11 Tips to Finish the Year Strong

Finish Strong unlike this guy

The year is coming to a close.  Time to get your financial house in order before we pop the bubbly and ring in the new year.

Here are some tips to optimize your finances before it’s too late:

1. Max out your 401k.

The 2015 IRS limit on 401k contributions is $18,000.  If you are 50 or over, you can contribute up to $24,000.   These limits are the same for 2016.  While working, we paid almost zero tax on a six figure income by maxing out deferred savings plans like the 401k.  You can save on taxes too!

 

2. Max out your IRA.

In 2015, you can contribute up to $5,500 if you are under 50, $6,500 if you’re age 50 or older.  These limits remain the same in 2016.  If you can’t quite make the contributions by December 31, you can make IRA contributions for 2015 as late as April 15, 2016.  But max out the IRA now so you don’t procrastinate!

 

3. Take advantage of tax breaks on 529 college savings accounts.

If you have kids and want to save for college, then don’t miss out on your 2013 tax savings.  Most states that have an income tax will allow a deduction for contributions to 529 college savings plans.  Every state has different rules governing how much you can deduct (ranging from $250 to an unlimited amount).  A few states, most notably California, Massachusetts, New Jersey, and Tennessee, don’t allow deductions of 529 contributions.  State by state rules for college savings deductions.  Where we live in North Carolina, the state income tax deduction for 529’s disappeared after 2013.  At least we saved $350 for our $5,000 contribution each year while the deduction was in effect!

 

4. Rebalance investments.

Take a look at your asset allocation and figure out whether you need to rebalance your investments.  I recently posted an article explaining what’s in my asset allocation and how I rebalance my portfolio.  If you are too lazy to read those valuable articles I wrote just for you, then at least consider spending 10 minutes to sign up for Personal Capital and it will do 90% of the work for you (review of Personal Capital).  As far as timing of rebalancing, you can choose to buy and sell investments before year end if you want any gains or losses to fall in the current tax year, or wait until January to push tax implications into next year.  Be strategic!

 

5. “Tax loss harvest” your investment account for a $3,000 tax write off.

If you aren’t currently tax loss harvesting your investments each year, you should start right now.  You can generate a $3,000 deduction every year that will save you $500-$1,000 in taxes each year (depending on your tax bracket and your state income tax situation).

What is “tax loss harvesting“?  The quick and dirty explanation: sell investments that have lost money during the year to generate a loss.  This loss is what you deduct on your taxes.  You can deduct up to $3,000 per year.  If you generate more than $3,000 in losses, you can carry over those losses to future years forever (until you use up those losses).

After you sell your losing investments, immediately buy back something similar to replace it.  That way you aren’t really changing your portfolio’s investments, but you still generate the money-saving loss (for tax purposes).  The IRS says you can’t buy a “substantially similar” replacement investment, but poorly defines what that means exactly.  Most have interpreted “substantially similar” as nearly identical.  In other words, a Vanguard 500 Index Investor Class mutual fund is substantially similar to the same fund in the Admiral Class since it holds the exact same thing (with slightly different expenses).  Instead, buy iShares’ similar 500 Index fund (ticker: IVV ) for example, and you can still own something very similar and take your tax loss without angering the IRS audit computers.  In this example, you can later flip back to the Vanguard fund you originally owned if you want (and possibly generate even more tax losses!).

 

6. Spend your Flexible Spending Account (FSA) funds.

If you participate in the healthcare Flexible Spending Account offered by your employer, don’t forget to spend all the funds in your account.  Historically, these funds have been “use it or lose it” each year.  If you didn’t incur reimbursable expenses by December 31, you forfeit remaining balances.  Most employers allow you to submit reimbursement requests for a couple months after the year ends, so make sure to get those receipts submitted ASAP!  A relatively new US Treasury rule allows up to a $500 balance in your FSA to be carried over to the next year.  Verify with your HR that this rule applies to your FSA account before you lose out.  Ways to deplete your FSA balance: preventative medical and dental visits, eye exams, glasses, and contacts, and any medical or dental treatments you have been putting off.

 

7. Use up vacation time.

This one is a little silly, but don’t forget your employer’s policy on vacation time, comp time, and holiday time.  Most employers let you roll over some unused vacation time, but usually there is a limit.  Why not take off a few extra days around the holidays if they are going to expire anyway?  Check your time off balances to see if any expire soon or will be forfeited at year end.  At one previous employer, my comp time expired after 12 months and I often forgot to keep track of this time.  I lost a few hours occasionally just because I didn’t keep track of it.  That’s almost like throwing money away, since leave time is part of your total compensation package.

 

8. Pregnant? Have the baby now.

This was Mrs. RootofGood’s suggestion, so hate mail can be directed at her.  I’m expecting (get it?!) that this tip won’t be helpful to the vast majority of you.  But for those that have a These things suck down milk and poop out tax deductionsbaby due around the end of the year AND have some control over the timing of their new arrival, pop it out before the clock strikes twelve on December 31.  I’m not advising calling up your OB right now and asking for a pre-emptive strike C-section on the 30th.  But if you are overdue and have to make a choice about inducing labor sooner or later, or you have to deliver by C-section anyway, ask your doctor if doing so on or before December 31 is healthy for all involved.  Just don’t tell them some guy on the internet advised you to do so.  If the baby makes its debut before January 1, you’ll qualify for a tax deduction and a tax credit for the current tax year.  That means $2,000 to $3,000 tax savings for most taxpayers.  This advice is doubly beneficial if you’re “lucky” enough to have twins on the way.  Oh, and congratulations!

 

9. Plan for your annual bonus.

Every company is different, but most employers tend to pay any bonuses around the end of the year or the first few months of the new year.  Think about what you want to do with the bonus.  Reasonable options might be: debt reduction, funding your IRA or 529, diverting a big chunk of it to a 401k, or funding a project at your house that might save you money long term (energy efficiency upgrades for example).  If you want to defer a lot of your bonus to your 401k to avoid a big tax bite, you may have to designate the additional withholding well before the bonus paycheck arrives.

There is no problem spending some of the bonus money frivolously, but you’ll grow much wealthier if you use it to fuel your net worth growth.

 

10. Donate junk to charity.  

Take a look around and see if you want to purge some possessions.  Nobody wants to be a hoarder.  It is financially and psychologically expensive.  Removing clutter from your house will make your domestic environment more enjoyable.  Craigslist or ebay anything really valuable.  Consider donating the rest of your stuff.  Lots of charities accept clothes, appliances, electronics, household goods, and sports equipment.  They convert your donated junk into good for the community.  If you itemize deductions, you can also benefit from donating stuff.  You get a tax deduction!  With a donation of $1,000 worth of stuff, a typical taxpayer will save $200-300.  That’s a win win win situation.  Just make sure to cart your stuff to the donation site by December 31 to lock in a tax deduction for the current tax year.

 

11. Donate cash to charity.

Consider donating to charity.  Find a cause that is near and dear to you.  One charity I particularly like is Wine to Water.  I met the founder, Doc Hendley, at an engineering conference in Raleigh a few years ago.  He was the keynote speaker at the conference.  After his speech, I had a chance to chat with him for 15 minutes or so.  We talked about his charity’s amazing work and about general philosophy on the most optimal way to improve the world.  The thing that impressed me the most was Mr. Hendley’s desire to maximize the efficiency of whatever charitable resources he can muster.

I’m probably getting ahead of myself a bit.  Let me tell you what they do.  They bring clean drinking water to some fairly depressed and impoverished communities in off the beaten path places like Uganda, Sudan, Cambodia, Peru, and Haiti.  I don’t mean they literally truck in clean drinking water to these communities.  That would be grossly inefficient.  Wine to Water provides the technical guidance and some basic financial resources to let the local community build a sustainable clean water supply.  Many times, they use local parts and local technicians to build a well or water filter.  The benefit of this approach is the long term functionality of the clean water source.  If the local community knows how to maintain the equipment and can acquire local parts to fix the well or filter, the odds of that particular clean water source surviving far into the future increase greatly.  They also get emergency family-sized water filters into crisis situations such as post-earthquake Haiti and war torn parts of Syria.  Mr. Hendley and his Wine to Water crew are very efficient at getting clean water to those who need it.  Like my other spending choices, I like my charity dollars to go as far as possible, and Wine to Water is a great organization that mirrors my thoughts on spending money efficiently.

I also have to give Wine to Water applause for not spamming me with follow up donation requests.  When I was chatting with Doc Hendley at that engineering conference a few years ago, I specifically mentioned how I don’t like some other charities we supported in the past.  We have received so many letters and other correspondence from one of these charities that I am certain they have spent more on marketing to me than the sum total of all we have donated to them.  After grabbing all the money in my wallet (only $40) and handing it over to Doc on the spot, I kindly asked Doc to not send me any additional solicitations for donations because it would be a waste of money.  Success!  These guys are smart, reliable and efficient.  The kind of organization I feel comfortable supporting and recommending to the 10,000 or so of you readers that will visit Root of Good this month.

Most of us in the developed world don’t think about clean drinking water very often.  It’s a fact of life for us.  Unfortunately, millions of people (mostly kids) die every year from totally preventable water-borne illnesses.  It’s the 21st century and kids are still dying from something as simple as severe dehydration caused by diarrhea.  What a shame.

 

Pro tip to maximize benefits of charitable giving: If you don’t itemize taxes every year, you might be able to “lump” all your charitable donations of cash and stuff into one tax year, then skip the next year.  Then repeat in the lumping in the following year.  We have lumped donations and other itemized deductions in this manner and squeezed out a few hundred extra dollars from the tax man every other year. 

I hope these tips help you finish the year on a strong financial note!  What else can you do to tighten up your finances before year end?

 

 

40 comments

  • I am still quite a few steps away from the baby savings! But great tips. The end of the year is an important time for people to take a look at some last minute financial adjustments.

  • Great post, J. Sounds like 2013 has been a great year for you and your family. It’s safe to say this post of suggestions can apply to 2014 as well. Let’s just cross our fingers the IRS increases the amount you can contribute to tax-advantaged accounts. 🙂

  • Nice list and thanks for introducing me to Wine to Water!

    That’s great they don’t spam you with tons of follow ups — that always happens to us with the charities and it’s so frustrating. You know they’re spending a huge amount of money on these solicitations that it calls into question how much good they are actually doing with your money.

    Clean water is one of the ‘low hanging fruit’ items that can do so much good for relatively small amounts of money (as compared to let’s say cancer research, which is clearly very important, but isn’t directly saving lives in the short-term). Mosquito nets also come to mind as low hanging fruit…

    • That’s it – low hanging fruit. I read about mosquito nets a while ago. Something like $2-5 per net, and they reduce the chance of malaria and mosquito born pathogens big time. Amazing what an inexpensive low tech solution like mosquito nets can achieve.

    • I asked a few people for charitable donations instead of a Christmas gift this year so will donate them to wine to water if they come in the form of cash and have not already been allocated!

      Efficiency of donated dollars/pounds is always a concern for me when giving. I keep meaning to research good charities to give to in this respect but haven’t had the time so thanks for highlighting this one for everyone!

      Enjoy a prosperous end to the year.

      • Hey, awesome! Let me know if you ever find other good charities that are highly efficient. I have heard Charitynavigator.org is a good site to research charities, but it might be limited to US based charities.

        • Will do mate!

          I just did a quick googling and found the following links which may be of use to your UK readers:

          http://www.thinknpc.org/
          http://www.charitycommission.gov.uk/

          I can’t vouch for either as not really got time to look at, but thought it was worth posting anyway. I’ll check them out in the new year I think when our tax year is drawing to a close.

          Also, I guess there is nothing stopping anyone donating to a US based charity anyway is there?

          • Thanks for the links for the UK.

            I imagine US based charities will accept donations from anywhere. And many take donations by credit card so it shouldn’t be a problem at all.

            In the US, you can get a tax deduction (as mentioned in this article) for charitable contributions in many cases. They do have to be official charities recognized by our IRS. I don’t know if tax deductibility is an issue in the UK and whether all US based charities would qualify for a UK deduction (if it exists).

        • Just remembered about this (after seeing the video Andrew posted on here: http://www.livingrichcheaply.com/2013/12/18/have-we-become-too-lazy/) so went off to donate now rather than wait until tomorrow to see what would happen!

          In the UK the charities claim the tax back through a scheme called giftaid, so every £1 you donate the charity actually gets £1.25 which is pretty cool. You can also give pretaxed payroll money as well (apparently, I only just found this out!) which is also great. Again something for me to look into next year I think! Our tax year runs till May-April in case you didn’t know so no real rush to get this done in the next few days… phew!

  • I plan on re-investing a large amount of gains from my business back into my business, so that I can claim expenses instead of paying taxes on my gains. This is by far the best investment because it allows me the ability to increase my overall monthly passive income.

  • Ha! Not pregnant, but we do tax loss harvesting whenever we can. Fortunately we’re all out of losses this year! It’s been a good run… let’s hope we don’t have any of those any time soon. 🙂

    Nice list.

  • Justin, just having found the site and skimmed through your posts, one question for you. Once your wife joins you in retirement, where is your income coming from? I think I read that your retirement budget is $2700?

    This interests me greatly as I am on the verge of ER myself, though my wife is going to keep working for the time being… this blog has now moved up high on my “must read” list.

    • Yes, roughly $2700/month or $32k/yr projected spending.

      We have about 10 times that amount in our taxable accounts. So there’s the first 10 years of spending, plus whatever amounts of investment returns we see on the taxable accounts during that 10 years.

      I also have about 2 years expenses in a 457 account that I can withdraw from any time without penalty (just pay tax on withdrawals as ordinary income).

      The long term plan is to convert funds from our traditional IRA to our Roth IRA each year. Five years after each conversion, we can withdraw the amounts converted tax free and penalty free from the Roth IRA. That will get us to 59.5. Then SS at some point if it exists and we qualify. Should be $20k/yr in today’s dollars at age 67.

      • At first glance, that looks really tight to me…. especially with kids to raise, but I am sure you trust your numbers.

        Still pouring over our own numbers to see if I can do what you have. I am 41 and want to “retire” either this year or next – like I mentioned before my wife has no problem working another ten years earning 6 figures. More importantly, she is supportive of my exiting my meat grinder career. We should still be able to save in excess of 5k per month during this 10 year period of her employment.

        I think I have been overly cautious with my planning – in all likelihood I could have quit years ago. But my great fear is having to go back to work someday. Better to have saved too much in my mind, just to be sure this doesn’t come to pass.

        • If you know for sure that you never want to return to work, then it’s prudent to save “a little too much”. Otherwise, you just accept that there’s a small chance you have to go back to work due to financial reasons.

  • Love this advice, really good stuff here, but I do have one question about the tax loss harvest. Would you really be looking at $500 to $1000 tax savings on a $3000 loss? Wouldn’t a capital loss be at the same rate as a capital gain, so therefore 15%?

    • No, that’s the beauty of tax loss harvesting.

      As long as you don’t have more capital gains than capital losses in a given year, you’ll be able to write off the capital loss against your ordinary income. Or put more clearly, you can write off the losses to the extend they exceed gains in a given year.

      In effect, capital gains are taxed at 0% when ordinary income is taxed at 15% and CGs are taxed at 15% when ordinary income is taxed at 25%.

      So a capital loss (up to $3000 per year) can be written off against ordinary income, thereby saving you 15% to 25% (whatever your ordinary income tax rate is). And in North Carolina at least, the capital loss reduces your state taxable income too, so that saves another 7% here.

  • Great tips to finish the year with a bang! I am now planning to donate junk and cash to charity. 🙂 I have lots of stuff that I am no longer using which I think will be useful to some charities.

    Cash donations are really helpful and I think this is one of the most important things to do before the year ends.

    Thanks for these every little piece of advice!

  • Great list to close out the year! I especially like the tax harvest tip. I’ve always been somewhat adverse to selling off my losers (psychological), but with a tax offset worth almost a grand that might sweeten the deal a little bit better for me!

    • There’s definitely a psychological hurdle to jump. But selling the losers and buying something similar means you’re not really locking in losses, except for tax purposes.

  • Woohoo! I think I’ve done all of these that apply to me. Guess I’m all ready for the new year!

  • I looked into Wine to Water after you posted about it, seemed like quite a remarkable company. My company provides me with $1k a year to donate to charity and I allocated the entire amount to Wine to Water.

  • I’ll pass on #8, but maxing out your contributions on accounts to lower your tax burden is great advice. You can’t complain about paying too much in taxes if you’re not taking advantage of the easiest ways to lower your tax bill!

    • Not many takers on #8, and it’s pretty late in the year to start now (given the 9 month lead time).

      Lowering taxes through tax deferred savings and tax loss harvesting is definitely low hanging fruit.

  • I’m considering stopping our debt payoff to max out husband’s new rollover IRA account. It has about 4900 in it now. We are dealing with my husband’s unemployment though so I’m weighing the pros and cons.

    • If you think you will run out of tax-deferred savings options in 2014, then it’s probably a good idea to fund the IRA if you can afford it. If nothing else, fund a Roth. You can always pull the contributions out if you get in a cash crunch later due to unemployment lasting longer than you expect.

      You can also postpone the decision until April 2014 to make 2013’s contribution to see what happens with cash flow and your husband’s job. It makes sense to delay the decision to contribute for 2013 as long as possible.

  • Even better than donating cash to charities is donating appreciated securities. The charity still gets the same amount and you pay less taxes.

  • Great post. I’m done with #8, but the others can be applicable. It’s important to keep tabs on rules, regulations, and all that we need to do by year end. I learned that lesson a few years back, when OTC products could be paid for with pre-tax dollars at work. I had several hundred left to spend, use it or lose it, by year end. On December 31 I spent it all just buying stuff, it was almost comical.

    • I wanted to write about buying a case of Nyquil and thousands of bandaids to use up your FSA balance but sadly OTC medical products don’t qualify for reimbursement any longer.

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  • Just got to reading this. You probably have the answer here, but here is my question. If we have $10,000 in gains for the year, can we sell some junk for a $10,000 loss? I have some old dogs (stocks/mutual funds) that need to go, but just wondering how much I can/should sell this year. Usually have around the $10,000 in gains. Many thanks!!

    • If you want to wash away all those gains, then sell and take the $10000 loss. Even better would be to take the $10k gains this year, pay any cap gains tax due (which is at a lower rate, possibly 0%), then take the $10,000 loss next year. Those capital losses will be more valuable since you can write off $3000 against ordinary income each year.

      However, if you expect to have $10,000 in gains each year, you might as well take the $10,000 loss this year to save on taxes immediately.

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