In a few short weeks, the books will close on 2015 and along with them, the chance to make some last-minute decisions about retirement funds.
“People get busy and miss out on these opportunities,” says Keith Klein, owner of Turning Pointe Wealth Management in Phoenix.
U.S. News spoke to Klein and other financial planners who say these are the seven biggest retirement mistakes people make at the end of each year.
Mistake No. 1: Failing to make planning a priority.
“When we come to the end of the year, a lot of people set resolutions,” says Andrew Rafal, president and founder of Bayntree Wealth Advisors in Scottsdale, Arizona. “There’s no better time for setting goals for retirement.”
Beyond setting goals, people should also look back at their fund performance for the previous year. Christine Baim, regional sales executive at Merrill Edge in Phoenix, says both workers and retirees should ask questions about their investments: “Am I allocated properly? Should I do anything to be more diversified?”
For those who aren’t sure about the answers, a financial professional can evaluate your retirement funds and make recommendations.
Mistake No. 2: Overspending during the holidays.
While it may not seem like holiday shopping and retirement are related, finance experts say they can be intertwined.
“I see a lot of people overspend during the holidays,” says Cory Schmelzer, founder of San Diego Wealth Management. “It can eat into your budget so you’re not putting money away for retirement.”
Don’t make the mistake of blowing your holiday budget or, even worse, taking out a 401(k) loan to pay for year-end spending. “As the year comes to an end, it’s important to stay financially disciplined,” Baim says.
Mistake No. 3: Avoiding conversations with your family.
Having a money conversation over Christmas dinner can be a recipe for indigestion, but Rafal says the holidays are a prime time to go over retirement plans. “A lot of time you’re with family, so this is a time to sit down with children,” he says.
That’s especially true if your children are far-flung, and you are rarely in the same place together. Rather than have a serious discussion during the holiday celebration, ask to meet with children or other family members at a separate time, like for breakfast the next day.
While there is no need to lay out the minutia of your finances and retirements plans, it’s a good idea to touch base and let children know where they can find important paperwork in case of an emergency. If you’re thinking of buying a second home to be near children or contemplating another big decision that could affect your family, a casual meal together or coffee outing can be a good time to float these ideas past your loved ones.
Mistake No. 4: Missing out on a 401(k) deduction.
Contributions to traditional IRAs can be made until April 15 of the following year and still be eligible for a tax deduction. However, contributions to traditional 401(k)s must be made by Dec. 31 if you want to deduct them on your 2015 federal income tax forms.
Ken Moraif, founder and senior advisor at Dallas-based Money Matters, says failing to make contributions can be a costly mistake. “The money you put in a [traditional] 401(k) is tax deductible, and you may get a match from your employer,” he says. Depending on your tax bracket, Moraif says the deduction and match can be like getting a 25 percent return on your money.
Mistake No. 5: Not dumping losing stocks.
For those who have their retirement money invested outside of an IRA or 401(k), Klein says now is the time to consider ditching any stock that’s down. Stocks sold for a loss can be used to offset any capital gains taxes for the year. Up to $3,000 in losses can be deducted each year.
You don’t even have to get rid of a stock for good if you like it. A stock can be sold for a loss and then repurchased, hopefully at the lower price, after a 30-day waiting period. “People who do tax harvesting regularly can successfully increase their returns by 1 percent,” Klein says.
Since tax loss harvesting can be subject to complex IRS rules, consulting with a professional first is advisable.
Mistake No. 6: Skipping your required minimum distribution.
The most expensive year-end retirement mistake is failing to take a required minimum distribution, otherwise known as an RMD.
People with traditional IRA or 401(k) accounts must withdraw a certain amount, calculated by a formula, each year after they turn age 70 ½. Failing to do so will result in a tax equal to 50 percent of the required distribution.
For those who turned 70 ½ during 2015, the IRS allows the first RMD payment to be pushed to April 1, 2016. However, that could end up costing taxpayers more come 2017. “If you delay the RMD until next year, then you’ll have to take out two of them [in 2016],” Moraif says. “That could push you into a higher tax bracket.”
People who inherit IRAs may also need to take an RMD. “If the owner had passed away, was 70 ½ and didn’t pull out the RMD, it needs to come out before [December] 31,” Rafal says.
The RMD can be a sizable amount and has the potential to move people into higher tax brackets, resulting in more money going to Uncle Sam each year. However, with advance planning, the size of the RMD can be reduced. Unfortunately, as the next mistake shows, too many people don’t think to do that type of planning.
Mistake No. 7: Overlooking ways to reduce future taxes.
Although contributions to traditional IRAs and 401(k)s are tax-deductible, once money is withdrawn, it becomes taxable. However, withdrawals from Roth accounts are tax-free. Plus they aren’t subject to a RMD. Those are two reasons finance professions say Roth accounts are key to reducing taxes in retirement.
“There are some strategies to look at [Roth] conversions, spread tax consequences out over the years and reduce the RMD,” Schmelzer says.
Money converted from a traditional retirement account to a Roth account is taxable, but that money then grows tax-free. What’s more, it can be withdrawn in the future without having to pay additional taxes. Considering a conversion at the end of the year makes sense because taxpayers will likely know the final amount for their annual income and how much they can convert without inadvertently placing themselves into the next tax bracket.
You may be busy during December, but making these mistakes can be costly. Once the calendar flips to 2016, you will have lost your opportunity to use some tax-strategies or begin the new year with a fresh financial slate. “Just because you’re on holiday,” Moraif say, “that doesn’t mean the deadlines go on holiday.”
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7 Year-End Retirement Mistakes Experts Say You’ll Want to Avoid originally appeared on usnews.com
