Financial Planning

4 Year-End Financial Planning Tips

Harvest tax losses, reassess your investment and retirement strategies, and don’t forget charitable giving.

As we are coming to the end of a lackluster year in the financial markets, it is time again to focus on year-end financial planning before time runs out in a few weeks.

Much of year-end planning seems to come down to tax-related moves. But any tax move, however tempting, should be made with your overall long-term financial and investment planning context in mind. It is important not to let the tax tail wag the financial planning dog.

Here are four key areas to focus on that will help you make the best of the rest of your financial year:

1) Realize Your Tax Losses. At the time of this writing, the Dow is still down 0.99% for the year, and the S&P 500 has been up just 0.79% for the year. There are a number of stocks and mutual funds that are down this year, some substantially, and could provide tax losses. So now may be a good time to plan tax loss harvesting. The IRS limits individual deductions due to tax losses to $3,000. However, realized losses (i.e., stock that you sell at a loss) can be offset against realized gains (i.e., stocks that you sell at a profit), thus providing you with a great tool to rebalance your portfolio with minimal tax impact.

2) Reassess Your Investment Planning. While it is important to take advantage of tax opportunities, you should never forget to ask why you bought that security in the first place. Thus tax loss harvesting opportunities can provide a great opportunity to reassess your portfolio strategy. It may have been a few years since you have set your investment strategy. Perhaps you did so when the market looked better than it does now.

As we know, it is very difficult to predict the market, especially in the short term. The last 11 months should have reminded us that bear markets happen. On average the market has been flat (so far) in 2015. Are you ready, and equally important, is your portfolio ready for a potential significant downturn? This is a good opportunity to review your portfolio’s asset allocation, and determine whether it makes sense for your situation.

3) Revisit Your Retirement Planning. Retirement planning is also a little about taxes. In 2015, you may contribute a maximum of $18,000 to a 401(k), TSP, 403(b), or 457 retirement plan. In addition, if you’re age 50 or over, you may contribute an additional $6,000 for the year. Have you contributed less than the maximum to your retirement plan? You have until December 31 to maximize your contributions to your plan, receive the benefit of reducing your 2015 taxable income, and improve your retirement planning.

The contribution limits are the same if you happen to contribute to a Roth 401(k) instead. While your contributions to the Roth 401(k) are made with after-tax income, distributions in retirement are tax-free. Consult with your Certified Financial Planner professional to determine whether a Roth plan or a traditional IRA would work best for you.

4) Plan Your Charitable Donations. Charitable donations can also help reduce your taxable income, as well as provide other financial planning benefits. If you have been giving cash, consider instead giving appreciated securities. You can deduct the market value of the securities at the time of donation from your current income, and legally avoid the capital gains tax that would be due if you sold the stocks and realized a gain instead. Now, who would not want an opportunity to save on taxes?

If you are retired and need to balance income with your philanthropic impulses, consider giving with a Charitable Remainder Annuity: you may be able to reduce your taxable income, secure a stream of income for the rest of your life, and do good. Check in with your Certified Financial Planner professional about opportunities that may fit your needs.

Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-only investment advisory firm in Waltham, MA. He specializes in retirement planning and divorce financial planning for professionals and business owners.

About the Author

Chris Chen, CFP®

Founder, Insight Financial Strategists LLC

Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-only investment advisory firm in Newton, Mass. He specializes in retirement planning and divorce financial planning for professionals and business owners. Chris is a member of the National Association of Personal Financial Advisors (NAPFA). He is on the Board of Directors of the Massachusetts Council on Family Mediation.

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