Corliss Law Group | 5 Must-Do Retirement and Tax Planning Tips

As 2013 winds down, I want to offer a few simple reminders and pass along some retirement and tax planning tips that will help you end the year on a high note and propel you into a prosperous 2014.

401(k) plans. Let’s start with an overview of some retirement plans, their contribution maximums and specific timetables. The 401(k) is the basic plan that everyone’s heard about, but not many people, especially young professionals, take full advantage of. You can put up to $17,500 each year into your 401(k), and if you’re age 50 or older, you can contribute another $5,500, called a catch-up provision.

It’s important to remember that with a qualified 401(k) plan, all contributions have to be made before Dec. 31 of this year. So, if you have a little extra money that you didn’t spend on gifts for the family, remove all temptation to buy something for yourself and make one final contribution. Another thing to remember is to leverage your corporate match program. Find out what it is, and take advantage of it. It’s basically free money.

Individual retirement accounts. If you have an IRA or Roth IRA, things are a little different. You can’t put away as much money each year, but the trade-off is that with a Roth IRA your future withdrawals are tax-free. Because the total contribution amounts are lower, it’s important that you contribute the full $5,500 each year, and if you’re age 50 or older, take advantage of the $1,000 catch-up provision.

Your contribution deadlines are also a different with IRAs and Roth IRAs. You have until tax filing time in 2014, plus any extensions, to make IRA and Roth IRA contributions for 2013. That being said, I would not advise you to procrastinate in making your contributions. Try and hit the maximum contributions by the end of 2013 because your retirement planning will be done for the year. Making the full contribution by the end of the year also helps simplify next year’s planning and budgeting process.

If you’re an individual business owner, or it’s just you and your spouse who own the business, you can place your money into a 401(k) called a solo 401(k) plan. This plan allows you to contribute up to $17,500 for each individual in 2013. The company can then contribute up to $33,500 as a corporate match, as long as the amount contributed doesn’t exceed 25 percent of your income. Also, like the 401(k), there is a catch-up contribution of $5,500 available for individuals over age 50. The Dec. 31 deadline still exists for contributions, but since a solo 401(k) plan doesn’t have to comply with nondiscrimination testing rules, the filing process is much simpler.

One last retirement planning tip: If you are age 70.5 or older, you must take your required minimum distribution this year because it’s a calendar year program. I cannot stress enough how important this is, and you literally cannot afford to forget! If you don’t make your scheduled RMD payment, the Internal Revenue Service will assess a 50 percent penalty on what you don’t withdraw. It’s one of the steepest penalties that the IRS can impose.

Shrinking Your Tax Bill. Let’s move on to tax planning. If you want to do tax planning, you have to do it during the current tax year. That may seem obvious, but sometimes people lose track when tax cycles begin and end. I have a calendar that I update regularly to show when I need to make local, state and federal tax payments. I created this calendar for two reasons: I want to avoid unnecessary tax penalties, and I want to show the months when I have less discretionary income than I would ordinarily have. If you create a similar calendar it will help you keep track of your expenses and plan for 2014.  

Now that we know when we have to pay our taxes, let’s discuss legal ways to lower our tax bill. For many investors, tax loss harvesting is an essential tool used to reduce the yearly tax bill. When properly executed, it can help you save on taxes and help you diversify your portfolio in ways you may not have considered.

For example, let’s say you’ve had a great year and “investment A” has given you a fantastic rate of return, but your other investment, “investment B,” has resulted in a loss. As long as both investments are within taxable accounts, you can sell your losing positions to harvest your losses, which can then be applied against your gains, leaving you with a smaller amount of gains and thus a lower base for taxes to be applied against.

Fortunately or unfortunately, this has been a really good year, and most people only have gains. However, if you have a stock or a piece of real estate that didn’t fare so well, you will have to sell it in order to take your loss and offset the capital gains tax.

Gifting. Another strategy that you may want to consider is gifting. It’s important to note that charitable contributions can help reduce your taxable income. As an individual, you’re allowed to gift $14,000 to any individual each year. That means you and your spouse could give a combined total of $28,000 per calendar year. As a result, you only have a few days left to make that 2013 gift.

Business expenses. If you’re a business owner, you can deduct some of your business expenses from your income, thus lowering the taxable income. The expenses follow a calendar year cycle as well, and must be taken by the end of the year, so you can claim them in this tax year.

529 contributions. One last tax strategy that you may want to consider is the 529 educational savings contribution. Certain states will allow you to take a deduction against state income taxes based on the amount of money contributed to a 529 plan. Remember that it doesn’t have to be your own 529 plan; it can be for your children or grandchildren. Just like expenses, you must make the contribution by Dec. 31 in order to reduce your taxable income for this filing year.

Don’t forget – while you can wait until tax filing season for some of these strategies, you absolutely must claim expenses and make 529 contributions by the end of this year. Completing one or more of these basic retirement and tax planning tips will help maximize your retirement accounts.

I hope I’ve given you some great ideas to consider and execute before the end of the year. The most important, above all tips, is to take a look at where you are and where you need to go, both investment and retirementwise. Then set a plan to meet those goals. Once you have designed your plan, review it to make sure you’re keeping up with your responsibilities in order to be successful in the new year. Have a great 2014.

Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Va. Campbell is also the author of “Fire Your Broker,” a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.