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Your Year-End Financial Checklist

As 2017 draws to a close, it is time to consider year-end strategies and begin organizing your finances for the New Year. To help you get started, we've put together a list of key planning items to consider.

Financial Planning Checklist

 Consider charitable giving

If you choose to give at year’s end, keep track of your donations to charities in all forms, and consider strategies that may qualify you for larger tax deductions. If you itemize your taxes, donating to charities from a taxable account can reduce your tax bill. This is particularly true if you can contribute appreciated securities you have held in your account for at least a year. Doing so not only entitles you to a tax deduction, but also allows you to help eliminate the capital gains tax and effectively rebalance your portfolio without significant tax recognition. To donate low basis stock, most charities have a deadline of December 21-26 to ensure the transaction is completed by year’s end.

As a reminder, for all non-cash contributions over $250, you'll need a receipt that includes a description of the item and other details. Donations for the current tax year must be made by December 31. Also of note, if you are over age 70 ½ and taking Required Minimum Distributions (RMDs), you can make a Qualified Charitable Donation (QCD) directly from your IRA using your RMD. A QCD counts toward your RMD for the year—up to $100,000—and isn't included in your taxable income.

Harvest your losses to lower your tax bill

Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss and replacing it with a similar though not identical investment. In doing so, an investor maintains the risk and return characteristics targeted in the portfolio but still generates losses that can be used to reduce current taxes. The tax savings that is generated can then be reinvested and will compound over time. Because this is such a powerful strategy, Gap Financial applies this throughout the year.  However, in bull markets as we are in now, it can be more challenging to find losses.

Spend your FSA dollars

If you have a flexible spending account for health care expenses (usually referred to as a health flexible spending account or FSA) and you haven’t used all the money in it, those funds may be forfeited if you don't use them by year-end. If you don’t make use of it by year-end, most plan sponsors have the option to allow employees participating in health FSAs to carry over, instead of forfeiting, up to $500 of unused amounts remaining at year-end. But you should check with your plan sponsor to see if this option is available to you. A key difference between these types of accounts and a Health Savings Account (HSA) is that the latter allows you to roll over all your funds year-to-year (the HSA is also usually tied to High Deductible Healthcare Plans, or HDHCs). But no matter what, you should understand your outstanding balance and put it towards something before the year is up. Some providers even allow purchasing a gift card or store credit for later use. It's also a good time to calculate your FSA allotment for next year, based on your current excess or deficit.

Make a strategy for stock options

If you hold stock options, now is a good time to make a strategy for managing current and future income. Consider the timing of a nonqualified stock option exercise. Would it make more sense to avoid accelerating income into the current tax year or to defer income to future years, considering your estimated tax picture? Unless you are worried about your employer’s stock price dropping precipitously before year-end, you should consider deferring your exercise until after December 31st. Waiting until the new year means you’ll defer the tax you owe from exercising your options until the 2018 tax year, which you may not have to pay until April 2019.

Manage your marginal tax rate

 To help ensure that your estate plan stays in tune with your goals and needs, you should review and update it on an ongoing basis to account for any life changes or other circumstances. If you haven't done so during 2017, take time to:

  • Check trust funding
  • Update beneficiary designations
  • Review trustee and agent appointments
  • Review provisions of powers of attorney and health care directives
  • Ensure that you fully understand all your documents

Review your insurance policies

Make sure you and your loved ones are well protected if something happens to you. Now is an appropriate time to consider whether any major life changes, like the birth of a child in the past year, might mean the need for insurance. If you do have enough coverage, it’s still a good time to review the different types of coverage you have and make sure beneficiary designations are up-to-date. Term life insurance makes more sense for most young families than whole or universal life insurance. And while it might seem like a bad time to do so, it is actually a good time of the year to gently review with parents or elders their own coverage. Long-term care coverage for older parents is an often-overlooked area.

Check your credit report

It's important to monitor your credit report regularly for suspicious activity that could indicate identity theft. Federal law requires that each of the nationwide credit reporting companies (Equifax, Experian, and TransUnion) provide you with a free copy of your report every 12 months, at your request. If you found yourself exposed to the Equifax breach earlier in the year, you can find what to do here: Equifax Data Breach: What to Do

Consider a 529 college savings plan account for your kids

If you have kids, the IRS has the ultimate gift for you this holiday season: the 529 college savings plan. When it comes to planning for your child’s college education costs, few things have the potential to prove as financially rewarding as enrolling early in a 529 and growing your savings tax free. If you already have a 529 plan in place, but want to make sure you are on track to meet your target, Gap Financial offers assistance to get you on track or confirm your strategy is adequate.

If you are fortunate enough to have a more substantial amount of money to contribute, super-funding a 529 offers significant benefits both in terms of objective savings results and behavioral finance perspectives. For example, instead of the $14,000 annual contribution limit, each parent can pre-fund up to five years’ worth of contributions, up to $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000 for each child and get even more value from compounding the larger contribution from the start.

Consider a 401(k) rollover or a Roth conversion

The tax-free benefits of a Roth IRA are well defined, but remember to consider the costs of conversion, the Medicare surtax, and gains on company stock in a 401(k). If you're interested in laying the groundwork for tax-efficient withdrawals in retirement, it's smart to have a mix of traditional and Roth accounts. That way you can withdraw monies from taxable and nontaxable accounts, to keep your taxable income in the lowest possible tax bracket. If most of your retirement savings have been contributed to pretax vehicles such as traditional 401(k)s, 403(b)s, or IRAs, your withdrawals will be taxed at ordinary income rates. If you have had some large capital losses this year, consider converting some traditional IRA or 401(k) money into a Roth IRA, where withdrawals in retirement are tax free. You'll pay income taxes now on the converted amount, but you'll pay lower taxes in retirement.

If you need guidance to determine if a Roth conversion strategy is right for you, Gap Financial has sophisticated tools that allow us to help you determine the amount and timing of conversion. If you have already converted assets from a Traditional to a Roth earlier in the year and the assets in the Roth have declined in value, you could wind up paying higher taxes than necessary if you leave things as is. Gap can help you “recharacterize” the conversion by transferring the converted amount (plus earnings or minus losses) from the Roth back to the Traditional IRA via a trustee-to-trustee transfer. You can later convert back to a Roth at a reduced amount and lower tax liability. 

If this is of interest to you, Gap will explore this in more detail along with contributing to a Back-Door Roth IRA for 2018 in a future blog post.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a fiduciary advisor, accountant, and/or legal counsel for advice for your specific situation.