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The Thanksgiving leftovers have been eaten. The Hanukkah candles have been lit, and Christmas songs have been playing at the mall for weeks. Yes, it’s the holiday season, and seasoned investors know that means it’s time to wrap up their self-directed investments and start planning to file their tax returns. This article contains a gift bag of tips regarding self-directed IRA distributions and contributions, retirement and tax preparation, and even a few hints about how to save while spending this holiday season. So, let's take a look at the 4 things investors do to prepare for end-of-year:
1. They Make Their 2018 IRA Contributions and Take Their Distributions
The more you contribute to your self-directed Traditional IRA, the more you save on taxes come April 15. If at all possible, make the maximum contribution to your self-directed IRA. This year, that means up to $5,500 a year, if you are under 50. If you're 50 or older, you can contribute $6,500 to a Traditional IRA.
Doing this has two benefits: First, you deduct the amount of your contributions from your 2018 taxable income, potentially reducing your tax rate. Second, the assets in your IRA grow tax-free until you take distributions, presumably after you have retired and have a lower tax rate. (Contributions to Roth IRAs are made from taxable income, but you benefit later from tax-free withdrawals.) You have until April 15, 2019 to make eligible contributions for 2018.
Speaking of distributions, if you turned 70½ in 2018, you have to start taking required minimum distributions from your Traditional IRA no later than April 1, 2019. There are no required minimum distributions from Roth IRAs for the original owner. (Read our article for more details.)
2. They Start Preparing for the 2018-2019 Tax Season
This is the first year the tax reform bill signed into law in 2017 will be in FULL force. It changes the tax brackets for individuals and corporations, alters the standard deduction and eliminates the personal exemption, expands the Child Tax Credit, and tweaks deductions for mortgage interest, charitable contributions, and medical expenses.
While everyone’s tax situation is different, it is likely that many households will discover that itemizing is no longer worth it. It’s also likely that you’ve already seen the first results of the tax reform law in your paycheck. Most employers modified withholding to reflect the new tax brackets. (We can only hope that you’ve been putting those extra dollars and cents into your self-directed IRA.)
Another goal of the tax reform law was simplification. But what’s simple for one person can be complicated for another. Whenever you have a tax-related question or are unsure what to do, it’s always best to consult a tax professional. Read more about the tax reform here.
3. They Continue to Plan for Retirement
Planning and preparing for retirement isn’t a seasonal activity; it’s something you need to do year round. That said, when the family is gathered together at the holidays, it might be a good time to talk about your retirement plans. Let people know your thoughts—where you might want to retire, and when. Sometimes just starting the conversation can be the impetus for more serious planning.
Here are a few things every retirement plan should include:
- An analysis of how much money you will need in retirement. Consider your day-to-day living expenses (rent or mortgage, transportation, groceries and utilities), taxes, health care costs, and discretionary spending (travel, entertainment, gifts).
- A road map to save the amount you will need. Using your current age and the age at which you want to retire, figure out how much you will need to save in the intervening years to reach your retirement income goal. Be sure to add in a bit extra, just in case your situation changes, for example, if you need to retire earlier than expected.
- Open a Traditional or Roth IRA and fund it fully as often as you can. This gives you immediate tax benefits, in the case of a Traditional IRA, and allows your retirement savings to grow tax-free until you need them. If you employer offers a 401(k) or similar plan, participate and be sure to contribute enough to qualify for the employer matching contribution.
- A diversified portfolio. Most banks and brokerage houses limit the type of assets you can hold in your IRA to stocks, bonds, and mutual funds. A self-directed IRA puts you in control of the assets you own. The Internal Revenue Service allows a wide range of assets in IRAs. Among Entrust clients, real estate, precious metals, and private placements are among the most popular. This allows you to put your investment knowledge to work for you and to diversify your portfolio. Learn more about the value of self-directed IRAs, how they work and start investing in what you know.
4. They Plan for Holiday Spending
It is possible to spend wisely while still enjoying the spirit of the holidays.
- Know whom you want to buy for and what you can afford to spend.
- Include items like decorations, travel, and entertainment in your spending plan.
- Pay with cash as often as possible. This gives you a better idea of how much you’re really spending, and it prevents painful credit card bills in January.
- Ignore the ads. Retailers know people can’t ignore a bargain—even when the bargains aren’t really what they claim to be.
- Giving the "gift" of yourself. Time with loved ones is often the most meaningful gift.
If you're an investor, you understand how being financially conscious during the holiday season is a great way to stay on top of your investments, as well as plan for the future. As a bonus tip that will promote both financial security and end-of-year preparedness: Sign up for a FREE consultation with a trained Entrust professional today.