Squirrel Away Savings When the Leaves Start to Turn

Posted by Indiana Retired Teachers Association on Nov 6, 2018 1:53:21 PM

When leaves begin turning colors and the air turns cool most of us begin to think of cider, pumpkins, family gatherings and upcoming holidays.

For the financially savvy, fall signals the time of year to make sure we have taken advantage of every opportunity to save for the long winter of retirement and accumulate some tax breaks to use when the spring thaw arrives in April.

These are five opportunities to take advantage of before December 31 or risk waiting till next year.

Blog-Squirrel-Away-Money-in-Fall.png 1. Maximize contributions to tax-advantaged retirement savings accounts

Even if you contribute regularly to your traditional 401(k) or similar workplace retirement plan, see if you can contribute more. You may be able to reduce your earned income by $18,000, the maximum you can contribute to a 401(k) for 2017—a potential $4,500 tax savings if you are in the 25 percent tax bracket.

If you're age 50 or older, you can contribute an extra $6,000, for a maximum contribution of $24,000. And you won't pay taxes on any money—or the money it earns—until you withdraw it.

If you contribute to a Roth 401(k), you won't get a tax break this year, but your money can grow tax free and generally be withdrawn tax free in retirement. 

Either way, the more you contribute now, the better odds you have of reaching your goals.

No 401(k)?

You may be able to save for retirement and reduce your taxable income by contributing to a traditional IRA this year. In 2018, you can contribute up to $5,500 if you are under 50, and $6,500 if you are 50 or older. You don't need to have a job to contribute to an IRA either. A nonworking spouse can contribute to an IRA up to the contribution limit, as long as his or her spouse has as much or more in taxable income.

HSAs can also be savings vehicles

If you have a Health Savings Account (HSA) associated with a high-deductible health plan, see if you are contributing the max in 2018: $3,450 for an individual and $6,900 for a family, plus an extra $1,000 if you are age 55 or older. An HSA has triple tax benefits:3 Your contributions are made with pretax dollars, so you reduce your current taxable income; earnings are free of federal tax; and so are withdrawals, if they're used to pay for qualified medical expenses now or in retirement. Plus, this is not a use-it-or-lose-it account; what you don't spend can be invested, and will grow over time to help pay for future expenses.

2. Reduce taxes on investment gains

If you invest in stocks, bonds, mutual funds, or ETFs in accounts other than tax-deferred or tax-exempt accounts such as an IRA, 401(k), or HSA—a taxable brokerage account, for instance—you may be able to reduce taxes on investment gains through tax-loss harvesting.

The idea is simple: Offset realized capital gains with realized capital losses. That means selling stocks, bonds, and funds that have lost value—and you don't believe in anymore—to help reduce taxes on sales of winning investments.

Offset capital gains

In general, first consider ways to offset short-term gains on investments held for one year or less (which are taxed at the higher "ordinary income" rates) with short-term losses. Then apply short-term capital losses to long-term capital gains (held for more than one year and taxed at lower rates). Finally, match long-term losses with long-term gains. Working ahead of time with your accountant and financial advisor can help you identify the best candidates for this strategy before the December 31 deadline. 

3. Evaluate your progress toward your savings goals

Whatever you're saving for—retirement, buying a home, paying for a child's college education, or another important goal—an annual status check will help you identify adjustments you can make to stay on track.

What will 2018 bring?

Have your circumstances changed? Did you experience (or do you anticipate) any life events or family changes (e.g., job change, marital status, move, illness) that could have an impact on your financial situation? Do you expect to fund any major purchases next year? Changes in your lifestyle or goals may require shifts in your financial plan.

Market changes may also mean you need to make adjustments in your investment portfolio. Did this year's stock market rise leave you overly exposed to stocks? Did the pullback in bonds in the wake of Fed rate hikes leave you underexposed to bonds? Or maybe you have more cash than you want or need.

Year-end is a great time to make sure your mix of assets is still in line with your goals and tolerance for market swings. Perhaps most importantly, you'll want to check on your progress toward long-term goals, like retirement.

4. Think about a 401(k) rollover or a Roth conversion

If you are interested in laying the groundwork for tax-efficient withdrawals in retirement, it's smart to have a mix of traditional and Roth accounts. That way you can withdraw monies from taxable and nontaxable accounts, to keep your taxable income in the lowest possible tax bracket.

If most of your retirement savings have been contributed to pretax vehicles such as traditional 401(k)s, 403(b)s, or IRAs, your withdrawals will be taxed at ordinary income rates. If you have had some large capital losses this year, consider converting some traditional IRA or 401(k) money into a Roth IRA, where withdrawals in retirement are tax free.4 You'll pay income taxes now on the converted amount, but you'll pay lower taxes in retirement. 

5. Consider charitable giving

If you itemize your taxes, donating to charities from a taxable account can reduce your tax bill. This is particularly true if you can contribute appreciated securities you have held in your account for at least a year. Doing so not only entitles you to a tax deduction (assuming you qualify), but also allows you to help eliminate the capital gains tax.

For non-cash contributions over $250, you'll need a receipt that includes a description of the item and other details. Donations for the current tax year must be made by December 31. If you charge your gift to a credit card before the end of the year, it will count for this year, even though you might not pay the credit card bill until 2018.

Whatever your situation, consult with a financial planner or investment advisor provider before you take action. There are many moving parts when it comes to evaluating moves to reduce your taxes. It pays to get the right advice.


Topics: finance

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