Published On
November 2, 2016

With the end of the year fast approaching, it’s easy to get side-tracked when it comes to getting your financial planning in order. Don’t miss these six tax deadlines which you must complete before December 31st:

1. Deadline to Convert to a Roth IRA

Current tax law allows all investors to convert to a Roth IRA from existing retirement accounts. A Roth IRA provides tax-free growth and income in retirement. In addition, if you have after-tax dollars in your retirement plan, you may be able to convert to a Roth IRA completely tax-free.

By ensuring you have not only tax-deferred but also tax-free savings in the form of a Roth IRA, you’ll be tackling one of the most important topics in financial planning, tax diversification. By having your money multiple “pools” (In the United States this would be taxable, tax-deferred and tax-free), you give yourself the flexibility to withdraw funds from the most advantageous sources in retirement depending on your other sources of income and current tax laws at the time.

2. Deadline for Establishing a Qualified Retirement Plan

A qualified retirement plan is described in Section 401(a) of the Tax Code. The most common types of qualified plans are profit sharing plans and defined benefit plans. Usually, your contributions are not taxed until you withdraw money from your plan. Most retirement plans you obtain through your company are qualified plans.

3. Last Day to Sell Securities to Realize a Gain or Loss

Consider selling investments that have lost value, since it can be a useful tax reduction strategy. This strategy, called tax loss harvesting, can help reduce taxes on capital gains from profitable investments. We recommend that you simultaneously purchase a similar investment to keep the integrity of your portfolio.

For example, say an investor has $40,000 in a mutual fund that he paid $50,000 for has an unrealized loss of $10,000. By actually selling his position he realizes the loss of $10,000. This can be used to offset other gains in taxable accounts, or even reduce taxes if there is no gain elsewhere. Up to $3,000 per year can be used to offset “ordinary income” which includes income from wages, withdrawals from tax-deferred accounts and other sources. The investor could use $3,000 for three years in a row, and $1,000 in his final year, eventually using the entire $10,000 loss (hypothetical example).

4. Last Day to Complete Charitable Contributions

Your charitable contributions could have huge tax benefits for you, but you must complete your contributions before December 31st.

There are several ways to gift to a charity that may benefit you from a tax standpoint. First, let’s establish that for the purposes of this discussion a charity is a 501c3 organization that is qualified to receive tax-deductible contributions. Gifts to private individuals or other entities that are not 501c3 organizations are not eligible even if the intent is charitable.

The gifts themselves can be in the form of cash or other assets such as stocks or real estate. The one asset you’re generally not going to be able to write off is the value of your own time when volunteering, although you may be able to write off expenses associated with charitable activities. Once you’ve determined your charity of choice and what asset (or amount of cash) you’d like to give, make sure you get a receipt for the gift.

Do your research beforehand regarding your own tax situation. Your charitable gift may not actually lower your tax bill if your total itemized deductions including charitable gifts are still lower than the standard deduction.

5. Deadline to Withdraw Required Minimum Distributions from an IRA

Make sure you take any required minimum distributions (RMDs) from your IRA, 401(k) or employer-sponsored plan if you have reached age 70½. If you neglect to take your RMD, you could face a 50% penalty on the amount of RMD not withdrawn.

6. Deadline to Open an Individual 401(k) for a Small Business

A Solo 401k can be an excellent option for business owners without employees or those whose business has no additional employees other than their spouse.

Generally, the plan must be set up by the end of the fiscal year for the business, usually, December 31st, although certain types of contributions may be made by the tax filing deadline (April 15th in most cases) or extended deadline.

Your employee contribution limit will be the same as those contributing to a regular 401k although you can also contribute additional amounts that are considered contributions of the company.

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