10 Ways to Improve Your Finances by New Year’s Eve
Complete this to-do list by the end of the year and you’ll be in better shape for 2015.
Can you suggest some things to do before the end of the year to help my finances?
Here are 10 things you can do to improve your financial situation before the new year.
Max out your 401(k).You can contribute up to $17,500 to a 401(k), 403(b), 457 or Thrift Savings Plan in 2014, plus an extra $5,500 if you’re 50 or older. Contributions are usually made by payroll deduction, so ask your employer if you can increase them for the final paychecks of the year. You may also be able to contribute a year-end bonus to the account. Pretax contributions lower your taxable income and may have other benefits as well – for example, they may put your income below the cutoff to be eligible to make Roth IRA contributions or help you qualify for a bigger subsidy to buy health insurance on the exchanges. See Retirement Account Contribution Limits for 2014 for more information.
Open a solo 401(k). If you have freelance or self-employment income in 2014, consider opening a solo 401(k). You can contribute up to $17,500, plus up to 20% of your net self-employment income (business income minus half of your self-employment tax), for a maximum solo 401(k) contribution of $52,000 in 2014. If you’re 50 or older this year, you can contribute as much as $23,000 plus up to 20% of your net self-employment income, for a total contribution limit of $57,500. You have until April 15 to make your contributions, but you must open the account by December 31. See Retirement Plans for Self-Employed Workers for details.
Consider a Roth conversion. When you convert money from a traditional IRA to a Roth, you pay taxes on the conversion now, but the money grows tax-free for the future. In addition to tax-free withdrawals in retirement, the money in a Roth is not subject to required minimum distributions. Be aware that the amount you convert from a traditional IRA to a Roth could push you into a higher tax bracket, make you ineligible for a health care subsidy or boost your Medicare Part B or Part D premiums. But you don’t have to convert all the money in a traditional IRA; you may want to convert a little bit of money every year, up to the top of your tax bracket. If you change your mind, you have until October 15, 2015, to undo a 2014 conversion. See Consider a Roth IRA for Tax-Free Income for more information about Roth conversions.
Shop for health insurance on the exchanges.If you buy your own health insurance, you have until February 15 to sign up for a policy for 2015. But you have to sign up by December 15 for the coverage to start on January 1. Even if you’ve been happy with your coverage, look at your options and update your income information with your state exchange so you receive the right amount of subsidy. See 6 Ways to Make the Most of Obamacare Open Enrollment for 2015 for more information.
Get ready to take required minimum distributions.You have to take required minimum distributions from your traditional IRAs, 401(k)s, 403(b)s and 457s after you turn age 70½ (although you can delay taking your RMDs from your current employer’s plan if you’re still working after age 70½). You generally have to take your RMD by December 31 each year or pay a penalty of 50% of the amount you failed to withdraw. You can delay taking your first RMD until April 1 of the year after you turn age 70½, but you’ll have to take your second RMD by December 31 of that year, too. Keep in mind that taking two RMDs in one year will boost your adjusted gross income and could bump you into a higher tax bracket. It could also affect the taxation of your Social Security benefits or make you subject to the high-income surcharge for Medicare Part B and Part D premiums. See Calculating Required Distributions From Your Retirement Accounts. Use our What Is My IRA Required Minimum Distribution? calculator for help figuring out how much you need to withdraw.
If you’re interested in giving your RMD to charity, ask your IRA administrator how late in December you can wait before taking the money. Congress has not yet approved the charitable transfer for 2014 but typically does so near the end of the year. See Save on Taxes by Donating RMDs From Your Retirement Plan?
Make the most of charitable donations. Don’t rush to write checks to charities right before New Year’s Eve; decide where your donations will go now. Also, if you have appreciated stock you were planning to sell, it can be better to give the stock to the charity rather than selling the stock and giving cash. That way, you avoid paying capital-gains taxes on the increase in value since you purchased the stock, but you get to take a charitable deduction for the current value. If you’d like to get the tax break for 2014 but want more time to decide which charities to support, consider opening up a donor-advised fund. See Smarter Ways to Give to Charity for more information about charitable giving.
Check the rules for your flexible-spending account.The Treasury Department changed the rules for flexible-spending accounts last year. Now employers can permit employees to roll over $500 in their medical FSA from one year to the next. Even if you are allowed to make the rollover, you may have to spend any money over the $500 limit before December 31. And some employers still have a December 31 deadline for using all of the money. See Spending Down Your 2014 Flexible Spending Account for ideas about how to use the money.
Contribute to a 529 college-savings plan. Your state may give residents an income tax break for contributing to a 529 plan, and the beneficiary of the account can use the money tax-free for college tuition, room and board, and fees. Most states require you to make your contribution by December 31 to get a tax deduction for 2014, although Georgia, Mississippi, Oklahoma, Oregon, South Carolina and Wisconsin give residents until April 15. See Savingforcollege.com for details about your state’s rules. Also see our The Best 529 College-Savings Plans.
Make last-minute tax moves.You have until December 31 to make other moves that can help reduce your taxable income or help you qualify for tax breaks for 2014. See 12 Smart Year-End Tax Moves to Make Now for more ideas.
Prepare your house for winter. This task doesn’t have a December 31 deadline, but now is a good time to take steps to protect your home from winter storms. See Protect Your Home From Pricey Winter Problems from more information.