The year is almost over, and while you may be eager to turn the page on 2012 and start a fresh new year, there are a few things you need to get in order first. In fact, taking care of business before the year is through will help set up your finances for a stronger 2013. Here are some of the things you should tackle before the ball drops on January 1st.
1. Hit Your Maximum Retirement Contributions
If you haven’t made a any contributions to your 401(k) or IRA, there are some good reasons to make a heroic effort to get as much cash in these accounts as possible before the year is out.
Playing retirement catch up will help you accumulate greater savings over time. Better still, many retirement plan contributions are tax-deferred, which means that you won’t pay tax on the amount you deposit (at least not until you withdraw it during retirement). This reduces the tax you will pay in 2012.
Maximum retirement contributions for 2012 are $17,000 to a 401(k) and $5,000 to an IRA. Deduction limits may apply to IRA contributions depending on marital status, income and whether you have a workplace retirement plan, so check with your accountant to determine the optimal type of retirement plan and contributions for your situation.
2. Contribute to a 529 Plan
If you have children, you may want to make contributions to a 529 Plan for their college education. These plans allow funds to grow tax-free, and some states even let contributors deduct a portion of their contributions from state taxes.
Plus, if your kids have grandparents or other family members who want to chip in, those contributions are eligible for the annual gift tax exclusion ($13,000 in 2012, or $26,000 for married couples filing a joint return).
There are no maximum contribution limits for 529 Plans, although they do have a lifetime contribution cap. This is between $100,000 and $270,000 and varies by state.
3. Compare Capital Gains Against Losses
Did you know that you can deduct up to $3,000 in capital losses? If you have a losing stock in your portfolio that you don’t think will turn around, selling it before the end of the year could be of benefit.
If your losses on that stock exceed your capital gains for the year, you can deduct that loss against other income. If your overall capital loss is more than $3,000, you can even carry it over and deduct it in 2013.
4. Take Required Minimum Distributions
If you are 70.5 or older, ensure you’ve taken your Required Minimum Distributions (RMD) from tax-deferred retirement plans such as 401(k)s or IRAs. As with all rules related to retirement plans, there are exceptions. You can learn more about RMDs by reading IRS Publication 590.
5. Review Your Beneficiaries
It’s a good idea to review your beneficiaries each year to cover any changes that may have occurred in your family. The assets in your retirement accounts, life insurance and annuities bypass your will because of the beneficiary forms these accounts require. If you want to make changes to your beneficiaries, remember that your need to make those changes to both your will and your beneficiary forms.
6. Use Up Your Flexible Spending Account (FSA)
If you’ve set up a flexible spending account (FSA) with your employer, now’s the time to use it. Although some employers offer an FSA grace period that stretches into the new year, they are generally a use-it-or-lose-it benefit that expires at year end.
If you need medical services or plan to incur other eligible expenses soon, be sure to get it done before your plan’s coverage period deadline to avoid forfeiting those FSA funds.
7. Review Your Long-Term Financial Goals and Set New Ones
You might be caught in holiday shopping and entertaining this month, but set some time aside to plan for 2013. It’s best to do this before the end of the year so that you can hit the ground running when 2013 arrives.
Think about what you learned in 2012 and what you can do in the upcoming year to improve your financial situation. Also think about your long-term goals, and break them down to determine what you need to be doing each year to hit them. Finally, write it all down and set some manageable goals for each quarter of 2013. This will help keep you on track.
8. Make a Budget
You can have all the goals in the world, but if you don’t make a plan for how you want to spend your money, you are unlikely to achieve them.
Pull out your bank and credit card statements for 2012 and find weaknesses in your budget. Are there areas where you could cut back and divert more money to saving? Are there some things you aren’t spending money on (such as insurance) that you would like to divert money to next year?
Make a plan now and begin enforcing it on the first day of 2013. It takes at least three weeks to establish a habit, so the sooner you start, the better.
9. Set Up Automatic Savings
Once you determine where you want your money to go in 2013, take a trip to the bank and set up automatic deposits to your savings and retirement accounts. This will enforce your saving habit and keep your savings out of your reach, making it harder for you to break your commitment to putting that money aside.
If you can, time the withdrawals to occur on the same day you receive your pay check. This way, your savings will be whisked away before you get a chance to even think about spending the money elsewhere.
The end of the year is hectic time for many reasons, but don’t allow these distractions to keep you from addressing your financial affairs one last time this year. Like it or not, your finances will play a major role in how 2013 shapes up for you. Set yourself up for a more prosperous new year, and many more to come.