Your 2011 End-of-Year Financial Checklist

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.