Ten Common Year End Considerations
Many employers will have open enrollment for 2 weeks before year end. Be sure to take some time to evaluate the costs and benefits of all of your options, as these elections can have a big impact throughout 2018. Remember that for most benefits you cannot opt-in after open enrollment, but you can opt-out.
MAXING OUT 401K & HSA
If able, make sure you are on track to maximize your contributions for your 401k and HSA. If you are not, you may only have a few more paychecks left to increase your rate of contributions. For 2017, the maximum contribution to your 401k is $18,000 and a $6,000 “catch-up” contribution if you are over age 50. Its $6,750 for a Family HSA with $1,000 catch-up.
For some, contributing to a Traditional or Roth IRA before filing your 2017 taxes due April 15, 2018 will provide both tax benefits and a boost to their retirement accounts. Maximum contributions are $5,500 and a $1,000 catch-up for those over age 50. There are lots of rules to follow based on amounts of earned income and your eligibility to participate in an employer sponsored 401k plan. For those who received severance this year, this income does count as “earned” income eligible for IRA contributions. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
It is likely that your equity (stock) investments performed well this year, especially in comparison to your fixed income (bond) investments. Therefore it might be time to complete your regular “rebalancing” of your investment account to get it back in line with your originally desired allocation to stocks and bonds. Not doing so could expose you to more risk than you are comfortable with in the future.
For those over the age of 70 ½ in 2017 you will need to make sure you take your Required Minimum Distribution from your 401k’s and Traditional IRA’s before year-end. If an account owner fails to complete their RMD, the amount not withdrawn is taxed at 50%. This is calculated using the appropriate IRS life expectancy table and your December 31st 2016 account balance. Using the Uniform Lifetime Table you would divide your 12/31/2016 account value by 27.4 to get your RMD for 2017. Your financial institution holding your account will calculate this for you, but it is up to your to make sure it is completed.
Depending on your desires and your taxable income this year, you may want to consider completing a donation to your favorite 501(c)(3) Charity before year-end. This could provide some much needed help to a charity for the holidays and a reduction in your tax obligation. Consider both cash and non-cash donations.
If you have a non-retirement investment account, check to see if you have “capital losses” and if those are investments you want to offload anyways. If so, work with your accountant to see if it may make sense to “harvest” those losses to offset capital gains realized earlier in the year, or you can apply $3,000 of capital losses to offset ordinary income.
A Roth conversion is a transfer from a Traditional IRA to a Roth IRA and the amount you convert will be taxable in the current year. Ideally, one should consider this in a year with low taxable income in order to minimize the current year taxes due. The benefit of this is to increase your allocation to your Roth account that will provide for tax free withdrawals later in your retirement or when it is passed on. Again, work with your accountant and financial planner to evaluate if this is appropriate to do this year.
For those that elected to contribute to a Flexible Spending Account (FSA) for healthcare or dependent care during 2017, remember to spend all your funds before year-end. These plans have a “use it or lose it” rule. However, some plans allow you to carry over as much as $500 into 2018 and/or give you a grace period of 2 ½ months past year-end to spend the money without losing it. Check with your HR Department how much you have left and if you have either of these options above available to you.
PAY STATE INCOME TAXES EARLY
If you make estimated state and federal tax payments, discuss paying your state income taxes due for the first quarter of 2018 in 2017. This could allow you to deduct that state tax payment in 2017 and potentially provide you a little tax relief sooner.
Consider us as your “personal CFO”, we likely have discussed or are already working on several of these for you, but please contact me if you wish to discuss any of these considerations in more detail.