10 Year-End Financial Moves
As 2011 draws to a close, there are
several financial moves that you should consider. Below are 10 steps that
could help reduce your tax bill, solidify your investment strategy and ensure
that your affairs are in order.
Review Beneficiary Designations
Many accounts, such as Individual
Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow
you to name a beneficiary who will receive those assets when you die. Many
people don’t realize that those designations take precedence over their will,
even if the will is more accurate and up to date. Because of this, it is important
to review the beneficiary designations on all your accounts annually to make
sure that they accurately reflect your wishes. Meet with your financial
adviser and estate planning attorney to ensure that your designations not only
pass property to the correct people, but also minimize expense and taxes.
Take Required Minimum Distributions
If you turned (or will turn) 70 ½
during 2011, then it’s time to start taking required minimum distributions
(RMDs) from IRAs and other tax deferred accounts like your 401(k). RMDs
don’t apply to Roth IRAs. Your financial adviser can help you calculate
your RMD based on IRS guidelines. You are required to take the distribution by
December 31st of each year with one exception. If you turned 70 ½ during
2011, you can delay your distribution until April 1, 2012. If you do that,
remember you will need to take two distributions next year — one for 2011
and one for 2012.
IRA Charitable Exclusion
The government extended the IRA
charitable exclusion for 2011. Basically this exclusion allows you to
distribute (tax-free) up to $100,000 from your IRA and direct it to a
charitable organization. If you are charitably minded and don’t need the income
from your distribution, then this could be a good way to avoid the tax bite on
your RMD.
Medicare Open Enrollment
The Medicare open enrollment period
is the time each year when those on Medicare can make changes to their existing
plans to better suit their needs. If you are on Medicare, then you should
review your health and prescription drug plans and decide if you want to stick
with them or if you would be better served by switching to another plan. The
open enrollment period typically runs from November 15 to December 31, but it
has been moved up this year to October 15 through December 7. Visit www.medicare.gov
for more information.
Year-end Charitable Contributions
One way to reduce your tax
liability in a given year is to make charitable contributions. If you are
considering making charitable contributions prior to year-end, consider using
appreciated stock rather than cash. Not only will you benefit from the
charitable deduction, but you could also avoid paying the built in capital
gains tax on the stock.
Year-end Gains and Losses
Capital gains and losses can be
used to offset each other. If you took profits in some of your investment
positions this year, look to see if you have any positions that could be sold
for a loss to offset the gain and minimize your taxes. Excess losses can
be used to offset up to $3,000 in ordinary income taxes. Losses beyond
that can be carried forward indefinitely to offset future gains.
Maximize Retirement Contributions
For 2011, you can contribute a
maximum of $5,000 to your IRA and $16,500 to your 401(k). If you are over
50, you can contribute an additional $1,000 to your IRA and $5,500 to your
401(k) per year. By maximizing your contributions each year, you greatly increase
your chances of being able to adequately fund your retirement.
Review Your Asset Allocation
The market upheaval of the last
several years and investors’ response to that upheaval has wreaked havoc on
many people’s asset allocations. Rather than having a balanced, diversified
portfolio, many have sought safety by moving everything to cash or bonds. That
could cause serious problems in the future if inflation picks up or the bond
market stumbles. To protect your assets and maximize your returns, you should
meet with a trusted adviser and make sure the investments you hold are
appropriate based on your risk tolerance, goals and time frame.
Review Your Estate Plan
Your estate plan should not be a
static document. As your life changes, your planning must change with it. Getting
married or divorced would likely change how you want to distribute your
property; likewise if there is a death in the family. Each year you should
review your documents, including your will, trust, and powers of attorney to
make sure that they still reflect your wishes and have the correct people
taking charge if you were to die or become incapacitated. Also, if you
move to another state when you retire, meet with your attorney to make sure
that your documents will be valid in your new state of residence. Make
revisions as necessary.
Shred Unnecessary Paperwork
Much of the paperwork you have can
be purged once a year. For example, if your December investment statements
summarize the year’s activity, you can shred the statements for the previous 11
months. Likewise, any bills, credit card statements, and receipts that you are
not using as supporting documentation for your taxes can go.
According to the IRS, you should
keep your tax records for “the period of time during which you can amend your
tax return to claim a credit or refund, or that the IRS can assess more tax.”
Seven years should do the trick for most tax documents, such as returns and any
supporting documentation like cancelled checks, receipts, or credit card
statements. The one exception is records supporting capital improvements
to real estate and the HUD 1 statements for real estate purchase. These should
be kept until the property is sold. Identity theft is on the rise, so always
remember to shred documents before discarding them.
As you can see, by taking a few
simple steps before year-end you can enter 2012 organized and on a firm
financial footing.
