As 2012 draws to a close, you're going to face all the usual craziness: travel, family, cooking, parties, cards, shopping, and maybe even some snow. Before your world gets too busy, schedule time to ensure you're taking care of your year-end financial obligations.
Maximize the benefit to your retirement nest egg while minimizing your 2012 taxable income:
--Contribute more to your 401(k) account if your budget and the IRS will allow it. In 2012 you can contribute up to $17,000.
--Catch up if you can. Individuals who are 50 or older can contribute an additional $5,500 to a 401(k) account--this includes people who turned 50 anytime during calendar year 2012. This bonus contribution for people nearing retirement is nicknamed a catch-up contribution; despite the moniker, anyone who contributes to a 401(k) and fits the age criteria can take advantage of the opportunity--even people who maxed out contribution limits for the past 30 years and don't need to catch up.
--Dump more money in your IRA if you're eligible to take advantage of the tax benefits. Income limits are lower for people who have access to a 401(k) plan versus those who do not. In 2012, the maximum deductible contribution is $5,000, and the catch-up contribution limit is $1,000 for people 50 or older.
Use all the money in your medical flexible spending account. If you still have extra dollars in the account at the beginning of December, look to spend it on approved items in your pharmacy and/or contact lenses and glasses. And don't forget to submit your out-of-pocket medical, dental and vision expenses from 2012 for reimbursement.
Give a little bit. If you'd like to reduce your taxable income in a charitable fashion, remember to make donations before 2012 ends. To check up on your favorite organization, visit Charity Navigator for unbiased reviews based on financial reporting.
Transfer wealth. Individuals who wish to transfer wealth can do so in smallish chunks each year. In 2012, an individual can gift another individual up to $13,000 without tax consequences.
Create a holiday budget now. With your shopping list in hand and the euphoria of discounted merchandise clouding your brain, it's easy to spend too much money. Not to mention you may be invited to parties, gift exchanges and any number of money-sucking events. It's helpful to hit the ground running at Thanksgiving time with a budget that extends to the New Year.
Prepare yourself for a little volatility as 2012 draws to a close. We always see some ups and downs related to consumer spending during the holidays. If spending is up year-over-year or exceeds expectations, the market may spike and then correct. If spending is lower than expected, the market could drop and then correct. This year we could see more volatility than usual with the presidential election and Congressional budgetary wrangling associated with tax changes and the fiscal cliff.
Establish specific goals for 2013. Decide by what amount you'll increase your retirement plan contributions and when you'll do it. The 401(k) contribution limit increases to $17,500 in 2013. You can also establish a plan for monthly budgeting, beefing up your savings, debt reduction and appropriate investing.
Set your IRS tax withholding for 2013. Armed with your 2011 tax receipt, your 2012 income and any information you have about your likely income level for 2013, you can use the IRS's Withholding Calculator to decide how many allowances to claim in 2013 in order to break even on you federal income taxes.
Don't allow 2012 to slip by without taking advantage of all it has to offer to you and your financial planning efforts.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
Smart401k is not an accounting firm and does not provide tax advice. Nothing in this article should be construed as tax advice and Smart401k does not warranty or guarantee, in any way, the accuracy of any tax-related information contained in this article. Please contact your tax professional to discuss: (1) the amounts and timing of your retirement plan contributions; (2) matters related to charitable and gift giving; (3) the timing of payments made from flexible spending accounts; (4) current and future tax withholdings strategies and requirements; and/or (5) any other tax matters.
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