As the year ends, it’s time to get your financial footing in place for 2018 taxes and 2019 investment and savings goals.
As the calendar ticks down to the end of 2018, there's still time to make moves that might benefit this year's tax filing. The tax filing deadline next year is April 15, but another important date is December 31—the drop-dead deadline for making most moves that could affect what you’ll end up paying the tax man and how you go forward in 2019.
Have you saved enough in tax-deductible vehicles like 401(k) and IRA accounts? Can you harvest stock losses to offset heavy gains elsewhere in your portfolio? What about saving for a child’s education or charitable giving?
Here’s a handy guide to help you cover your bases.
1. Make workplace retirement contributions. Employee deferrals to a 401(k) or 403(b) are generally done on a calendar-year basis since your contributions show up on the W-2 you receive. For 2018, you can now contribute up to $18,500 into a 401(k), 403(b), or other similar employee retirement plan, up from $18,000 in 2017. If you haven’t reached that, you can ask your employer to bump up your contributions before the year is out, or you can use the proceeds from a periodic or year-end bonus to help you get there. If you’re older than 50, you can potentially add an extra $6,000 catch-up amount for a total of $24,500. Remember, this can potentially lower your taxes, because the contributions are subtracted from your income. (Of course, you’ll pay taxes when you begin withdrawing funds.) Be sure to speak with your tax consultant about your personal circumstances.
2. Add to your personal traditional IRA. Traditional IRA limits are at $5,500 if you’re under 50; $6,500 if you’re older. The same rules apply for taxes at withdrawal. Remember, too, that the deductions may be limited if you or your spouse are covered by a workplace retirement plan. You may also be able to contribute to a Roth IRA, which is taxed up front, but when you take distributions in retirement, you don't pay taxes on that money. The annual contribution limit is spread across all of your IRAs, so if you have more than one account, the sum total may not exceed that $5,500/$6,500 mark. The deadline for 2018 IRA and Roth contributions is April 15, 2019.
3. Harvest stock losses. This was a big year for sizable gains in the stock markets, but there were still some laggards out there that may have missed the 2018 record-breaking parties. If you’ve got some of those stocks, bonds, or mutual funds in your portfolio, consider using those losses to offset some gains or to lower your taxable ordinary income (the limit is $3,000 annually for filing jointly, $1,500 for individuals) as a tax-reduction plan. There’s a strategy to tax-loss harvesting that calls for complete records of your cost basis to help offset like gains from like losses, and it’s not without risks. Short-term gains face higher taxes than long-term gains, and the IRS has a wash-sale rule that can cloud tax-harvesting plans. You may want to find a tax professional to help.
4. Make a charitable donation. This, too, can help in the tax-reduction department, but there are rules that must be met for the IRS to consider your generosity deductible. The contributions must be made to what the IRS deems as “qualified organizations,” and the record-keeping has to be precise. Contributions to individuals are never deductible, and that includes donations to crowdfunding sites like GoFundMe. Besides writing out checks, consider donating appreciated stock to charity. The fair market value of the stock at the time of the contribution is deductible, allowing you to potentially sidestep the capital gains taxes.
5. Add to kids’ education plans. Contributions to education savings plans like a 529 are not tax deductible, but withdrawals aren’t subject to federal tax—and generally not state tax—when used for qualified education-related expenses. Now, with the new tax policy, those expenses include elementary and secondary education. Remember, there are child and dependent care tax credits available, plus education and lifetime-learning tax credits. The deadline for making contributions to a 529 for 2018 is April 15, 2019.
Other financial measures you can think about as we head into the new year include:
6. Review contracts and documents. This can be a good time to get your paperwork organized. Ensure your beneficiary information is up to date and that your trusted contacts are correct. Take note of your status on things like options contracts, short positions, or wash sales.
7. Save for a rainy day. There’s never a bad time to put money aside for any unpleasant events that life might toss your way. Got a year-end bonus? Sock it away for a jump on a six- to nine-month emergency fund. You’ll thank yourself later.
8. Pay down high-interest debts. This shouldn’t be a surprise, but high interest rates on credit cards, car loans, mortgages, student loans, or any other kind of debt can eat away disposable income quickly. It’s always better to pay credit cards off every month to avoid interest rate charges—average credit card rates range from 15.3% to nearly 21%. A 21% annual percentage rate on a balance of $10,000, would cost about $175 just in interest if only the minimum is paid. But because interest compounds, payments can rise even as the balance is reduced. Many auto, home, and school loans allow you to add to the monthly principal, after paying the interest, to accelerate the pay-down of the loan.
9. Readdress investment goals. There’s nothing like starting off the new year on good financial footing. Consider taking another look-see at your short- and long-term investment goals, your overall contributions, and portfolio allocations to verify that you’re still on track.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
The key to filing taxes is being prepared. TD Ameritrade provides information and resources to help you navigate tax season.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
All investments involved risk including loss of principal.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.