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5 Smart Year-End Financial Moves to Save More in 2016

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Steve Pomeranz, Financial Moves

2015 is almost drawing to a close, with the S&P 500 up just about 1% or so year-to-date – it hasn’t been such a good year for stocks – with a fair amount of volatility and a sharp drop in mid-August that sent markets reeling… but, thankfully, markets recovered and were up a very solid 8.3% in the month of October alone… but, as one of my guests (Sam Stovall, Managing Director of U.S. Equity Strategy at S&P Capital IQ) reminded me just last week, after the strong rally in October, don’t expect more than modest market gains in November and December, statistically speaking… no one knows for sure, of course.

And with presidential elections due in November 2016, you’ll be happy to know that – since World War II – the S&P 500 has been up 6% on average in each election year… so, with some luck, 2016 should look good for stocks… and as goes January, so goes the rest of the year – so all eyes will be on how markets perform in January 2016.

Here are five year-end financial moves that can improve your finances and increase the odds of your portfolio doing well in 2016

But without relying too much on the vagaries of the market, Bloomberg’s Suzanne Woolley has highlighted five year-end financial moves that can improve your finances and increase the odds of your portfolio doing well in 2016.

#1 Check your mix

So… as I stated earlier, 2015’s been a pretty volatile year for the markets… and this volatility could have messed up your portfolio mix. So before the year ends, I want you to take a careful look at your portfolio, 401(k) investments, etc. to see if they are aligned with your long-term investment goals. I also want you to carefully look at your target-date funds, if you have any – these are funds that automatically rebalance your holdings between asset classes as you get closer to your retirement date – and check to see if they are in need of any tweaking.

Now… Why check something that’s on autopilot, you might ask… Well, first, because I am surprised by how many people just don’t know how their target-date funds are invested and what they will likely deliver as they approach retirement. And, second, because I want you to understand the different fund types you hold to get a sense of your portfolio’s equity risk.

For example, T. Rowe Price’s 2025 Retirement fund has 71 percent invested in equities now, with 10 years until the date its holders plan to retire. Another fund – the Wells Fargo Advantage DJ 2025 fund – has 49 percent invested in equities and a shorter period to retirement. So make sure that the funds you hold are in-line with your anticipated retirement date, and proportionally hold the right amount of equities relative to debt.

The point is simply to know what you own and be comfortable with it, or adjust your holdings… and not give in to panic if there’s a big market drop that you fear could crimp the growth of your retirement assets.

#2 Lower your taxable income

Now’s also the time to complete all your tax-deductible items… So if you’re inclined to philanthropy, now is a good time to complete your charitable givings – which must be done by December 31 so you can take those as deductions on your 2015 taxes… and make sure you keep your receipts, just in case you’re audited.

If you have kids and live in a state that allows tax credits or deductions for 529-fund contributions, be sure to contribute by yearend. I believe 34 states and the District of Columbia offer full or partial deductions.

You should also consider donating or gifting appreciated assets such as stocks, real estate and mutual funds – to avoid paying hefty capital gains taxes. For example, let’s say you want to donate $20,000 to your alma mater… and say you just happen to have a mutual fund that’s now worth $20,000 that you bought ages ago for $5,000. Your one option is to sell the fund, pay taxes on the $15,000 in capital gains and dip into your other accounts to give the full $20,000.

Alternately, without selling anything, you could simply donate your $20,000 of mutual fund holdings  directly to your college… this way, you get to write-off the full $20,000 as a charitable deduction… and avoid paying taxes on your $15,000 capital gain – so that’s a pretty smart and tax-efficient way to give.

#3 Optimize your health benefits

I’m sure many of my listeners have those use-it-or-lose-it flexible spending accounts (FSAs) for annual healthcare expenses… the ones where you contribute pretax money to the account… but have to use the funds for qualified medical expenses by Dec. 31 – so tally-up your medical expenses for the year and see if you’ve used up everything you put into your FSA… and, if not, with the flu season and the year-end approaching, now is a good time to use up that remaining cash – so let the parade of visits to doctors, opticians and dentists begin.

Another item to consider now and over the next two years is maximizing contributions to health savings accounts (HSAs) which are tax-advantaged savings accounts for medical expenses that are often paired with high-deductible health-care plans… because in 2018, a provision of the Affordable Care Act called the Cadillac Tax – will take effect and could limit your ability to fund these kinds of plans.

If you want to be prudent with any excess dollars this year, look at fully funding an HSA, particularly since unused HSA funds can eventually be used as retirement savings. For 2015 the limits are $3,350 for individuals and $6,750 for a family.

#4 Read up on Roth IRAs

I also want you to be reasonably familiar with the benefits of a Roth IRA – where you invest after-tax money towards retirement but pay no future taxes on capital gains. Here’s why I want you to read up on an IRA: If the market drops – as it did in, say, 2007 – and sends the value of your traditional IRA and associated capital gains way down, you can take advantage of this adversity by converting the pre-tax money in your traditional IRA into an after-tax Roth IRA. Upon conversion, you will have to pay taxes on the amount you’re converting but with a Roth you can withdraw the money tax-free in retirement.

There are no income limits on this move, and a conversion is the only way those with high income can get into a Roth IRA and have their money grow tax-free after they pay an upfront tax. And, fyi for 2016, you can only open a regular Roth IRA if you’re single and have adjusted gross income of less than $132,000, or married filing jointly with income of less than $194,000. Above those limits, you cannot take advantage of a Roth IRA unless you convert from a Traditional to a Roth IRA as I just mentioned.

#5 Prepare to file early

Finally, file early to protect yourself from scam artists who steal your identity and claim your tax refund directly from the IRS – a matter that has recently become a major concern. So if you are expecting a tax refund, the best way to stop a scammer from getting your refund is to file as early as possible. That way, you may beat a potential fraudster to the punch.

The earliest you can file is Jan. 25, 2016, for most people. Now, ideally, I’d rather you withhold enough of your income so you don’t overpay your taxes and instead invest that money towards retirement… and pay whatever is due when you file your taxes in April – this way, you don’t get a refund and no one can scam you out of your refund.

So, to summarize… check your portfolio mix and make sure it’s aligned with your retirement dates and needs, take advantage of ways to reduce your taxes such as donations and investments in 529 plans, consider investing in Health Savings Accounts where your money can grow tax-free and be used for qualified medical expenses, read up on Roth IRAs, and adjust your withholdings so you do not get a refund, or file your taxes early so you don’t get scammed.