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Your Year-End Financial Checklist

| November 16, 2017
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With the end of the year rapidly approaching, we’re providing you with a brief checklist of financial tasks to keep in mind as you wrap up 2017 and head into the New Year. Depending on the phase of your financial journey, you may have different tasks at hand. While Pinnacle Financial Advisors clients do not need to worry about completing these tasks on their own since they’re part of our financial planning services, we want to point them out for those who desire the extra education or prefer to personally handle the lion’s share.

For people who are recently on the path to financial independence, consider the following:

  • Fund your retirement account to get employer match: This is one of the easiest ways to get a return on your investments. If you haven’t already, figure out what your employer match is. Generally, employers will match up to a certain percentage of your salary, such as 3 percent. Therefore, if you haven’t put at least that 3 percent (in this example) of your salary into your retirement plan, do so before December 31 to get that 100 percent guaranteed match.
  • Review your current year’s budget and start planning for next year: Now is the perfect time to look back at your inflows (such as salary, dividends, interest, etc.) and outflows (expenses, taxes, insurance, etc.) to see how you did compared to your 2017 planned budget. We recommend all of our clients create a budget to see where they are spending their money over time so we can course correct as needed. Didn’t have a budget in 2017? No problem—start fresh in 2018. Check out this article about getting started with a budget. (And as a reminder, cash flow management is a service we provide as part of the financial planning process.)
  • Top off your emergency fund: At Pinnacle Financial Advisors, we recommend that our clients save roughly three-to-six months of living expenses as an emergency fund. Unpredictable emergencies such as health scares, home repairs, or auto accidents are often the top reasons people fall into bankruptcy. Having a side pot that holds three-to-six months of living expenses in a conservative account will help insulate you from those unpleasant and unexpected occurrences.

For those further along on their path to financial independence:

  • Tax loss harvesting: To minimize your taxable income and future tax bill, it is sometimes appropriate to harvest some of your portfolio losses to effectively wipe out some of your taxable gains. First, you need to determine what your realized capital gains are for the year. Next, see if you have any securities in your portfolio that have lost money that you can sell at a loss to wipe out some or all of those aforementioned gains. The idea is to make your losses equal to your gains so there is nothing for the IRS to tax. However, make sure that doing this doesn’t throw off your portfolio allocation. Also, watch out for the wash provision, which stipulates that you can’t buy a similar security to the one you just sold within 30 days, or the losses will be “washed out.” See a financial advisor for assistance with this strategy.
  • Maximize your healthcare benefits: Many employers offer Flex Spending Accounts (FSA) and Health Savings Accounts (HSA) to employees to help cover the cost of healthcare. If your employer matches a portion of your HSA, we recommend funding it to that level at a minimum. HSA accounts are a great vehicle because they are triple tax deferred, meaning they provide you an upfront deduction like a 401(k), grow tax deferred like a 401(k), and are not taxed when funds are withdrawn, as long as they are used for qualifying medical expenses. On the FSA front, generally only $500 of the account is transferrable to the next calendar year. Therefore, if you have more than that amount left in your account, use it or lose it! Make sure you’re maximizing these benefits and check with your human resources department to determine which transfer amounts are applicable to you.
  • Weigh the potential benefits of a Roth conversion: Unlike a traditional 401(k) or IRA, a Roth IRA or Roth 401(k) is funded with after tax dollars but grows tax free and is generally not taxable at withdrawal (as long as you satisfy the 5-year rule). If you are in a low income year, a common strategy is to convert part or all of your traditional retirement accounts to Roth accounts. This will incur tax liability this year, because converted funds are counted as taxable income. The goal with this strategy is to take advantage of being in a lower tax bracket temporarily. If you are in a lower tax bracket now than you will be down the road after receiving Social Security and other required minimum distributions, it is better to pay lower taxes now. The Pinnacle team has considerable experience with Roth conversions and recommends working with a financial advisor to conduct the analysis and carry out conversions as part of the financial planning process. 
  • Required Minimum Distributions: Also called RMDs, these distributions refer to the minimum amount you must withdraw from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account each year when you reach age 70 1/2. Roth IRAs do not require withdrawals until after the death of the owner. The owners of the accounts are responsible for taking the correct amount of RMDs on time every year from their accounts or face stiff penalties for failure to do so: 50% of the RMD amount! RMD calculations are a service provided by Pinnacle Financial Advisors every year.

Make it your New Year’s resolution to get your finances where you want them! This will only happen if you take the necessary steps to either plan yourself or reach out to a professional. We encourage you to reach out to us to help you create a customized financial roadmap.

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