Attention to Year End Finances

It is the end of the year, and that means a few things for people financially. For some, it means that they will start gathering their paperwork to do the all dreaded taxes. Others are evaluating their assets and portfolios. While some of you may be preparing to do some last minute buying for your retirement accounts, regardless of your end of year activities, these are all three major things that most people need to look at during the last month of 2018 and the first few of 2019. It is never too early to plan when it comes to your finances.

For many, this is the time of the year that we make many last minute purchases in both retirement accounts and brokerage accounts the same. While I generally recommend buying for retirement accounts at the beginning of the year with the roller coaster that we have been experiencing with the ups and downs in the market now is a good time as any to buy buying certain assets. When it comes to equities December is generally a decent time to buy and also re-balance existing equity account balances. When it comes to equity mutual funds, December can have pluses and minuses depending on how you view the actions of the fund’s company. On the plus, it is when they tend to distribute the dividends to the owners on record which is a significant portion of a fund’s gains for the year in many instances. On the minus side, it is also when the fund distributes its capital gains which are taxed as ordinary income and not at the same favorable rate as the dividend distributions. If your funds are held in a tax-advantaged account, this probably will not matter to you, but it will affect your bottom line if they are held in an account that is not tax-deferred.

Opportunity

If you are looking at buying an asset that is a fixed income asset such as a bond or bond fund, now might not be the most opportune opportunity for you. While the Federal Reserve indicated, interest rates were deemed neutral in the previous meeting minutes it also did not rule out a rate increase this month. As you know when the rate increase the price of current bonds will go lower due to the lack of purchasing power of the income stream as newer instruments will offer a better return. As always when purchasing bonds or bond funds keep the duration of the asset in the four to the six-year range to minimize the interest rate risk to the asset. This will keep you from losing as much in future purchasing power as the time for the bond too mature is shorter, and that will enable you to re-invest the principal and interest at the new higher rates.

If you are buying for your IRA accounts now is the time to be preparing to do that for any un-contributed funds you may have left for 2018. But do not fret, if you do not have the funds right now to reach the maximum $5,500 for those under age 50 and $6,500 for those over the age of 50 you have until April 15, 2019, to make it to your contribution maximums. But do not just be thinking of your 2018 contributions also consider getting prepared to make your 2019 as well as soon as the new year starts. By not waiting until later in the year you allow your money to work in your benefit for the entire year in those wonderful tax-deferred accounts and not just a few months in the end. But if you cannot make all your contributions at once at least have a plan to do them monthly or quarterly. And remember, the contribution limits for 2019 have increased by $500 after being flat for the last six years.

Preparing for next year

Also, consider your workplace retirement accounts as well at this time of the year by preparing for next year. While many do not contribute the maximum on these accounts as the dollar limits are much higher than an IRA it is a goal you should strive to achieve none the less. For 2018 you can contribute $18,500 and add an extra $6,000 for those over the age of 50. Like the IRA these limits increase $500 in 2019. But regardless of achieving a maximum contribution, you do need to increase your contributions to some degree or as a percentage of your income. As I work for the government, if we get a cost of living adjustment, I always increase my contributions to my Thrift Savings Plan by that amount. That way I live on the same amount of the previous year, and I do not even miss the extra little bit of pay that is diverted to my retirement account.

When it comes to the 2018 tax year, all I can say is I hope you are prepared for just about anything to happen. Yes, there was a massive tax bill passed this time last year, but it is not really what it appears to be on the surface. When I got my first paycheck after the bill went into effect, I did get a slight increase in my paycheck, but they were not withholding enough in taxes from my bi-weekly check. What this meant for me was a projected tax liability of about $1,600 due to fewer taxes being withheld from my check and trust me that would not have been a welcome surprise as my wife and I plan our taxes, so we either get a small refund or owe just a few hundred dollars. I could not play with the exemptions to get the figures to work out, so I made estimated quarterly payments this year to ease the potential liability come tax filing time in 2019.

When I was preparing taxes for people earlier this year the tax bill was still new, and no one really knew the effects it would have on people’s 2019 taxes, but I did do an amendment and someone’s 2017 taxes late in the year, and the results were surprising. In the case of the person who I did the amended return, they are self-employed and have a level history of income to project their 2018 tax liability by. In 2017 they had an AGI of less than $34,000 and owed $1,800 in income taxes. For 2018 using the same AGI their tax liability increased $300 to $2,100 for the income tax portion. Not exactly a ringing endorsement for the new tax bill. As for the individual’s taxes that were filed late, they had an AGI of less than $34,000 as well but unlike the amendment filed as head of household and their taxes were essentially the same for 2017 and 2018. Again, not a ringing endorsement for the tax cuts people are expecting.

With the end of the year upon us, you can see why it may be the right time to look at these areas for 2018 and plan for 2019. As always, if you have any questions or comments, I welcome them and enjoy the holiday season!