The year is rapidly coming to a close. Most of us are ready for celebrations and vacation, but there are still a few things that we should do before the year is over. Time may be short as you complete your holiday planning, but your retirement needs some attention too. Check out this list of things to get done before December 31st:
Check your 401(k) contributions. If you haven’t maxed out your 401(k) contributions yet, there is still a little time left. If you contribute before the end of the year you’ll pay less tax in April. At least make sure you contribute enough to receive the maximum benefit of the employer matching available. Don’t leave that extra money on the table. The maximum contribution to a 401(k) in 2012 is $17,000, or $22,500 if you are at least 50 years old.
Contribute to an IRA. If you’ve put off contributing to an IRA until December, it can be difficult to catch up. December is usually a big spending month due to all the holiday gifts and travel. However, consider contributing to an IRA if you have any extra savings. Contributing to a traditional IRA will reduce your tax bill next year. Contributing to a Roth IRA is even better because you will give your retirement savings a boost and you never have to pay tax on that account again. You can deduct contributions made until April 15, 2013 on your 2012 tax return, but it can get confusing when you do that. It’s better to get all your contributions done in 2012 and call it done. The maximum contribution to an IRA in 2012 is $5,000, or 6,000 if you are 50 and older.
If you have kids, don’t forget about a 529. Higher education will be even more important in the future, so we need to help our kids as much as we can. Any gain in a 529 college saving account can be withdrawn tax free for higher education costs. It’s best to start saving when your children are young so the 529 account will have a chance to grow. The contribution may also be deducted on your state taxes.
Sell some losers and rebalance your portfolio. In your taxable account, it’s time to sell some losers and take the tax break on the losses. The S&P 500 gained nearly 15 percent in 2012, so I’m sure most of us made some money. It’s time to review your gains and losses for 2012 and see if you need to sell some losers to offset your profit. You can always buy back the stock in 30 days if you still like it. Under the wash sale rule, you can’t take a tax deduction on the loss if you buy the stock back in less than 30 days.
Make a charitable donation. You can donate some of your stock winners to charity to maximize the benefit to the organization and to your tax bill. You will avoid the capital gains tax on the profit if you donate the stock instead of cash. The charity can then sell the stocks and receive the full amount. Uncle Sam is the only one losing out on this transaction. Check with the charity to see if they can accept stocks, because some smaller charities may not have a brokerage account.
Make an early mortgage payment. Your mortgage payment is usually due on the first day of the month, but consider paying the January mortgage in late December instead. Your January 1st mortgage statement includes the interest for the month of December, so if you pay it early, you can deduct that interest when you file the 2012 tax.
Enjoy the holidays. Even if you can’t do everything here, doing just a few of these things can set you up for a good start to 2013. Hopefully, you have some vacation time left and are able to spend time with family and friends. Have a great holiday.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.