Year-End Financial Tasks You Can Probably Safely Skip

This is the time of year when financial advisers trot out last-minute money tips, and for good reason.

Much of it is geared to potential income-tax savings, for which some actions need to be completed by New Year’s Eve to take them on your 2015 return.

But some of these are really inaction items. Several common suggestions aren’t all that applicable to most people or don’t work well each year. Here are examples of year-end tips that you might be able to safely ignore, or at least delay until 2016.

 

Making A Charitable Donation

This is one of the easiest ways to shave your tax bill. Make a donation by Dec. 31 and you can deduct the amount contributed. Non-profit groups raise a big chunk of their overall donations during the waning weeks of the year. Holiday cheer and tax savings put donors in a giving mood.

But for the roughly 75% of Americans who don’t itemize, and thus don’t claim charity deductions, this year-end tip doesn’t help. In fact, many people probably would be better off hanging onto the money so they can pay off credit card balances from holiday shopping when those bills arrive in January. Others could apply the money to enhance their personal savings or start contributing to an Individual Retirement Account or something like it.

It’s hard to argue against making donations, because so many worthwhile non-profits genuinely need the money. But for some taxpayers, perhaps most, there’s no compelling reason to give in December compared with any other month.

 

Rebalancing Your Portfolio

It’s smart to bring your investment allocation  back into alignment on occasion. The idea is to pull some money from your highflying assets and reinvest the proceeds in those that have lagged. The concept rests on the notion that you already have a target for what percentages of your assets should be held in stocks, bonds and so on. Rebalancing provides discipline to stick to your plan. It also forces you to sell high and buy low, from time to time.

However, there’s no requirement to rebalance at the end of the year. Alternatively, you could make moves after your investment mix has shifted out of alignment by a notable amount. Suppose you aim to keep half in stocks and the other half in bonds. If your assets now show a 60-40 mix, it’s probably time to rebalance. But if not, you don’t need to take any action.

If your investments are held in taxable accounts, any selling could trigger gains on which taxes likely would be due. For this reason, it could pay to delay rebalancing changes until early next year, so that you can defer the tax bite for another year.

 

Heeding Required Minimum Distributions

This is a big investment caveat for some investors. If you have reached age 70½ and have an IRA or 401(k)-style account, you likely will need to start withdrawing money and pay taxes on it. Otherwise, you face a stiff 50% penalty on the amount that you should have withdrawn but didn’t.

This is certainly an important penalty to avoid. But if you’re younger than 70½ or don’t have a retirement plan, this tip doesn’t apply to you. If you just recently passed that age and haven’t yet taken your first RMD, you don’t need to heed the Dec. 31 withdrawal deadline. For first-timers, the initial distribution generally can be taken as late as April 1  following the calendar year in which the person turned 70½. But after that, in subsequent years, the Dec. 31 deadline does apply.

 

Funding A Retirement Account

As with required minimum distributions, Dec. 31 isn’t a hard deadline for certain people seeking to put money into retirement plans. If you invest in a workplace 401(k)-style plan, you typically can increase the amount at any time. If you seek to open or add to an IRA, whether traditional or Roth, you pretty much can do that at any time, too.

In fact, funding an IRA is one of just a few retroactive tax breaks. You may contribute money as late as next April, to correspond with the general due dates for filing 2015 tax returns, and still have the investment applied for 2015. If you qualify for a deduction on a traditional IRA, that means you can take it for this year on money contributed in 2016. Or, you can disregard the deadline and fund your 2016 IRA at any time next year.

 

Harvesting Losses

One enticing benefit for investors is the ability to sell money-losing stocks, mutual funds or other assets and deduct at least part of it against ordinary income. First you need to match capital losses against gains. If you have an excess of losses, you may deduct up to $3,000 of the excess against ordinary income each year, with any further amount carried forward to future years.

But a harvesting strategy doesn’t work well in all situations. For example, it only applies to investments sold from taxable accounts rather than those in IRAs and 401(k)s. It also might not make sense in years like 2015 when the markets have been flat, assuming you have little in the way of money-losing positions.

 

Source: USA Today