Whenever the year comes to close, we’re ready to jump into making our new year’s resolutions. But before you set goals for the new year – especially financial ones – make sure you’ve mapped out your year-end financial plan. Think of it as a health checkup of your finances where you take a long hard look at your assets as well as your liabilities and determine what adjustments you need to make in the coming year.
Here's a checklist for a your year-end financial planning with 4 main categories: Health and Wellness Planning, Savings and Investment Planning, Comprehensive Tax Planning and Pro-active Planning
Health and Wellness Planning
- Use up your flexible spending account (FSA) funds. FSA Account (Flexible Spending Arrangement) is a special account that you use to pay for certain out-of-pocket health care costs, such as medical and dental expenses, over-the-counter prescription medications; or medical equipment, and diagnostic devices. Year-end is also a good time to calculate your FSA allotment for next year, based on your current excess or deficit. If you're not using an FSA or any of the additional types, evaluate your health care costs for the year to see if setting up for the incoming year would be a good move.
- Make changes in your Medicare coverage. Upon receipt of your Annual Notice of Change (ANOC) and/or Evidence of Coverage (EOC) from your plan provider, review them for any changes in the costs, benefits, and/or rules for the upcoming year. Even if you are satisfied with your current Medicare plan, it could be wise to look at other Medicare options in your area that could better suit your needs in the coming year. If you are not happy with a Medicare Advantage Plan you’ve chosen during Fall Open Enrolment, you can un-enroll from it during the Medicare Advantage Disenrollment Period (MADP).
Savings and Investment Planning
- Review your retirement contributions. Review how much you have contributed to your traditional 401(k) or your workplace retirement accounts to maximize your contributions to these tax-advantaged retirement savings accounts. If you're not matching your employer contribution, consider increasing yours to a match level beginning next year. If you've already maxed out your match, see if you can further increase your individual contribution to avail of further tax advantages. No 401(k)? You may be able to save for retirement by drawing a traditional IRA plan from the coming year.
- Consult your financial adviser on setting up a tax-free savings account (TFSA) or contributing to registered retirement savings plans (RRSP). They are good savings instruments that would serve you well in the future.
- Contribute to 529 College Savings Plans (Fund 529 Plans) for your children, grandchildren, or others. Thirty-three states offer a full or partial tax deduction or credit for 529 plan contributions. Take advantage of annual gift exclusions to qualify for any state tax deductions on your annual tax return by contributing to this fund.
- On investments, ask your financial adviser about managing your current and future income in relation to your current stock options; employee stock options if any; rebalancing opportunities on assets; analyze your current investment portfolio positions and review your investment risk score
Comprehensive Tax Planning
- Manage your marginal tax rate. Check with your Accountant if deferring income or accelerating deductions would help you reduce your tax exposure especially if you're on the tax bracket boundary. Reviewing your capital gains and losses may also offer tax planning opportunities. Check with your Accountant certain key tax thresholds like the marginal tax rate, capital gains tax rate, itemized deductions and personal exemption phase-out if any, or the surtax on investment income.
- Consider the benefits of giving to charity and various gift giving alternatives. It further reduces your taxable income.
- Consult your tax advisor on your stock options to manage current and future income, or in choosing between accelerating income into the current tax year and deferring income to future years in light of your estimated tax picture. Ask your tax advisor to prepare an alternative minimum tax (AMT) projection to see if there's any tax benefit in waiting until January of the following year.
- Consider the tax benefits of a health savings account (HSA) associated with a high-deductible health plan through maximum contribution into the plan. HSAs have triple tax benefits: (1) Your contributions are tax-deductible, thereby reducing your taxable income; (2) Any growth associated with the contributions is tax-free; and (3) It is not covered by the “use-it-or-lose-it” rule.
Pro-active Planning
- Request a copy of your credit report. Checking your credit report is your first line of defense against identity theft or credit card fraud. Look out for red flags like names you don’t recognize, Social Security numbers that don’t belong to you, or accounts that aren’t yours, and take prompt action. Your credit report also tells you if you need to correct any inaccuracies in your account such as how much you owe, or whether or not you’ve paid on time. These errors can be costly and can affect your credit score.
- Plan your estate. If you already have one in place, review your estate plan and make changes in tune with the times and your current circumstances. A will should spell out, among others, instructions on what your family should do if you are no longer capable of deciding for yourself. Name a health care proxy; draw out a "living will" regarding end-of-life medical care; name a power of attorney grantee. Talk to your family about your will. If you have parents in their advanced years, ask them about their requests as well. Review and update beneficiary designations of your retirement accounts and life insurance policies.
Financial planning is a continuous process for as long as you are physically and mentally capable. Periodic reviews of their status and progress lead to better results. Get professional advice from Financial Rescue customer reps. We can assist you in mapping out your plan so you’re better prepared not just for the new year but for a lifetime.