The year is nearing its end, and so are your chances to make a few last-minute moves that’ll benefit your bottom line. So before you count down the new year and clink Champagne glasses, squeeze in one of these expert tips to save more money.
1. Sell Underperforming Stocks
Nobody likes to lose money, but if you did have a few underperforming investments this year, you can sell them at a loss as part of a strategy known as tax loss harvesting.
“Particularly in this year’s market environment, where most investments have been down over the past several months, there may be more opportunities than usual to sell investments at a loss and reinvest them in similar (but not identical) investments,” said Bill Nelson, founder of Pacesetter Planning. “Your capital losses will offset other investment income you’ve received this year to reduce the taxes you owe in April.”
That means you can use investment losses to offset capital gains. And if your losses exceed your gains, you can apply up to $3,000 toward reducing other types of taxable income, such as regular wages. That can be especially helpful if you’re teetering on the brink of a higher tax bracket.
2. Convert To A Roth IRA
In the past, people who wanted to convert a traditional IRA to a Roth IRA were subject to income caps. But recently, those caps were lifted. So if you previously earned too much to contribute to a Roth IRA and your financial situation has changed ― for instance, you dropped to a lower tax bracket or moved to a state with no income tax ― a Roth conversion could save you money in the long run. Keep in mind that you do have to pay taxes on those contributions after converting.
“Be sure that if you’re going to move forward with a conversion, you’re 100 percent certain you want to do so, since conversions can no longer be reversed,” said Levi Sanchez, a certified financial planner and founder of Millennial Wealth, LLC. “Investors who think they’ll pay less in taxes today than they will in the future are great candidates for Roth conversions.”
3. Make A Charitable Donation
Considering that recent tax reform increased the standard deduction significantly (to $12,000 for single filers and $24,000 for joint returns), it’s a lot tougher now to qualify to itemize taxes.
Even so, “If your charitable donations will put you over the top of the new standard deduction, December 31 is your last chance to make deductible donations,” said Bradley Nelson, president of Lyon Park Advisors. “Check if you can double up your 2018 donations with your planned 2019 donations to put you over the top of the standard deduction.”
4. Take Your Required Minimum Distributions
If you own an IRA and you’re age 70.5 or over (or you own an inherited IRA), you probably know that you have to take required minimum distributions. This is the minimum amount of money you’re required to withdraw from the account each year.
Don’t forget to take your RMDs for this year, and be sure to take the full amount required on or before the Dec. 31 deadline, said Jason Speciner, a certified financial planner and founder of Financial Planning Fort Collins. “The penalty is a stiff 50 percent.”
5. Spend The Last Of Your FSA Dollars
If you have money in a flexible savings account, it’s likely you have to use that money by the end of the year or else you lose it. Some employers will allow you to carry over up to $500 to the next year, or offer a grace period of an additional 2.5 months after the end of the year to use the money in your account, according to Frank Shields, certified financial planner and founder of Future Map Financial.
“Make sure you get in those doctor’s appointments, stock up on some medical supplies and maybe even treat yourself to the chiropractor or therapeutic massage,” Shields said. “FSA funds can be applied to many qualified healthcare purchases, so make it a priority to spend those tax-free dollars.”
6. Max Out Your Health Savings Account
If you have a high-deductible health insurance plan and contribute to an HSA instead, you don’t lose any unused funds at the end of the year. But you do miss out on tax savings if you don’t max out your contributions.
Amelia Thomas, a financial planner, explained that HSA contributions have triple tax benefits:
The contributions are 100 percent tax-deductible with no income limitations.
The earnings grow tax-deferred.
If the account balance is used for qualified medical expenses, the distributions are tax-free as well.
As a bonus, an HSA can double as a retirement savings account. After age 65, you can use your HSA money for non-medical expenses without paying a penalty. You’ll simply need to pay taxes on the withdrawals.
7. Set Up A Retirement Plan For Your Freelance Business
There’s a bit of a retirement savings hack that self-employed individuals can take advantage of, assuming they have a lot of cash to sock away. Any business owner with one or more employees can open a SEP-IRA or Solo 401(k), which allow contributions from both the employer and employee. As a freelancer, small business owner or other self-employed worker, you’re both.
“For those who wish to make both employee and employer retirement contributions, December 31 is the last day to establish a qualified retirement plan,” said Nelson. “Actual contributions are not due until April 15.” That means you can create the account now and still have more than three months to fund it and reap the tax benefits. Now that’s a nice way to start a new year.