This is the time of year when financial advisers trot out
last-minute money tips, and for good reason. Much of it is geared to potential
income-tax savings, for which some actions need to be completed
by New Year's Eve to take them on your 2015 return. But some of
these are really inaction items. Several common suggestions aren't
all that applicable to most people or don't work well each year.
Here are examples of year-end tips that you might be able to safely
ignore, or at least delay until 2016.
Making a charitable
donation.
This is one of the easiest ways to shave your tax bill. Make
a donation by Dec. 31 and you can deduct the
amount contributed. Non-profit groups raise a big chunk
of their overall donations during the waning weeks of the year.
Holiday cheer and tax savings put donors in a giving mood. But
for the roughly 75% of Americans who don't itemize, and thus
don't claim charity deductions, this year-end tip doesn't
help. In fact, many people probably would be better off hanging
onto the money so they can pay off credit card balances from holiday
shopping when those bills arrive in January. Others
could apply the money to enhance their personal savings or start
contributing to an Individual Retirement Account or something like
it.
It's hard to argue against making donations, because so
many worthwhile non-profits genuinely need the money. But for
some taxpayers, perhaps most, there's no compelling reason to give in
December compared with any other month.
Rebalancing your
portfolio.
It's smart to bring your investment allocation back into
alignment on occasion. The idea is to pull some money from your highflying
assets and reinvest the proceeds in those that have lagged. The
concept rests on the notion that you already have a target for what percentages
of your assets should be held in stocks, bonds and so on. Rebalancing
provides discipline to stick to your plan. It also forces you to sell high
and buy low, from time to time.
However, there's no requirement to rebalance at the end of
the year. Alternatively, you could make moves after your investment
mix has shifted out of alignment by a notable amount. Suppose you aim to
keep half in stocks and the other half in bonds. If your assets now show a
60-40 mix, it's probably time to rebalance. But if not, you don't need to take
any action.
Heeding required
minimum distributions.
This is a big investment caveat for some investors. If
you have reached age 70½ and have an IRA or 401(k)-style account, you
likely will need to start withdrawing money and pay taxes on it.
Otherwise, you face a stiff 50% penalty on the amount that you should have
withdrawn but didn't.
This is certainly an important penalty to avoid. But if
you're younger than 70½ or don't have a retirement plan, this
tip doesn't apply to you. If you just recently passed that age and
haven't yet taken your first RMD, you don't need to heed the Dec. 31 withdrawal
deadline. For first-timers, the initial distribution generally can be
taken as late as April 1 following the calendar year in which the
person turned 70½. But after that, in subsequent years, the Dec. 31
deadline does apply.
Funding a retirement
account.
As with required minimum distributions, Dec. 31 isn't a
hard deadline for certain people seeking to put money into retirement plans. If
you invest in a workplace 401(k)-style plan, you typically can increase the
amount at any time. If you seek to open or add to an IRA, whether traditional
or Roth, you pretty much can do that at any time, too.
In fact, funding an IRA is one of just a
few retroactive tax breaks. You may contribute money as late as next
April, to correspond with the general due dates for filing 2015 tax
returns, and still have the investment applied for 2015. If you
qualify for a deduction on a traditional IRA, that means you can take it for
this year on money contributed in 2016. Or, you can disregard the
deadline and fund your 2016 IRA at any time next year.
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