Year End Planning & Budgeting

Household Information

Who besides you knows where to locate information about professional contacts, assets and obligations?  How challenging would it be for other members of the household or family to figure things out if the unexpected happens?  Life is unpredictable and it’s best to be prepared.  Use our “Personal Financial Key” and keep it in your files in a folder marked In Case of Emergency.  Consider giving a copy to a trusted family member or advisor.  This is also helpful to share with aging parents to start a conversation about their plans and organize their information!

Organizing Your Records

What do I keep?  How long do I keep it?  Why am I keeping it???  Get all that paper under control in a system you can follow and easily manage going forward!  Here’s a list of some of the most common categories and questions.

  • Tax Returns & Supporting Documentation – 7 years:  The IRS can pursue false or fraudulent returns forever, but can audit you for up to 3 years from the date you file and can pursue underreported income for up to 6 years.  7 years seems a reasonable approach for keeping tax records.  Other things to keep for 7 years – cancelled checks and bank statements.
  • Things to Keep Forever (preferably in a fireproof safe)
  • Things to Keep Until Assets are Sold or Documents are Updated

A Few Thoughts on our Virtual Lives

  • Maintain a back up of your electronic records on a flash drive or external hard drive.   This should include your legal documents, tax return, account statements, etc.
  • Create a “grab and go” paper folder of legal documents, your recent tax return, year-end account statements, etc.
  • Keep a paper copy of your important contacts’ phone numbers and addresses.  No one remembers this any more, so if you can’t access your phone/data, you may want this handy for land line/postal contact.
  • Keep some emergency cash on hand.

Make a Wealth Plan!

  • Know Your Budget:  What comes in?  What goes out? Be honest about the difference between “want” and “need.”
  • Pay Down Debt:  Rank your debt by interest rate, make all your minimum monthly payments and send extra money to your most expensive debt first.  Tackle double-digit interest credit card debt- wipe it out and keep it out!
  • Start to Save:  Build an emergency fund of 3 – 6 months worth of expenses.  Be sure to take advantage of employer matching in work place retirement accounts.  No amount is too small, getting started is the biggest challenge!
  • Start to Invest:  What are your goals?  House, college, retirement, new shoes?  It’s important to know your time horizon, and your emotions around investing, to understand your risk budget.

A Few Notes on Year-End Tax Planning

Please consult your tax advisor to discuss how any of these strategies could impact your tax situation. 

  • Maximize Retirement Plan Contributions

The 2017 annual limit is $18,000, or $24,000 if you are age 50 or older.  You should at least be contributing the minimum required to maximize your employer’s match – free money!

  • Flexible Spending Accounts

Make sure you spend all of your flexible spending dollars as these plans are “use it or lose it.”

  • Required Minimum Distributions

You typically have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or retirement plan accounts when you reach age 70½, or sooner if you are the beneficiary of an Inherited IRA.  Make sure you take your required minimum distribution, RMD, before 12/31.  The IRS can charge a 50% penalty tax on any shortfall you failed to distribute.

  • Charitable Contributions

Make sure you complete your planned donations before year-end.  If possible, donate appreciated assets instead of cash to potentially increase your tax benefit.  Consider spending an afternoon cleaning out your closets to collect clothing and household goods to donate – remember to get a receipt.  If you are facing a particularly high income year, you could consider “front-loading” a Donor Advised Fund with several years of expected future charitable contributions.

  • Gifts to Individuals

The IRS allows you to give $14,000 to any individual in a calendar year without filing a gift tax receipt.  This is particularly useful to help reduce your taxable estate, especially at the state level.

  • Roth Conversion

If you have a Traditional IRA you can choose to convert some/all of the funds to a Roth IRA.  You pay ordinary income tax on the funds converted but eliminate income tax on future withdrawals and allow your money to grow tax-free.  Generally speaking, you want to take advantage of years where you will be in a lower tax bracket than your future expected tax bracket.  A few examples of situations when it might make sense to consider converting:

  • Low taxable income years between retirement and when Social Security Income begins and/or age 70 1/2 when Required Minimum Distributions begin
  • You have unused itemized deductions
  • You have after-tax dollars to pay the tax liability

The decision is complex, but under the right circumstances there could be significant benefits to a Roth Conversion.

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