What are some year-end financials tips?
MELLODY: The end of the year is always a busy time with all of the planning for the season, the holiday celebrations, and of course running to the mall – or hopping online – for those last-minute gifts. But in the midst of all of this, it is always good to carve out some time to step back and take a look at your finances before the end of the year, because there are a few things you want to consider that will affect your retirement, you taxes, and your broader financial goals before December 31 approaches.
What should we consider in these last few weeks of the year?
MELLODY: Perhaps the biggest reminder for year-end relates to your retirement 401(k). I would urge everyone to do, if you are able is add to your retirement savings! Why should you do this? There are two big reasons. Number one, if your employer matches your contributions and you have not already hit that cap for matching, any contribution is going to have twice the benefit. The second reason is your contributions will save you some green when your tax bill is due because they lower your taxable income. All 401(k) contributions are due by the December 31 however, so you have to add to your account soon!
Secondly, take this opportunity to get ready for next year. Consider setting your contribution amount a little higher for 2016, especially if you received a raise, bonus or tax refund this year. Not only will every little bit grow your retirement account, redirecting part of it to a retirement account will set you up for a lower tax bill in 2016. If you do not have access to a 401(k) program, consider creating an IRA or self-employment account such as a SEPP. As long as your create these accounts by the end of the year, you can make contributions until April 15.
How about taxes?
MELLODY: Beyond the tax benefits you reap from making some of these retirement contributions, there are a few other items to keep in mind before December 31. My first piece of advice is for those who are in retirement: Make sure to take your required minimum distributions. If you are retired over 70½, distributions from your accounts are required, and income tax will be due on each withdrawal.
The penalty for missing a distribution is a 50 percent tax on the amount that should have been withdrawn. And if you delay your first distribution until April, you will then need to take two distributions in the same year, which could result in an unusually high tax bill.
Secondly, consider prepaying your taxes. You can deduct the payment of state and local income taxes, real estate taxes, personal property taxes, state and local sales taxes, and qualified motor vehicle taxes on your federal income tax return. If you’re going to have to write the check come April, you can pay a little early and take the deduction for this year.