Year-end Financial Planning Tips: Moves You Need to Make Before December 31

2019 is almost over and many investors are often asking us about year end financial planning tips they should take advantage of before the end of the year. 2019 in particular offers a big opportunity to look over your finances, do something that could lower your taxes, and put more money in your pocket before opportunities go away at the end of the year.

There are some simple tips steps you can take right away. Others may require the expertise of a financial advisor or accountant, but their advice may be worthwhile if it lowers your tax bill.

Set up a donor-advised fund

You have until the end of the year to make charitable contributions that you can deduct on your tax return. Instead of spreading out your charitable gifts over future years, consider setting up a donor-advised fund this year and sending checks to your favorite charity at a later date.

If tax rates go lower in 2020, this may be a huge opportunity to front-load your charitable deduction and take a higher tax deduction this year.

Read: Tax Smart Charitable Giving

Realize capital losses or capital gains

If any of your investments have done poorly, talk to your accountant about realizing losses. This can be a great tool to offset future capital gains as well potentially reduce your ordinary income by $3,000 a year until the losses are used up. If tax rates go lower next year, it may be even more important to manage your taxable income in 2019.

On the opposite side of the coin, if you’re temporarily in a lower tax bracket now, consider realizing capital gains. This lets you lock in gains while potentially paying less in taxes.

Adjust your tax withholding

Think back over the past year: If you got married, divorced or had a child, chances are you’ll need to adjust your withholding on your W-4. Talk to your CPA so that you don’t end up giving the government an interest-free loan or worse, owing a penalty for not paying enough tax over the course of the year.

We recently spoke to a client who paid a tax penalty last year solely because he didn’t withhold enough from his paycheck. Don’t make the same mistake.

Contribute to retirement

In 2019, the maximum you may contribute is $19,000 to a 401(k), TSP, 403(b), or 457 retirement plan (assuming you earned that much). Plus, if you’re over 50, you can contribute an extra $6,000. You have until Dec. 31 to max out your plan and receive the benefit of deferring your income. If you’re contributing to a Roth 401(k), you have the same contribution limits, but you’ll pay taxes on your contributions now so that all growth in the account grows tax-free.

If you are self-employed, consider opening up an Individual K, which is essentially a personal 401k and profit-sharing plan for those who are self-employed. For 2019, the maximum elective deferral is $56,000, or $62,000 if you are over 50. Bankrate.com has a great Self-Employed 401k Calculator to help you know how much you can contribute.

If you’re considering delaying retirement savings until next year, keep in mind that tax rates may go lower if new tax laws are enacted. So it may make sense to defer as much income as possible this year.

Talk to your CPA about a Roth conversion

If you had a year with less income than usual, consider a Roth conversion. Even though tax rates could go lower if new tax laws are passed, you still could be in a much lower tax bracket if you’re between jobs or earned less income than usual.

If you’re going to be in a lower-than-usual tax bracket this year, it may make sense to pay taxes on your retirement savings now and convert them to a Roth IRA. That way, you avoid paying a higher tax rate at a later date.

Barry Glassman, CFP®
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION