The holidays are upon us. And while we’re busy preparing the best dinner and shopping for loved ones, we may forget about one important thing to check off our list: Getting our finances and retirement strategies in order.
But don’t worry. We’ve set aside a personal finance checklist so you can quickly make sure that your finances are on track.
And you can get back to what matters most this holiday season: spending time with loved ones and spreading holiday cheer.
Rebalance Your Investment Portfolio
Many financial advisors recommend you rebalance your portfolio every six to 12 months.But what exactly does that mean?
Rebalancing your investment portfolio starts with taking a look at your asset allocation. That is the mix of stocks, bonds, and other assets designed to meet your risk tolerance and help you achieve your long-term investment goals.
So say your portfolio’s asset allocation is 60 percent stocks and 40 percent bonds. A major stock market rally and no change in the bond market can significantly push up the value of the stocks in your portfolio. The shift can be so substantial that your asset allocation ends up being 70 percent stocks and 40 percent bonds.
That leaves you open to risk should the stock market endure a downturn. Rebalancing is about mitigating risk.
So to rebalance your portfolio back to its original asset allocation, you sell some stocks and buy more bonds to bring it back to 60 percent stocks and 40 percent bonds.
But keep in mind that selling shares of stocks that have grown in value would trigger capital gains taxes.
A capital gains tax is levied on the growth of an asset that you sold for a profit.
Tax-Loss Harvesting
Many financial advisors recommend you engage in a tax-loss harvesting strategy at the end of the year, when you rebalance your portfolio and have a good view of portfolio performance.Tax-loss harvesting is the strategy of selling assets like stocks that have depreciated in value since you first bought them in order to offset capital gains resulting from selling assets that have grown in value.
In other words, you’re using your investment losses to reduce your tax burden.
So how does it work?
Say you purchase Stock A and Stock B for $10,000 each at the same time. Six months later, you sell Stock A for $15,000. You’d owe a capital gains tax on the $5,000 profit.
But Stock B went down and you sell it for $8,000 ($2,000 capital loss). You can apply the $2,000 loss to offset the $5,000 capital gain. So now you’d owe capital gains tax on just $3,000.
But keep in mind that tax-loss harvesting is used on taxable accounts or brokerage accounts. It won’t apply to tax-advantaged accounts such as 401(k)s and individual retirement accounts (IRAs).
Maximize Your Retirement Contributions
Strategically saving in a tax-friendly retirement plan such as a 401(k) and IRA is one of the most efficient ways to grow a nest egg for your Golden Years.This is why you should contribute as much as you can to these plans. But there are rules.
Each year, the IRS sets contribution limits for retirement plans like 401(k)s and IRAs. And to help workers closer to retirement, the IRS also sets up extra “catch-up” contribution limits for those aged 50 and older.
Plus, some employers offer matching contributions to their employees’ plans. But there are rules behind that too. So let’s break it down.
Traditional 401(k) and Roth 401(k)
- Standard contribution limit: $23,000
- Catch-up contribution for those 50 or older: $7,500
- Total contribution limit for those age 50 or older: $30,500
- Total employee and employer contributions for those under 50: $69,000
- Total employee and employer contribution for those 50 and older: $76,500
Traditional IRA and Roth IRA
- Standard contribution limit: $7,000
- Catch-up contribution for those 50 or older: $1,000
- Total contribution limit for those 50 or over: $8,000
Take Your Required Minimum Distributions (RMDs)
When you reach age 73, you need to start taking regular withdrawals or required minimum distributions (RMD) from retirement plans such as IRAs and 401(k)s.But it’s important to know that you must take RMDs based on the total value of all units within a specific type of account. For example, let’s say you have two traditional IRAs. You need to take your total RMD across both. But you can choose to take the total RMD from one account or divvy it up across both. So say your total RMD is $7,000. You can withdraw all from one or $4,000 from one and $3,000 from the other.
Additionally, some 401(k) plans may allow you to skip RMDs until you retire if you still work for the company.
But failure to take an RMD would result in a 25 percent penalty on the amount.
Donate to Charity
Even though gift-giving should always come from the heart, it can also be a part of a sound financial plan.That’s because there could be some tax advantages to supporting your favorite non-profits and charities.
And one way to make the most out of that is by contributing to a donor-advised fund (DAF).
A DAF is a type of investing account for charity. You can contribute assets like cash, stocks, and mutual funds to a DAF and earn an income tax deduction.
You manage this account and direct the provider on how to distribute the funds to your chosen charities based on your set time frame.
The funds in a DAF grow tax-free. So you won’t owe taxes on interest or dividends. And if you contribute appreciated assets like stocks that have grown in value to a DAF, the charities you donate to get all the proceeds from the sale and you could avoid capital gains taxes.
For example, say you bought stock ABC shares for $10,000. Your stocks grew to $15,000 and you contributed these to your DAF to support an IRS-qualified educational organization. In this scenario, you avoid capital gains taxes on the $5,000 growth ($15,000 - $10,000) and the total $15,000 goes to the organization.
But if you sold the stocks for $15,000 and then donated the cash to charity, you’d face a capital gains tax on the growth in value.
The Bottom Line
As you close out the year, it’s important to look back at your finances to make sure you’ll be ready for the next chapter. Remember to review your investment performance, see where you can save on taxes, and don’t forget to support your favorite charities and causes. And while everyone may not be able to max out their 401(k) or IRAs this year, any bit you contribute can go a long way and reward you when you reach your Golden Years.We hope this checklist can help you brush up on your finances before you toast to 2025.
