget.
Learn more about AAA Financial Services.