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Year-End Financial Checklist to Prevent Tax Penalties and Missed Planning Opportunities

Several significant tax and savings deadlines are fast approaching. Before you flip your calendar to December, consider making some of these smart money moves.

As you approach the end of the calendar year, there are many financial deadlines and cutoffs that you may not be aware of. From minimum distributions to annual gifting exemptions to tax-loss harvesting, there are more annual rules and limitations than any one human could reasonably be expected to know.

To simplify the year-end management of your finances, here are the top nine deadlines and cutoffs to be aware of.

Required minimum distributions: Dec. 31

For those over the age of 70½, RMDs are annual withdrawals required by the IRS to be made from qualified retirement accounts. These include standard IRAs, 403(b)s and 401(k)s if you no longer work at the company, but exclude Roth IRAs, which are funded with post-tax deposits. The RMD for each account is determined by the IRS based on the balance of the account as of Dec. 31 of the prior year and your age, among other factors. If you have an adviser or family office who assists you with your financial planning, you can task them with ensuring that your RMDs are made, but if you manage your accounts yourself, this is a withdrawal you must remember to execute every year prior to Dec. 31. If you fail to do so, the difference between the RMD for each account and the amount you withdraw will be hit with a whopping 50% penalty. (To figure out your own RMD, see Calculate Your Required Minimum Distribution From IRAs.)

Capital gains distributions: Vary by fund, but generally in November and December

Mutual funds are mandated by law to distribute at least 98% of their net capital gains (after “netting” out trades with losses and gains) to shareholders once per year, typically in November or December. These distributions are significant – in 2018 an estimated $300 billion was paid out, according to the Investment Company Institute. ETFs are also required to pay out capital gains distributions annually, although for ETFs this is more infrequent. If your funds are owned in a qualified retirement account (meaning one that grows tax-deferred, such as a 401(k) or IRA), there will be no capital gains liability. But if they’re owned within a taxable account (like a trust or an individually held investment account) the capital gains distribution must be accounted for when you prepare your tax return. It’s important to monitor your capital gains distributions because you will likely owe taxes on them, and they could even move you into a different tax bracket.

Max out employer-sponsored retirement plan contributions: Dec. 31

For all employer-sponsored retirement plans, there are annual contribution and salary deferral limits. These caps vary from account to account, and in some cases, depending on the age of the employee, but for many people planning for retirement, maximizing their contributions for the year is an important part of the plan. The deadline for your annual contributions is Dec. 31, but since these contributions are generally made as a percentage of your gross income withheld, to make any year-end adjustments, you’ll need to coordinate with your HR department and leave enough time for your change to be implemented and make an impact.

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For more on that, see:

Tax loss harvesting: Dec. 31

Tax-loss harvesting is a strategy where an investor sells a position for a loss to generate a tax deduction and offset other investment income. Investments sold to implement this strategy fall into two tax categories: short-term and long-term. Any security held for less than 12 months is considered a short-term investment. Securities held for 12 months or more are considered long-term. Losses from the sale of either are applied first against gains in the same class — meaning long-term losses are applied against long-term gains, and short-term losses are applied against short-term gains. Up to $3,000 of leftover losses can be used to offset other gains, including ordinary income and taxable interest.

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For example, if an investor has more long-term losses than long-term gains, the excess losses could be applied to short-term gains as well, and up to $3,000 of ordinary earned income if there are long-term losses in excess of both long-term and short-term gains. Lose more than that? Any remaining losses can be carried over to next year. But all tax loss harvesting must be applied to the matching class of gains first.

When using this strategy, it is also important to be cognizant of the wash-sale rule, which requires that you wait 30 days before repurchasing the same security for the sale to be recognized as a sale and for the loss to apply.

Roth IRA conversions: Conversion deadline Dec. 31, contribution deadline April 15

There are a number of reasons why you may wish to convert a traditional IRA into a Roth IRA. The retirement advantage is that when you withdraw funds in the future, they will be tax-free (as long as you're 59½ and have held the account for five years) and there will be no RMDs. The lack of RMDs allows you to determine how much of the money will remain in the account and continue to grow tax-free. In addition, should you wish to leave your Roth IRA to a beneficiary as part of your estate, they will not be assessed income tax on their distributions either.

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All contributions to the traditional IRA for which you received an income tax deduction and all associated growth will be taxed as ordinary income in the year you convert to a Roth IRA. The conversion must be completed by Dec. 31, but if you're just contributing to an existing Roth IRA, you have until April 15, 2020, to have that contribution count for the previous year (2019).

Charitable donations: Mid-December

Although the deduction structure changed with the implementation of the Tax Cuts and Jobs Act, if you itemize, you can still reduce your taxable income through charitable contributions. But you should keep in mind that it takes the charitable organization time to process the donation. So don't wait until the last minute, especially if you're contributing appreciated securities, which take longer to process than cash. For many institutions, the cutoff for the current year’s contribution of appreciated securities is around mid-December.

Max out your HSA: April 15

A health savings account can be used to pay for medical expenses, reduce taxable income and can play a key role in retirement planning. It is also the only account with a triple tax benefit: Tax deduction, tax-deferred growth and tax-free withdrawals if used for qualified health expenses. The maximum annual contributions are $3,500 for individuals or $7,000 for a family. If you are 55 or older you are allowed to make an additional catch-up contribution of $1,000 to your account. Similar to IRAs, the cut-off date for annual contributions is April 15.

Spend unused FSA money: Generally, June 30 or Jan. 31 – determined by your health care plan

Many health care plans include a flexible spending account that you can contribute to with pre-tax dollars. FSA money can be spent on co-pays, lab work, glasses or any other qualified medical expense. The catch is that only $500 can be rolled over to the next year, and any unused funds beyond that amount will be lost. Check with your health insurance provider to verify the cutoff dates — most plan years end either on Jan. 31 or June 30. If you anticipate a remaining balance in your FSA greater than $500 at the end of your plan year, visit www.fsastore.com where there is surprisingly wide range of approved FSA items you could purchase.

529 contributions: Dec. 31

Donations to a child, relative or friend’s 529 account count as a gift for tax purposes, and they are currently limited to $15,000 a year, per person, to avoid paying a gift tax or having the gift count against your lifetime gift exemption. If you want to maximize the amount you are giving to a 529 each year, the cutoff is Dec. 31.

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About the Author

Casey Robinson, CFP

Managing Director - Wealth Planning, Waldron Private Wealth

Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.

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