In addition to caroling and secret Santa gift exchanges, there”™s a new holiday tradition of top 10 lists for year-end reflection and year-ahead planning. With all due respect to David Letterman, we”™re getting in on it, offering you our top 10 ways to make the most of your investments in 2016. The list is in no particular order.
- Take stock of investment gains or losses. It”™s been a volatile year in the markets. As of mid-December, the Dow Jones Industrial Average (DJIA) is -3.1 percent, S&P 500 -2.3 percent and NASDAQ +4.2 percent (the week before it was up 8 percent). Interest and money market rates remain low, so bond returns are anemic as well. Taxes are the largest eroding factor on your investment portfolio. Balancing out losses and gains ”” even outside of your portfolio ”” makes good tax sense. J. Paul Getty was quoted as saying “You can make more money saving taxes than you can by making more money.” Do a quick inventory of your portfolio now and have a discussion with your financial adviser.
- Check ex dividend date on year end mutual fund purchases. Most mutual funds follow the above advice and trim their portfolios at year”™s end. They pass those gains on to investors as dividends, and the share price drops accordingly. (Index funds tend to minimize this.) You have little control over when and how this happens, but bear the tax burden. Be sure to factor this into year-end tax planning, and your gain/loss calculations. Also keep this in mind when making new mutual fund purchases between now and year”™s end. It may describe why share process look like they are trading at a low.
- Consider (or reconsider?) a Roth conversion. Back in 1997 ”” a senator from Delaware ”” William Roth ”” impacted U.S. tax code and the retirement planning of millions of Americans. The concept was to allow investors to pay income tax on their IRAs (from another pocket) and let the balance grow tax free. It”™s a major upgrade from tax deferred. Roth provisions are now available in 401(k)s as well. This concept is often misunderstood as a planning tool. In the broadest sense, “Rothing” your IRA or 401(k) (yes, it is now a verb) makes sense for two categories of taxpayer. The first are those who will find themselves in a higher tax bracket. The second are those who have high retirement account balances and want to avoid being forced to take minimum distributions.
- 401(k) bucket property filled up? Federal limits on contributions to a 401(k) are now higher than they have ever been. Taxpayers may defer 100 percent of their income up to $18,000 per year into a program (plus an additional $6,000 if you are age 50 as of 12/31/2015). Same deal for 403(b) or 457 plans. These limits have not been increased for 2016. A reminder: These limits are per person, not per employer. So, if you changed jobs this year and deferred $10,000 in your old job, the limit in your new job is $8,000. Of course, your new employer has no knowledge of what you deferred in your former position, so keep those old pay stubs!
- Is your FSA bucket empty? Many employees have activated a type of feature in their medical plan that allows the employer to save for unreimbursed medical expenses on a pretax basis. These plans (called Flexible Spending Accounts) have annual “use it or lose it” provisions. So, if you have a balance, be sure to sift through the pile of statements from your health insurance provider and submit that through your payroll or benefit administrator. That money may help offset the cost of the latest X-Box controller your child has been begging for. An important thing to note: As of last year, firms are allowed to modify their FSA rules to allow for a $500 carryover. This is optional ”” not required ”” so check with your HR department.
- Check itemized deduction limits. Taxpayers who itemize are allowed to deduct certain expenses above a threshold of adjusted gross income (AGI). The calculation often requires a bit of effort (AGI is your gross income minus certain deductible expenses, so it may take a draft tax return to identify). The most common expenses are unreimbursed medical, certain moving expenses, some types of alimony, etc. Bottom line: Paying off that carryover hospital or doctors bill may be more effective before year”™s end.
- Consider gifting annual exclusion, medical/educational. Worthy of a top ten list on its own, estate planning rules can be cumbersome and clunky. The most common are the annual gift exclusion and medical/educational exclusions. Every American taxpayer who is a U.S. citizen is allowed to gift any other individual $14,000 per year (email me for direct deposit instructions). For a married couple, that means $28,000 per child or grandchild that can come off the top of their estates. A less frequently used, but potentially more powerful provision is the unlimited amount that may be paid for education or medical expenses. That means that your wonderfully sweet Aunt Betty who loves your kids can pay all four years of Harvard (probably close to $300k) or for those new braces. The catch is that the check must go directly to the provider or the institution.
- Have you taken RMDs? For high earners, consider donating that RMD directly to a charity. The government spends a significant amount of time creating rules to encourage long-term retirement savings. Then, of course, they force you to take it by a certain age (generally, 70½ years). They even publish a chart that tells you what the minimum is based upon your age. The older you get, the more you must take. They take this system quite seriously as evidenced by the fact that failure to take your required minimum distribution results in a 50 percent penalty on the income not taken. (PLUS income tax on the amount once you take it). Most brokerage firms have this reasonably automated, but don”™t let it slip through the cracks. It can be an expensive oversight.
- Review your 2016 withholding amounts. For most of us, claiming the number of exemptions that apply to withholding taken from each paycheck is a “set it and forget it” exercise. Changes in income or deductions can have an impact on what you must, or should, have withheld. Since all of this simply amounts to a tax-free loan to the federal government, be sure to sharpen that pencil and revisit the calculation every few years. In the end, you will owe the same tax either way. It”™s just a matter of who keeps your money (or arguably theirs) and for how long.
- Begin now to organize your tax records. Most of us have a financial junk drawer or two ”” or ten. Accurate records are the key to proper tax planning. Not only in the event of an audit, but even when it comes time to hand that box or records and receipts over to your tax preparer. Financial programs like Quicken and eMoney have made this somewhat easier. A little effort now (while your memory is relatively fresh) can save much frustration, or inaccuracy, later.
Anthony Domino Jr. is managing principal of Associated Benefit Consultants LLC, an employee benefit and personal planning firm in Rye Brook. He can be reached at adomino@associatedbenefit.com or 914-288-8882.Â
