As we enter the home stretch of 2016, let’s take a quick step back from elections and holiday plans for a quick financial checkup. There’s still time to strengthen your retirement account, avoid penalties on required distributions, and minimize tax as you reposition your investment portfolio for the future.
Yes, it may seem like a daunting task that you don’t have time for. If you agree, let’s simplify to a basic end-of-year checklist:
- Retirement Plan Contributions
- Required Minimum Distributions
- Investment Portfolio Assessment
Taking a few simple steps now can affect not only your long-term financial goals, but also your tax bill this coming April.
Retirement Plan: Add Some Muscle
Did you take full advantage of the match offered by your employer this year? If not, you risk leaving free money on the table! Review your 401(k) or other employer retirement plan to ensure you are contributing enough to receive the full match. If not, talk to your payroll administrator to increase your contributions between now and year-end.
If you are doing enough to receive the full match, but not maximizing for 2016, you should still consider upping your contributions. The 2016 maximum is $18,000 ($24,000 if age 50 or older). Besides building your retirement savings, the pre-tax contributions also reduce your income tax for 2016. If you are in the 25 percent marginal federal tax bracket, for every $1,000 you contribute, you save $250 in federal income tax.
Getting the full match, maximizing your savings, and reducing your income tax is a great way to take advantage of every dollar of savings!
Inherited IRA: Don’t Get Caught With a Penalty
If you have achieved age 70.5 and own a Traditional IRA, you are likely very familiar with the required minimum distribution (RMD). However, if you inherited an IRA, did you remember to take your distribution for 2016? No matter what your age, you need to take a minimum distribution each year from an Inherited IRA.
Just like the Traditional IRA, failure to take your distribution from an Inherited IRA can result in an onerous penalty: 50 percent of the required amount not taken by the end of the calendar year. For example, if your RMD for 2016 is $4,000 and you take nothing from the account, you will owe the IRS a penalty of $2,000. Plus you still need to take the distribution and pay income tax!
The required distribution amount for both the Traditional and Inherited IRAs is calculated based on the account’s value at the previous year-end and the IRS factor assigned to your age at the end of the calendar year.
Investment Portfolio: Powerful Year-end Adjustments
Now is a great time to determine whether your investment portfolio is still aligned with your long term goals. But, before you make any adjustments, you must consider the tax consequences of moving money between investment vehicles.
For example, if you are selling shares of a stock or mutual fund that has done well in order to trim your position, you may be realizing capital gains, which will add to your tax bill this coming April. Caution: If those shares have been held for less than one year (short-term), they will be subject to your ordinary income tax rate. If you are able to hold on to the shares for more than twelve months (long-term), the tax implications of realizing gains become less severe. For most investors the long-term capital gains tax rate for 2016 is 15 percent, although it can vary for extremely low or high income earners.
To minimize your income tax, be aware of your holding period before you sell. But, if you have taxable gains due to selling securities or receiving capital gains distributions from mutual funds, you have another strategy to exercise.
Tax-loss harvesting can reduce your taxes for 2016. You can offset some or all of those expected capital gain taxes by selling investments before year-end in which you have a loss. Capital losses offset capital gains. If you have more losses than gains in a year, you can reduce up to $3,000 of your ordinary income. Any excess capital losses can be carried forward and used in future years to offset gains.
Take the time now to review your retirement contributions, any required distributions from Inherited and/or Traditional IRAs, and your investment portfolio for both the timing and matching of gains and losses. Then, you may be able to cross the 2016 finish line with a weight lifted off your shoulders.
This article was contributed by Anthony Harcourt, an Investment Analyst at Bedel Financial Consulting, Inc.
Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine’s book, "Advice You Never Asked For… But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at firstname.lastname@example.org.