As soon as the back-to-school rush wears off, the holidays arrive, so now is the best time to prepare your finances for the rest of the year.
Here are the five most important end-of-the-year financial considerations:
1. Max Out Your 401(k) Contributions
Some people assume that they can make one large cash contribution to their 401(k) account at the end of the year, but unfortunately, that’s not possible. Contributions must be made through your employer, so check with your account manager to make sure that you will meet your maximum contribution amount by December 31.
It’s easy to confuse 401(k) and IRA contributions. With most IRAs, you can continue to contribute until April 15 of next year and claim it all on this year’s taxes. However, 401(k) contributions are limited to the current calendar year. Some might, for example, defer a bonus until after December 31 and plan to use it as a 401k contribution for the present year. But, it must be applied to next year’s 401(k) balance and therefore cannot be used to max out this year’s contributions.
If you have reached your 401(k) and profit sharing contribution limits, you should consider a cash balance plan (CBP). CBPs must be set up by the end of the year, but they do not have to be funded by then; they combine the high contribution limits of a defined benefit plan with the flexibility and portability of a 401(k) plan. If you are a business owner or independent contractor, you can start your own CBP; otherwise, your group or partners will need to start it. Contribution limits in CBPs are set by a combination of age and 401(k) contributions, but the contribution limit age breakdown generally looks like this:
Age 35-39 = $132,000
Age 40-44 = $156,000
Age 45-49 = $188,000
Age 50-54 = $235,000
Age 55-59 = $288,000
Age 60-62 = $328,000
Age 63+ = $317,000
You can read more information about CBPs here.
2. Prepare Your Spending and Savings Accounts
With Halloween, Thanksgiving, and Christmas, the holiday season can get expensive quickly! For Halloween, you might splurge on a great costume, go all out with decorations for your house, and give full-size candy bars to all the neighborhood kids.
For Thanksgiving, whether you travel to be with family or host in your home, you’ll have additional expenses. Last year, experts estimated that Americans would spend more than $991 million on Thanksgiving turkey. That doesn’t include side dishes, desserts, wine, or take-out after everyone gets tired of eating turkey.
And, of course, at Christmastime, in addition to food and decorations, you buy gifts—gifts for your family, coworkers, neighbors, your kids’ teachers, book club members, and so on. Travel costs also increase during the holidays, and you’ll need to tune up your vehicle if you’re planning a long trip to visit loved ones.
Don’t let financial stress take away the joy of the holiday season. Check your spending and savings accounts to make sure you’re prepared for the extra expenses the season brings.
3. Make Decisions About Charitable Giving
Don’t wait until the last week of December to throw money at a charity just for the tax break. Thoughtfully consider what organizations you would like to support and budget your giving now. And as we’ve written about here, donor advised funds (DAFs) are a great way to maximize your donations. Every dollar you contribute grows along with the market, which increases the amount of support you can give.
4. Do the Math and Avoid the Gift Tax
If you have given large gifts or assets to friends or family this year—or if you plan to do so during the holiday season—you will need to file an IRS Form 709 to disclose gifts that exceed the allowed amount.
In 2019, you can give up to $15,000 in cash or assets (e.g., car, land, property) without having to disclose it to the IRS. That limit is per recipient, which means you can give up to $15,000 to as many people as you would like. Also, the annual exclusion is per person, so if you are married, you and your spouse can give up to $30,000 to an individual without needing to disclose the gifts.
Fortunately, charitable donations do not count as gifts, so they are not subject to the gift tax.
5. Update Your Will and Trusts
Nobody expects a tragedy, especially during the holidays, but because we do not know what the future holds, estate planning is incredibly important.
One of the hardest parts about the sudden loss of a loved one is the need to make instant, permanent decisions. If you were to pass away, would your loved ones know how to access your financial information? Would they know how you want to be memorialized? If you are married with children and something happens to you and your spouse, does your extended family know who you want to care for your children?
Make sure you have accounted for major life events from the past year:
Marriage
A new baby
A salary increase
A major purchase like a home or investment property
These are not easy conversations, but they are necessary. Take this time before the holidays to make sure everything in your estate is current and accessible for your family.
Reduce Financial Stress
As a firm, one of our core values is to help physicians and dentists reduce financial stress. We hope you follow these steps to finish out the year strong. Don’t let money become a distraction or stressor. Take action now so you can enjoy the things that matter most during the holiday season.
