One of the most important aspects of successful financial planning is learning how to manage your household cash flow properly. Having enough cash on hand without having too much cash sitting idle can be a delicate balancing act. Whatever money you have left after taking care of your expenses, you always want to ensure it is working for you, not against you. Looking carefully at how you handle cash at year-end can make a difference in your tax burden and overall financial planning.
From a financial perspective, year-end tends to sneak up on us. The holiday season is a busy time, but it’s vital to keep in mind that there’s no turning back once the calendar flips. Each year, we need to make financial decisions and take actions that may affect us in the coming year and for years to come.
We all deserve to enjoy a wonderful holiday season. But a lot of hard work and careful planning went into earning the cash you have, so why spend it frivolously? Go into the season with a budget in mind and stick to it. With careful planning throughout the year, you can indulge in fun, gifts, travel, and festivities without overextending yourself or going into debt.
Manage Your Windfall Wisely
At the end of the year, it is not uncommon for employees to receive extra income, such as a bonus payout, or for someone to receive a cash gift. Rather than use this cash to splurge, look closely at your situation and make a smart choice — fund your emergency savings, pay off debt, invest for retirement, open a mutual fund, or explore other opportunities to use the windfall wisely.
Make Charitable Donations
Generously giving gives back in many ways. You may want to consider making a charitable donation to potentially reduce the amount of tax owed. Depending on your circumstances, it could also be a smart move to think ahead and prepay next year’s charitable gifts this year, giving you a larger tax deduction this year. If you have reached the age of 70 ½ as of December 31, 2019, or age 72 after this date, you may be eligible to make qualified charitable donations (QCDs) to reduce your tax burden by contributing some or all of your IRA to charity. Sending your RMD directly to a charitable organization means you do not have to count that part of the distribution as income.
Review Your Retirement Contributions
Take a look at your 401(k) and IRA contributions for the year. Would it potentially benefit you to offload some cash for the future? By maximizing the amount you contribute before the end of the year, you will be taking advantage of the available tax deductions. Plus, you could also benefit from additional employer matching contributions, if applicable.
Review Your Retirement Distributions (RMDs)
If you have reached the age of 72, or 70 ½ if you reached that age prior to January 1, 2020, generally you must take your RMD from your IRAs and your former employer 401(k) accounts before the end of the year — even if you don’t need the cash, regardless of whether you are retired or not. If you fail to do this, the IRS will fine you 50% of the amount you should have withdrawn. Distributions can be challenging for many retirees to manage effectively, so if you find yourself wondering how to handle this cash flow issue best, now is the time to start planning for next year.
Consider a Roth Conversion
If you have cash available at year-end, a Roth conversion might be a useful strategy for you. This will come into play if you do not qualify for contributing to a Roth IRA directly. It is possible that you would benefit from contributing now to a Traditional IRA and then converting the funds to a Roth, so it may be worth looking into and discussing with your financial advisor.
Examine Your Tax Losses
Have you lost stock positions this year? If so, it’s important to review any losses and weigh the tax implications. It might make sense to sell them to offset gains and reduce your overall taxable income. Then you would most likely want to take that cash and reinvest it in a similar security — albeit not the same or substantially identical stock within 30 days of the original sale — before the end of the year. This strategy of tax-loss harvesting is generally used to limit the recognition of short-term capital gains, which are usually taxed at a higher rate than long-term capital gains.
Use Your Flexible Spending Account
If you have a flexible spending account (FSA), be sure to check the balance as you head into the end of the year. Many employer plans do not allow for rolling over your money into the next year, so you have to spend it on qualified expenses before December 31. In other words, use this cash or lose it.
Start Tax Planning
You should also be having tax planning discussions before the end of the year with your financial advisor and tax professional. Remember, your CPA uses your year-end tax information to prepare your tax returns next year, so any adjustments you make to your portfolio and investments now will matter. These conversations are critical and time-sensitive.
The Bottom Line
Remember, the IRS will not allow you to go back to a previous year and make adjustments after the fact. Once the year-end deadlines have passed, it’s too late to take advantage of many potentially money-saving moves.
At the end of the year, you have a lot on your plate. But you can plan to enjoy the holiday season without losing focus on your finances. Your money matters because it’s what helps you provide for the people and causes you care about most. As the year comes to a close, take some time to speak with your financial advisor to ensure your financial house is in order so you can have confidence. Start now, and you still have time to take action.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.