5 Year-End Financial Planning Moves

Money advice to start 2012 off right.

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Roger Wohlner

With the end of the year approaching, here are some financial planning moves for you to consider. Some need to be done by year-end to impact your 2011 taxes. Others constitute areas that should be reviewed periodically, and year-end is always a good time to get your financial house in order as we move into a new year.

Harvest tax losses from your investment portfolio. We have experienced a lot of volatility in the stock market in 2011, including significant declines in many of the major indexes in the third quarter and during November. It is always a good idea to go through your taxable investment accounts and look for holdings with unrealized losses on an annual basis. Consider realizing these losses in your 2011 tax return, especially if you have capital gains against which to offset them. If your losses are larger than your gains, up to $3,000 of excess losses can be deducted each year. Also, remember that any losses above that limit can be carried forward and used in subsequent tax years. There are other rules pertaining to the use of these losses, including rules that depend on the duration of your holdings and the timing of your trading activity. As a result, this may be an area in which a consultation with a financial planner or tax advisor knowledgeable in this area can really pay off for you.

Consider a Solo 401(k) or other self-employed retirement plan. If you work for yourself, and qualify to contribute, the deadline to establish a Solo 401(k) is Dec. 31 if you want to deduct contributions made in 2011. You can contribute up to $49,000 ($54,500 if 50 or older in 2011). Beyond that, depending upon your business structure (sole proprietor, corporation, LLC, etc.), the deadlines for contributing will vary. These plans can be established at Schwab, Fidelity, Vanguard, TD Ameritrade and many other custodians. Besides a Solo 401(k), the self-employed can also consider a SEP IRA, a SIMPLE plan, or even a pension plan. The best plan for your situation will depend upon a variety of factors including your business income and the stability of your business cash flow. Again, this is an area where a consultation with a qualified financial advisor can pay off for you.

Review your beneficiary designations. Take a look at your workplace retirement plans, IRAs, annuities, insurance policies and any other instruments that transfer ownership or where payment is made to a designated beneficiary upon your death. Be sure the person or people named in those instruments match your wishes. For example, if you still have an ex-spouse named as the beneficiary of an insurance policy that is who will get the money when you die. This might not sit well with your current spouse if you are remarried.

Review and rebalance your 401(k) account. All too often investment choices are made once in these accounts and that’s it. For many, your 401(k) is your biggest retirement savings vehicle. I generally suggest that you review and, if needed, rebalance this account at least annually. Many plans have an auto rebalance feature which makes the latter task even easier. Above all, review your 401(k) plan as a part of your overall portfolio, not in a vacuum. Ideally your company retirement plan should work in harmony with your investments outside of the plan as a part of your overall financial planning strategy.

Hire a financial adviser if you need one. I encounter many folks who feel that they can do their own investing and financial planning. Many of them are perfectly capable. The question is will they actually take the time to do the planning and ongoing reviews and updates that are so critical? My (very biased) suggestion is to seek out a fee-only adviser.

The end of a calendar year is a time when we often reflect on where we are in life and upon what has happened over the past year. Take some time in this last month of 2011 to get your financial house in order and to position yourself to hit the ground running in 2012.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.