Year-end money moves: Get your financial house in order

December 16, 2010

U.S. one dollar bills are displayed in this posed photograph in Toronto October 22, 2008. It’s that time of year again: The holidays, when your to-do list starts to look as lengthy and convoluted as the nation’s tax code. You’re overrun, overbooked, and overwhelmed, traveling and working and juggling a thousand different chores – all at the same time. We get it.

But if there was ever a time to sit down and sort out your financial affairs, this is it. Dec. 31 isn’t just time to pop cheap bubbly, it’s a crucial cut-off date for everything from tax writeoffs to college-fund contributions. Resolving financial issues won’t just give you peace of mind for the holidays, it could literally save you thousands of dollars.

That’s why Tiffani Murray’s planning to clean house in time for Jan. 1. Tiffani Murray is pictured in this undated handout photo. REUTERS/HandoutThe 33-year-old from Atlanta, currently a human resources technology manager, is leaving her full-time gig to pursue her side career in freelance writing.

To lower her overhead next year, she’s taking pre-emptive action now – looking into refinancing her home, stockpiling a fund to cover first-quarter bills, making her annual Goodwill run to book the charitable donation, and prepaying critical expenses to qualify as this year’s tax writeoff.

“Despite all the December spending on holidays and travel, it’s actually the best time to plan for the New Year,” says Murray, whose writing ventures include and the relationship book Stuck on Stupid. “I estimate I can cut out up to $500 worth of monthly expenses next year, just by making a number of small changes now.”

Following Murray’s example, which financial areas should you focus on right now, before the ball drops on New Year’s Eve? A few time-sensitive issues to consider:

IRA contributions. Forgoing one year of retirement savings, especially for younger workers, can turn into a massive mistake by the end of your career. “The power of compound interest is a giant snowball effect,” says Matthew Russell, a financial planner in Kingwood, Texas, and founder of MTR Financial Services. “Missing just one year’s $5,000 IRA contribution could have a huge impact on your retirement.”

Roth IRA conversions. Many Americans have been converting their traditional IRAs into popular Roth versions, since they won’t owe the IRS a penny when they eventually withdraw the funds in retirement. But typically there are income limits to convert, and you owe the IRS taxes on the shift (since contributions to a traditional IRA are pre-tax). This year and this year only, there are no such income restrictions, and you can spread the ensuing tax hit over two years.

Save for college. With IRAs, if you procrastinate, you actually have until April 15 to chip in for the previous tax year. Not so with 529 college-saving plans, where your contribution has to be booked by Dec. 31. If you do so, the state-tax deductions can be quite juicy; in Colorado, South Carolina, West Virginia and New Mexico, for instance, they’re unlimited for in-state residents. The plans are also a terrific place for grandparents to kick in some holiday cash for their grandkids’ future, since they can gift up to $13,000 in a given year, totally tax-free.

Use it or lose it. Flexible-spending accounts help people cover medical expenses that aren’t covered by their insurance plan, like co-pays for prescription drugs or doctor visits. But they come with a caveat: Use the cash by the end of the year, or lose it entirely. (You may get an additional grace period of 2.5 months, but that’s up to your employer.) An additional wrinkle for 2010: In past years, you could use the funds for an array of over-the-counter expenses at the local drugstore. Starting Jan. 1, though, those items have to be doctor-prescribed to be reimbursable. So if you have FSA cash that’s waiting to be spent, stock up now on everything from Tylenol to Band-Aids.

Revisit your allocation. Experts advise looking at the asset allocation of your portfolio every year or so, and now is the perfect time. Along with many Americans, you may have been freaked out by the volatile stock market of the last few years and heavily favoring bonds and cash. Now with the economy lurching towards a recovery, it might be time to chart a fresh path. “Many people have shifted out of equities, which may have been good for the time,” says Russell. “But you don’t want to keep that allocation for the long-term.”

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