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Year-End Personal Finance Checklist
To be sure, you have time to get your financial act together
before 2006 ends. But not much time. Here's a recap of what Sue
Stevens, director of financial planning at Morningstar, and
other financial planners suggest doing:
Fix your portfolio. Year-end is the perfect time to
rebalance your portfolio. At a minimum, investors and their
financial planners should revisit (or create if they don't have
one) their Investment Policy Statement (IPS) to see if you need
to make any changes to the asset allocation. An IPS is a written
document that articulates the investor's overall investment
goals and how those goals will be accomplished. It's designed to
take the emotion out of investing and keep the investor on
track, regardless of what the market or the economy is doing. In
some cases, rebalancing will be required because the percent
invested in certain assets exceeds the limits established in the
investment policy statement. In other cases, circumstances may
have changed, requiring changes in the percent invested in asset
classes.
When rebalancing, it's a good idea to review whether you can
sell some securities at a loss and others with a gain to reduce
potential taxes. In addition, it's a good time to check whether
you have any losses from prior years that can be carried over to
this year.
Because many mutual funds are expected to declare capital
gains this year, find out if any of the investments you own now
expect to distribute these gains. It's also important to examine
whether the mutual fund or funds you plan to buy or sell in the
last part of the year have had any year-end capital gains
distributions. Usually, people try to avoid these payouts
because they can complicate a tax return and result in unwanted
and needless taxes.
Catch up if you can. Those who have an
employer-sponsored 401(k), 403(b) or 457 retirement plan, should
contribute as much as possible to their plan. The maximum is a
total contribution of $15,000 in 2006 and $20,000 for persons
who will be at age 50 or older by December 31, 2006. In some
cases, employees can adjust their payroll deduction before
year-end to reach that amount. In other cases, they may have to
use a portion of their bonus.
Besides socking money away in an employer-sponsored
retirement plan, taxpayers should also consider — if eligible
and possible — contributing to an IRA or Roth IRA. This can be a
bit complicated. If you have earned income, you are always
eligible to contribute to an IRA — which may or may not be tax
deductible — but income restrictions may rule out Roth IRAs.
You can contribute up to $4,000 in 2006 or $5,000 if you're over age
50 in 2006. Of note, you can do this up to next April 15.
For those who are self-employed, consider setting up a 401(k)
or profit-sharing plan before year-end, or a SEP-IRA, or for
potentially even larger tax deductions a defined benefit plan.
Plan that estate. People tend to procrastinate when it
comes to getting their estate planning documents in order.
Consider these a priority before the year ends: Name guardians
for your children and trustees for your assets. Make sure you
have named someone who could make health care decisions for you
if you are unable to do so. Of course, if you already have
estate documents, review them with a qualified professional who
will know about recent changes in the law that might affect your
plans.
Put money away for your children's education. Be it a
529 Savings Plan, a Coverdell Education Savings Account, a
Uniform Gift/Transfer to Minors account, or something entirely
different, start socking money away for your children's future.
The new tax law change causes kids under 18 (previously 14) to
be taxed at parent's rate so this could be a good time to
consider switching to a 529 plan from a UGMA.
Charitable giving. You can give $12,000 each to as
many people as you'd like this year without triggering gift tax.
But that gift doesn't have to be cash. In fact, lots of people
who have appreciated stocks in their portfolio give those
instead.
Take those RMDs. If you're over age 70 1/2, you
probably have to take at least the minimum distribution required
by Uncle Sam from your qualified retirement plan (unless you're
still working for that company) or traditional IRA. Don't wait.
You'll owe 50 percent of the amount you should have taken plus
ordinary income tax if you miss the year-end deadline.
Do a Year-End Tax Projection. Most people hate tax
surprises. If you do tax projections throughout the year, that
could help reduce the odds of surprises next April. It's
especially important for those who have to pay AMT (alternative
minimum tax), exercise stock options, or have income from
multiple sources.
Consider a Roth IRA Conversion. If you meet the
criteria, if you have AGI (adjusted gross income) under $100,000
and you have a traditional IRA, you may want to think about
converting to a Roth IRA. You can convert all or part of the
traditional IRA. Of course, you will have to pay ordinary income
tax on the portion of the traditional IRA that you convert.
November 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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