December 2019

Year-End Financial Guide 2019

Author: Kent Thune

Now that we are deep into the holiday season, it may be tempting to just cruise through December and enjoy your well-deserved family time and festive activities. But if you can take just a few minutes to review your finances before the year ends, you may be able to keep more of your money in 2020. More reason to celebrate the New Year, 2020!

Here are some of the best things you can do by the year’s end to maximize your personal finances in the coming year:

Use the money in your flexible spending account.
If you have a flexible spending account (FSA) through your employer, keep in mind that this is a “use it or lose it” account. An FSA can be a smart financial tool to use because contributions to the account are free of taxation. But if you don’t use the full amount you’ve elected to contribute by the end of the calendar year, the remaining balance is forfeited and goes back to your employer. You may use your FSA for certain out-of-pocket health expenses, such as deductibles, co-pays and medications.

Check your tax withholdings.
If you received a big refund on last year’s tax return, it may be wise to change the withholdings on your W-2. Another reason to update your withholdings is if a significant life event, such as a birth, death or marriage, occurred this year. You can adjust your withholdings by changing your allowances on your W-4 form with your employer. The more allowances you claim, the less money is withheld. Therefore, if you want to get more money in your paycheck now (and reduce your tax refund next year), increase the number of allowances on your W-4.

Maximize retirement plan contributions.
If your employer sponsors a retirement plan, such as a 401(k), you may make an annual contribution of up to $19,000 for calendar year 2019. If you are 50 or older in 2019, you may make catch-up contributions of up to $6,000 to a 401(k). These contributions must be made through payroll by or before December 31, 2019. The maximum contribution for an individual retirement account (IRA) is $6,000 for 2019, subject to certain limitations. The catch-up contribution for IRAs in 2019 is $1,000. IRA contributions can be made for 2019 by April 15, 2020.

Minimize capital gains tax with tax-loss harvesting.
In capital markets, 2018 and 2019 were mixed years. Therefore, if you have a taxable brokerage account and it’s well diversified, chances are that some of your investments have gains, while others have losses. At the end of every year, it’s a good idea to take advantage of capital losses by using them to offset capital gains. As a simple example, if you sell shares of a stock with a $1,000 gain and you sell another stock with a $1,000 loss, the gain and loss offset each other, and no capital gains taxes are owed. This is called tax-loss harvesting.

Rebalance your investment portfolio.
For diversification purposes, it’s generally wise to rebalance your portfolio of investments at least once per year. This is because the performance of the various investment securities in your portfolio will rarely be equal during any given calendar year. For example, if you have a balanced blend of 60 percent stocks and 40 percent bonds in your portfolio and the stocks had a gain of 10 percent, while your bonds gained 4 percent, your 60/40 split is out of balance. In this scenario, you would sell shares of stock and buy enough bonds to return your allocation to the 60/40 target.

Don’t forget to make your required minimum distribution (RMD). If you are 70 and a half years old or above and you have made pre-tax contributions to an individual retirement account (IRA), you are required to make minimum distributions every year. If you turned 70 and a half in 2019, you’ll have until April 1, 2020 to make your first RMD. Subsequent RMDs must be made by December 31 of each year. Non-spouse beneficiaries must also make RMDs on inherited IRAs every year.

Consider making more charitable donations.
If you donate to charitable organizations, go ahead and estimate your tax deductions now. The standard deduction for 2019 is $12,200 for single filers and $24,400 for married filing jointly. If your total itemized deductions are relatively close to your standard deduction, you may want to help your favorite charity and reduce your taxes at the same time with another 2019 donation. You can estimate your itemized deductions for the year by looking back at your 2018 tax return. For example, if you estimate a mortgage interest deduction of $15,000, a property tax deduction of $3,000, and charitable giving is $4,000 thus far in 2019, you have reached $22,000 in itemized deductions. A married couple filing jointly may benefit by making more charitable donations before the end of the year to cross over the $24,000 standard deduction amount.

Remember the purpose of your money.
Some wise words you’ll hear this time of year is to remember the reason for the season. Perhaps the most important thing to remember this time of year, with regard to personal finance, is the reason for your money. With so much focus in our world on materiality and on measuring success by financial status, it’s easy to forget why you are working, why you are sacrificing your time and energy, why you are building your retirement account, and why you have money in your pocket and in the bank.

Whether the purpose of your money is to support your family, to make a positive impact on the world, or simply to fill your life with wonderful experiences, remember that the purpose of money is not to make more money; remember that life is not about making money; money is about making a life. 

Kent Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments, LLC. He also provides financial counseling to Marines and other service members on Parris Island. Thune’s financial guidance has been published at The Motley Fool, Yahoo Finance, Kiplinger.com, MarketWatch.com, Nasdaq.com, InvestorPlace.com, and on his own blog at TheFinancialPhilosopher.com.

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