The year is coming to an end, and most people are already looking toward a fresh start in 2019. But before you bid farewell to 2018, make sure that your finances are in order.
Now is the time to make last-minute retirement contributions, complete any Roth IRA conversions and use the money in your flexible spending account before it disappears. Below, I discuss these and other money moves that you should make before we ring in the new year.
1. Contribute as much as you can to your retirement accounts.
Technically, you have until April 15, 2019 to make a contribution to your retirement accounts for the 2018 tax year. But it's best to do it before the end of the year if you can. This way, you can begin setting money aside right away for your 2019 contributions. Plus, the sooner your money hits your retirement account, the sooner it will begin growing and the more you'll benefit from compound interest.
You're allowed to contribute up to $5,500 to an IRA and $18,500 to a 401(k) in 2018. Adults 50 and older can play catch-up by contributing an additional $1,000 to an IRA and $6,000 to a 401(k), bringing their contribution limits up to $6,500 and $24,500, respectively.
2. Do your Roth IRA conversions.
When you do a Roth IRA conversion, the money you're converting is added to your taxable income in the year of the conversion. If you procrastinate until January, it becomes your taxable income for the following year rather than 2018. This can be problematic if you earn more next year than you do this year, which might happen if you receive a raise or land a higher paying job or receive any other kind of financial windfall. The higher income, along with the Roth conversion, could push you into a higher income tax bracket, forcing you to pay more in taxes than you would have this year.
There's also the five-year waiting period to think about. This isn't as much of a concern for younger adults, but if you plan to tap your Roth IRA funds within the next few years, it's something worth paying attention to. You're free to withdraw your Roth IRA contributions without penalty as long as you're over 59 1/2, but you cannot withdraw any earnings until five years after the conversion.
The catch is, the clock starts on Jan. 1 of the year you make the conversion. So if you do the conversion in December 2018, the five year countdown begins Jan. 1, 2018. But if you wait until January 2019, you must wait until Jan. 2024 to access your earnings.
3. Take your required minimum distributions (RMDs.)
Adults 70 1/2 and older must take required minimum distributions (RMDs) before the end of the year from all retirement accounts except Roth IRAs. However, you can delay your 401(k) RMDs if you are still working and own less than 5% of the company you work for. Failure to take RMDs will result in a 50% penalty on the amount that should have been withdrawn, so don't forget to take them.
This amount you have to withdraw from your retirement accounts is based on the current balance of those accounts and your age. You can calculate yours by using this worksheet. Find the distribution period for your age and divide the balance of each of your retirement accounts by this number. This is how much you must withdraw before the year is over in order to avoid forking over half the RMD to the government.
4. Use the money in your flexible spending account (FSA).
Use it or lose it! You must use the money in your FSA before the plan year is over. Otherwise, you will any remaining funds disappear. But there are a couple of exceptions to this that your employer may offer. First, they may offer you a grace period, which gives you until March 15, 2019 to use any remaining funds. Alternatively, they may enable you to carry over up to $500 into the next year. Employers are not required to offer you these options, though, and if they do, they will offer one or the other, but not both.
If you're unsure of the rules surrounding your FSA, check with your employer's human resources department to learn more about your plan and do what you can to use up any remaining funds before your plan year is over.
5. Make charitable contributions.
The end of the year is the season for giving, for more reasons than just altruistic holiday spirit. Donating to charity can helps you save on your taxes. There are some limits you need to be aware of, though. First, you must donate cash or property to a qualified tax-exempt organization in order to claim it as a deduction. Donations to political parties, individuals or for-profit companies do not qualify. Second, you must have documentation -- bank statements, canceled checks, etc. -- proving that you made the charitable donation.
Finally, you're limited to 50% of your adjusted gross income in charitable contributions. If you exceed this amount, you will not be able to deduct the extra from your taxable income. There is a lower limit of 30% of your adjusted gross income for certain organizations, including some private foundations and veterans associations.
If any of the above situations apply to you, it's important to make these financial moves before 2018 is out. Otherwise, you could miss out on some valuable tax breaks or cost yourself money you didn't need to lose.
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