By Paula Pant.
New Year's Eve is coming up. You might be thinking about champagne and party hats, but before you head to the party, don't forget that you need to make a few smart end-of-year financial moves.
For better or worse, New Year's Eve signifies plenty of important financial deadlines that you don't want to miss. Here are 8 smart financial moves you should make before you ring in the festivities for 2016.
1. Open a Retirement Account
If you don't already have a 401(k) or IRA, open one before the clock strikes midnight on December 31. You're required to open the account by the end of the calendar year.
However, if you don't have any money to contribute right away, don't sweat. You can retroactively contribute to this account through the tax-filing deadline of next year.
In other words, set up the account right now, and contribute money to it any time in 2016 prior to April's tax deadline.
2. Take Your Required Minimum Distributions
If you're 70-1/2 or older, you're required to withdraw a certain amount from your 401(k) and traditional IRA. This amount is known as your "required minimum distribution," or RMD.
If you don't do this, you could face substantial penalties that could be as large as half the amount you should have withdrawn.
Talk to your financial advisor to make sure you're withdrawing the correct amount. This is one area where you don't want to make a mistake, given the strict penalty.
3. Try Tax Loss Harvesting
If you sell equities for a gain and your income is above a certain threshold, you're subject to paying capital gains taxes.
However, you can counterbalance some of these gains by using a tax loss harvesting strategy. This involves selling stocks that have fallen and writing off the losses. It could substantially minimize your capital gains taxes. Talk to your accountant before you make any moves.
4. Research Your State's 529 Rules
529 college savings plans are tax-advantaged plans meant for college savings. Each state has different tax deduction rules and contribution limits, so check with the specific regulations in your state to find out how much you can contribute and what your deadlines are. It's worth doing this homework prior to New Year's.
5. Use Your Flexible Spending Account
Many flexible spending accounts, otherwise known as FSAs, hold a “use it or lose it” structure. That means if you don't spend the money in your FSA, it disappears.
Federal regulations allow employers to let employees roll over up to $500 into the next calendar year. However, it's up to the employer's discretion whether or not they want to exercise this right.
In addition, some employers give their workers a grace period for the first few months of the following year, during which time workers can use funds from the year prior. Other employers, however, require that the funds are used by New Year's Eve.
Look up the regulations in your place of work to ensure that your FSA funds won't disappear.
6. Save Money and Contribute to a Good Cause at the Same Time
If you itemize your deductions, you may be able to receive tax benefits by donating to qualified tax-exempt charities.
Make sure you receive a receipt from the charity as proof of your contribution. If you're donating items rather than cash, photograph the item and save receipts or other documentation proving its value.
7. Enroll in a Health Insurance Plan
If you're interested in coverage beginning on January 1st, you have until December 15th to enroll in a new health insurance plan or change your coverage.
If you miss this deadline, don't worry. You have until January 15th to change your plan or enroll for coverage beginning on February 1st. If you miss that deadline, then you have until January 31st to take advantage of the open enrollment period.
If you need to buy or change your health insurance, do it sooner rather than later.
8. Give Gifts – Estate and Gift Tax Limits
The 2015 gift tax exclusion remains at $14,000, just as it was in 2014. If you're planning on giving cash gifts to family members, you're allowed to give up to $14,000 per year without triggering tax consequences.
A husband and wife can each gift $14,000 to the same recipient. A married couple, for example, can gift each child $28,000.
This gift tax exemption is "use it or lose it." If you don't give a gift this year, that $14,000 limit doesn't roll over into next year.
You may not want to think about complex financial issues when you're trying to prepare for the holidays. You'd rather think about pecan pies, holiday decor and gift-wrapping. We understand.
But spend a couple of evenings reviewing your finances to make sure everything is on track. This could prevent massive chaos from unfolding in the New Year.
Take time to execute a few smart year-end financial moves, so you can celebrate New Year's Eve with peace of mind, clarity, and confidence that next year will be even better.
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