Just as an annual physical is good for your physical health, annual financial checkups are good for your financial health. They enable you to assess where you are and compare it with where you want to be. You can measure progress, make necessary adjustments, and get or stay on track with your long-term goals.
Each year there are 10 financial checks you should make before the end of the year to ensure you are on target, take advantage of tax savings, and are financially ready for the upcoming year.
- Required Mandatory Distributions (RMDs). Reaching 70i ½ begins the requirement to take withdrawals from your 401K or Traditional IRA. You may begin receiving distributions after you reach 59 ½, but you MUST start taking money at 70 ½, even if you don’t need it financially. Money from these accounts grow tax-free, and Uncle Sam does not get paid until you receive the funds. Thus the required distributions on these tax-advantaged The rule applies to accounts the offer deductible contributions and include most employer accounts, SEP and SIMPLE IRAs, and Traditional IRAs.
Each year the amount is different based on the current balances. Failure to withdraw the minimum can result in a penalty of up to 50% of the required withdrawal or RMD. When you have all your investments with one company, they will send you reminders and calculate the RMD each year to ensure compliance. You must, however, act on those notices or set up automatic withdrawals for the minimal amounts. Those with investments in more than one place need to ensure you have taken the minimum amounts to avoid the additional tax. The withdrawal deadline is December 31 each year.
- Avoid Kiddie Tax. Initially, the Kiddie Tax was designed to impact the wealthy and eliminate the benefits of transferring assets to children to avoid taxation. However, today many middle-class families may find their children paying the tax due to changes in tax laws. Parents can now claim college aged children up to the age of 24, if they are in school, leading to more families being subject to the Kiddie Tax rules.
The Kiddie Tax does not apply to earned income (their job) but takes effect when a child has an unearned income like interest, dividends or capital gains from investments in their name. The the first $2,100 of unearned income pays a lower tax, at the child’s rate, and any amount over this pays tax based on the parent's rate unless the child is self-supporting based on the child’s earned income.
- Empty Your FSA. Many employers offer a Flexible Spending Account that does not roll over from year to year. These accounts can cover both child care costs and health care expenses. In most cases, you will forfeit any remaining funds in the account after December If you have extra funds, check the list of approved expenses. You can fill prescriptions for additional months, buy qualifying over the counter medications you will need this winter, or get needed medical tests completed like eye exams, dental work, and other qualified expenses.
- Double Check Your iWithholding Status on your paycheck. When you begin a new job, you complete a W-4 which calculates the amount of taxes withheld from your check in the form of taxes. With the vast majority of Americans receiving a refund each year, you can reduce your refund and increase your monthly pay, by adjusting withholdings. Another important note on withholdings is that when you receive a bonus, you pay higher taxes because the calculations assume you receive that amount each paycheck. Before the company disperses the bonus, you can increase your withholdings to give you more money in your pocket.
- Review Your Investment Portfolio. At least once a year you should compare your investment strategy with your life goals. Rebalance investments, check the diversification, and ensure you have the right investments based on your time horizon, the level of comfort with risk, and current life circumstances. Review all your investments, including those held by an employer. During your annual review is a good time to roll over old work accounts into an IRA and increase contributions for the upcoming year. A small percentage increase completed regularly will add up to a significant increase in balances.
If you have had a year with limited income, consider rolling over the 401K or Traditional IRA into a Roth IRA, which offers tax-free growth instead of tax deferred growth.
- Bundle Expenses to Maximize Benefits. Stacking expenses and deductions in a single year can increase your benefits, lower out of pocket costs, and lower your tax liability. For example, if you have met your insurance deductible, address next year's anticipated medical needs now, before the deductible resets at the first of the year. You can also pay extra interest on student loans and mortgages to increase tax-deductible interest.
- Get a Copy of Your Credit Report. You qualify for a free copy of your credit report each year, from each of the three national credit bureaus. You can get all three at once or stagger them throughout the year. With the high incidents of identity theft and the frequency of inaccurate reporting, you should check your report each year to ensure its accuracy and stave off fraud.
- Review Insurance Needs. Insurance can be a lifeline when the unexpected happens, and prevent a life event or natural occurrence from becoming a financial disaster. Having too little insurance can leave you vulnerable and too much, can leave you with higher than necessary out of pocket costs. Review all your insurance policies including health, vehicle, home, life, and disability. If you are not carrying insurance, consider your needs and look for an inexpensive policy that will igive you proper coverage.
- Complete a Beneficiary Review. Account beneficiaries allow you give someone control over an account when you die. The beneficiary typically receives funds by presenting a copy of the death certificate and can bypass the probate process and your will. Insurance policies, bank accounts, and investment funds commonly offer the option of a beneficiary. If you want money to pass through the will, list the estate as the beneficiary.
- Hold Yourself Accountable. You control your financial future. Life is unpredictable, but it is how you respond to circumstances that determine your financial destiny.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.