With the holidays around the corner, a personal finance checklist for year-end planning is probably not the most fun of the lists of the things to do. I believe the strategies on the list are worth sharing because they can boost retirement savings, improve tax efficiency and make savings go further for people. In particular, the list highlights the good use of work benefits, the silver lining of losses, ways to use tax-advantaged savings, how timing does matter and a simple way to avoid unnecessary taxes. The summaries are for informational purposes and should not be viewed as investment, tax or legal advice.

Maximize Your Match

Making good use of employer matching programs is on the top of my year-end planning list. I am always surprised when people tell me they don’t take advantage of this benefit from their work. Many employers will match contributions to qualified retirement plans, such as a 401(k), and to charitable organizations. A dollar-for-dollar match in a retirement plan is effectively an 100% return on investment with essentially no risk. Employer matching programs are one of the closest things to a real free lunch. Usually, I get extra skeptical when I hear about free lunches, which are hardly ever truly free. This is not the case with employer matches because they fall under the added scrutiny of the many ERISA and IRS on qualified retirement plans. There still may be time to make good use of the match in 2014 or to get ready for 2015.

The power of employer matching for charitable donations can greatly increase the impact of personal giving and fundraising. As members of the Walk Committee for the 2014 Walk to End Lupus Now in San Francisco, my wife and I actively reminded donors to use their corporate match. We estimate that the matching programs added at least 30% to our fundraising total. Overall, the Walk was a great success with new records set for fundraising and participation.

Harvest Losses to Keep More Gains

Next on my list for year-end planning is seeing the silver lining in an investment loss. Losses can reduce a tax bill. As part of a tax-loss harvesting strategy, losses can reduce what is subject to tax, thereby reducing the tax bill. The tax rate is 15% for the federal long-term capital gains tax at the federal level for most taxpayers. It can be as high as 23.8% effectively for those in the highest federal tax bracket and subject to the net investment income tax. If recognized losses exceed gains, up to $3,000 of the net loss can be used to offset other earned income. If the investment no longer holds merit, money raised from selling the investment can serve other purposes or be reinvested elsewhere. Taxes, however, should not be the sole factor for investment decisions. At Candent, we put into context the merits of investment holdings as they pertain to investment goals, evaluate the costs to harvest and coordinate with a client’s tax advisor on ways to improve returns after taxes and fees, i.e., returns that the client can actually keep.

Plan to Use Tax-Advantaged Dollars to Save

For many, year-end planning at this time includes elections for next year flexible spending accounts (FSA) and decisions about charitable giving. Both present opportunities to employ strategies to use tax-advantaged or before-tax dollars that can result in sizable savings. I find myself constantly reminding people how important it is to use great care in selecting the types of accounts they use to save.

A new must-do when planning FSA elections for 2015 is to confirm the terms of the FSA program with the employer. In October 2013, the IRS allowed employers to modify their plans to allow employees to carryover up to $500 into the new year. FSAs are popular because they let employees pay for qualified expenses with before-tax dollars. Qualified expenses may include healthcare, dependent care and transit. FSAs can greatly reduce these expenses. They can be a large portion of some household budgets. The limit for health FSAs are $2,500 for individuals or $5,000 for a two wage-earner household. Historically, the catch with FSAs was that an employee would forfeit unused balances at year-end or after a grace period. Now employers can adopt rules either to carryover unused balances or to offer a grace period. In our opinion, it is well worth knowing the terms of your FSA before making the election.

Charitable donations offer another opportunity to use what I consider tax-advantaged money. Imagine selling an appreciated asset such as stocks that have gone up in value to raise cash and then writing a check to the charity versus donating the stock directly. By donating appreciated stock, it would be like using tax-advantaged money. The reasons are simple. Just like writing a check, the direct donor gets a tax deduction up to their fair market value of the donation. The difference is that the donor saves in two ways: on the cost of selling the appreciated stock and because the donated stock is not subject to capital gains tax. If the holding is a keeper that can be easily repurchased, one option is to donate the appreciated stock, capture the tax deduction and then buy back the stock in order to restore your holding.

Don’t Pay Taxes for Gains You Didn’t Enjoy

At year-end, planning for new investments should include a careful review of funds that may make sizable taxable distributions of capital gains and dividends. Buying into a fund right before the distribution can result in a tax bill based on gains that you didn’t enjoy. Last year, some funds paid out as much as 30% of their net asset value (NAV) at this time of the year. Those that bought into a 30% distribution last year may have gotten a bill shortly afterwards for tax on 30 cents for every dollar they invested even if the fund did not appreciate. Being tax aware can reduce such unwelcome tax situations.

Fund companies have started to announce estimated distributions for 2014. We expect to see high distributions between 10% and 30% of NAV for many funds given the strong appreciation in the stock market in recent years.

Avoid Unnecessary Taxes, Take Your RMD

At age 70 ½, people with retirement plan accounts are subject to required minimum distributions (RMDs) from IRAs and retirement plan accounts. An exception is money held in Roth IRAs. Seniors subject to RMD have until December 31st to take their distributions. The RMD calculation uses a formula from the IRS based on the value the IRA as of December 31st of the prior year. Many account custodians, fund companies and tax advisors can help. The cost of not taking a sufficient amount from the retirement account is high. The penalty is an additional tax equal to 50% of the undistributed RMD. My guess is that taking at least the minimum required will bring more holiday cheer than sharing some of it with the IRS.

Happy Holidays!


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