Money plays a huge role in our lives and we work hard for it, but are you taking proper care of yours? Statistics show that women lack confidence when it comes to making financial decisions. According to the Financial Experience & Behaviors Among Women study, between 2014 and 2015, nearly half of women were the breadwinners of the household but only “a third gave themselves an ‘A’ for their knowledge of managing money (33%) and debt (29%).”
With less than two months until the end of the year, it’s time to start thinking about our finances and making plans for our money in 2016. We tapped CFP’s Gary Plessl and Kevin Houser, managing partners of The Houser and Plessl Wealth Management Group and authors of The Book on Retirement, to share the top financial items you need to take care of before it’s too late. Scroll down to read more.
Do a “reality check” on your expenses
How often do you underestimate what you really spend each year? Plessl and Houser said this is a common problem with their clients and many don’t acknowledge it either. “The premise of cash flow being king in retirement is important, but knowing how much cash flow you need is a function of understanding how much you need to have coming in to meet your expenses,” Gary says. So be sure to write a detailed list your actual expenses each month and keep track of where your money is going. This is the only way to start saving.
Drain your flex spending account
If you’re unfamiliar with the term, a flex spending account is a special account you can deposit money into for out-of-pocket health care costs. According to the Employers Council on Flexible Compensation, about 35 million Americans have their employers deduct a portion of their paycheck into a health-care FSA. The best part about an FSA is you don’t have to pay taxes on the money, but if you don’t use it on medical expenses before the end of the year, it’s gone. “This is a ‘use it or lose it’ scenario,” Houser says. “If you don’t drain the account, it does not carry forward for you.”
Start planning now to ease next year’s tax reporting
Plessl says it’s too late to make your 2015 tax reporting process easier, but you can start thinking ahead and plan for the next tax season. “Any accounts consolidated by 12/31 will only have statements (hence tax reporting statements) for that year,” he added. “So if you are with five firms this year, then you will get five tax reporting statements. If you consolidate everything by year-end, then the following tax season will be a lot easier, administratively speaking.”
Overshoot or recharacterize your Roth conversions
Have you even thought about your Roth conversions yet? Plessl says one of the most powerful things to do by year-end is determine whether or not a Roth conversion makes sense for you. So what is a Roth conversion, anyway? Well, this is when you move your assets from a traditional, SEP (simplified employee pension), or simple IRA to a Roth IRA, which is generally not subject to taxes. Investopedia says this “can be advantageous for individuals with large traditional IRA accounts who expect their future tax bills to stay at the same level or grow at the time they plan to start withdrawing from their tax-advantaged account, as a Roth IRA allows for tax-free withdrawals of qualified distributions.”
Here Gary provides an example: “For 2015, a couple filing married and filing jointly can have taxable income of up to $74,500 and still stay in the 15% tax bracket. One of the main reasons why your tax firm and investment firms either need to be one in the same or communicate effectively together is because if you do not do a Roth conversion by year-end, you lose the chance to do it. The reason we overshoot the $74,500 TI is because even if we overshoot the mark, you have the opportunity to recharacterize some or all of the conversion before you file your federal taxes."
“Bunch” your deductions
There are many surprises when it comes to paying taxes, but the fact that the tax code limits some itemized deductions based on a percentage of your adjusted gross income (AGI) is not. For example, Houser says miscellaneous deductions only take effect if they are over 2% of your AGI. “Medical deductions must meet a 10% threshold, 7.5% if you are age 65, only through 2016,” he says. “When possible, bunching expenses into a given tax year can help a taxpayer meet these thresholds.”
Withdraw enough funds from the IRA to avoid “bracket creep”
Ever heard of “bracket creep”? Well it’s time you knew before it happens to you. Bracket creep is what happens when inflation pushes your income into a higher tax bracket, thus increasing your income tax. Pessl explains, “For 2015, a couple filing married and filing jointly can have taxable income of up to $74,500 and still stay in the 15% tax bracket. If a couple has $50k of taxable income, we would have that client take out $25k to max out the 15% bracket without jumping up to another bracket. Our rule of thumb is if you can get money out of your IRA at 0% or 15% tax bracket, you need to do it. In our opinion, more than likely you will never get that money out at any lower rate in your lifetime.”
Organize your documents in iDocs
If you really want to keep your “financial house in order,” House says you should digitize a copy of all of your important documents. “This is a great back-up in the event of an emergency such as a fire, hurricanes, or theft,” he says. “It also helps our team transition any assets to the surviving spouse and/or children upon the death of one of our clients.”
Maximize your retirement contributions
How often have you made contributions to your retirement fund? If you can’t think of any, then it’s probably time you did. Gary says this is an “excellent way to increase savings and lower your current tax liability.” He adds; “Unfortunately, we find that several of our clients are also not taking advantage of their company match contributions. Some employers will match an employee’s contributions up to a given percentage.” If you can afford it, it’s always wise to max out your 401K investments to whatever percentage your employer is willing to match.
Have you started planning for 2016 yet? Do you have any tips for getting your finances in order? Share them with us below.