The last few weeks of the year are always a mad rush to wrap up loose ends, often in a frantic fashion. In the spirit of the season, we thought it a good time to share a checklist of important items to consider before the calendar year ends, all related to your investments and finances. We also wanted to reiterate some key topics we’ve already discussed, but that are especially important to review by end-of-year. Here are some brief pieces of financial advice on several fronts that could benefit you and yours in multiple ways, and that could ultimately add to your long-term bottom line, not to mention peace of mind.

1. Establish or Tune Up Your Emergency Fund

If you have not already, give yourself and/or your family the gift of an emergency fund. As we discussed in Build the Emergency Fund That’s Right for You, our recommendation is to keep funds that could cover at least three to six months’ worth of expenses saved and easily accessible in the form of a fairly liquid type of low-risk account such as a money market fund.

2. Max Out Your IRA and/or Roth IRA Contributions

Traditional and Roth IRAs allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Returns generated in both IRAs compound tax-free over their entire life. Each allows you to withdraw money without penalty for various reasons including qualified higher education expenses, certain medical expenses, and a limited amount for the purchase of your first home. Your contribution into a traditional IRA can be made up until April 15th of the year following the year in which you plan on taking the deduction. In other words if you want to contribute $5,500 to a Traditional IRA you can receive the deduction for 2014 if you contribute to your IRA up until April 15, 2015. In return for the upfront deduction, you will have to pay taxes when you later withdraw money from the account and you will be subject to the ordinary income rates in effect at that time. The contribution to a Roth IRA, on the other hand, is not deductible, but you do not pay a tax upon withdrawal as long as your money has been invested for at least five years from the initial contribution date. For those yet to open either type of account worry not, read our post ‘When Do You Use a Traditional vs. Roth IRA?’ for all the information you will need.

3. Rebalance Your Portfolio

While those of you with a Wealthfront account do not have to worry about rebalancing (our platform does it automatically), your outside accounts might not be getting the same treatment. As we are fond of pointing out around here, at least once or twice a year you should look to rebalance your investment portfolio to make sure you’re not becoming too weighted toward one asset class because it has outperformed everything else in your portfolio.

4. Harvest Your Losses

Tax-loss harvesting (TLH) is a method of reducing your taxes by selling an investment that is trading at a significant loss and replacing it with a highly correlated though not identical investment. In doing so you maintain the risk and return characteristics of your portfolio and generate losses that can be used to reduce your current taxes. The tax savings you generate can then be reinvested and will compound over time. According to New Research on the Efficacy of Tax-Loss Harvesting, the practice of tax-loss harvesting can prove extremely worthwhile, even at low risk levels and tax rates, and this is especially the case if it is offered for no additional cost (as is the case at Wealthfront). Your potential amount of annual benefit can vary significantly based on your risk tolerance, income level and the length of your investment time horizon (again, read the New Research post for extensive simulation and back-testing results). Granted, tax-loss harvesting done manually can be a tedious, time-consuming process. Wealthfront launched the first automated software-based TLH engine more than two years ago. We now offer two different levels of TLH service. Clients with a minimum of $100,000 invested in a taxable account qualify for our daily TLH service at no additional charge.

5. Review Your Life Insurance Policies and Discuss Future Health Care Costs with Your Parents or Elders

Make sure you and your loved ones are well protected if something happens to you. Now is a good time to consider whether any major life changes, like the birth of a child in the past year, might mean the need for additional insurance. If you do have enough coverage it is also a good time simply to review the different types of coverage you have. We explained in detail Why Whole Life Insurance Is A Bad Investment and why, for many people, term life insurance makes more sense. And while it might seem like a bad time to do so it is actually a good time of the year to gently review with parents or elders their own coverage. Long-term care coverage for older parents is one area often overlooked, even by many financial advisers. Also, many retiring boomers fail to consider how much they will have in the way of out-of-pocket healthcare costs post-retirement. If you want to perform a quick back-of-the-napkin calculation to estimate these costs for an older parent or loved one check out this free one-click cost calculator.

6. Spend Down that FSA or HSA and Begin Discussing Any Changes You Might Want to Make to Your Health Insurance Next Year

If you have a flexible spending account (FSA) for health care expenses, and you haven’t used all the money in it you’ll need to use the bulk of it before the end of the year (or by your open enrollment period in some cases). The longstanding “use-or-lose” rule was upended by the U.S. Department of the Treasury and the IRS in 2013 when the agencies issued a notice modifying the rule. Plan sponsors continue to have the option to allow employees participating in health FSAs to carry over, instead of forfeiting, up to $500 of unused amounts remaining at year-end. You can reference this IRS page on Publication 969 for additional information and related updates. A key difference between these types of accounts and a health savings account is that the latter allows you to roll over all your funds year to year. In Think Carefully Before Signing Up For a High Deductible Health Plan, we reviewed the case for HSAs (which are generally offered as part of a High Deductible Health Plan) and determined that they should be viewed mostly as a repository for any free contributions available from your employer. If you lack such free contributions, HSAs should be avoided because they tend to be such poor investment vehicles.

7. Review Your Homeowners’ Insurance Policies, If You Rent Purchase Renters’ Insurance

If you own your own home, chances are good you have homeowners insurance, in fact some states and most lenders require it if you take out a mortgage. The opposite tends to be true for renters — a 2013 survey of 1,000 renters by found that 60% of those surveyed lacked renters insurance. As we discussed in You Need Renters Insurance, the consequences and costs of not having renters insurance can be pretty high. In the post we document, in detail, the almost $15,000 loss experienced by one individual following an apartment fire (a total made more dramatic considering the average policy tends to be around $200 per year).

8. If You Have Kids and Have Not Already Started One, Enroll in a 529 Plan

When it comes to long-range planning for your family, few things have the potential to prove as financially rewarding as enrolling early in a 529 Plan for your kids. In 529 Plans and Saving For College we cover the basics from the types of accounts available and their pros and cons to giving you an idea of how much you’ll likely need to save. And in 529 Plans: The Benefits of Superfunding we discuss how, given the right circumstances, you can more immediately set up and fund a plan. In a nutshell, for those parents who find themselves in the fortunate situation of a significant windfall event (a fairly common occurrence for employees of technology companies that either go public or are acquired by a public company), superfunding a 529 plan offers significant benefits both in terms of objective savings results, as well as from a behavioral finance perspective. Superfunding dramatically increases the amount you can start a 529 plan with. Instead of the $14,000 per year annual limit, each parent can pre-fund in a single instance up to fiver year’s worth of contributions, up to $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000. Obviously, that’s a tremendous amount to allocate to a savings plan up front, but the benefits are numerous in situations where it’s possible. You’ll see in the post the biggest advantage is the compounding over time.

9. If You Are at a Pre-IPO Startup, Consider Exercising In-the-Money Stock Options Up to the AMT Crossover Point

If you have vested stock options that are significantly in the money, meaning your strike price is far below the current fair market value, you should consider exercising them up to the AMT crossover point to save on taxes later. Consider this: if you have options priced at a strike price of $1, but the last funding round gives your options a fair market value of $9, you may be able to cut your taxes in half on some of those shares by exercising now and paying 25% long term capital gains when the IPO happens rather than 50% or more in ordinary income.

If you exercise now, when the company has grown to the point where you consider the risk acceptable, you need to count the discount of $8 per share ($9 – $1) as an Alternative Minimum Tax (AMT) preference item. If you end up paying AMT, it could work out to a 35% effective rate once the reduction in the exemption is factored in, but many taxpayers can absorb some amount of AMT preference items before actually paying any AMT. Until you hit that point, you aren’t paying taxes on the exercise of your stock option. You can use TurboTax to run scenarios to find the amount of AMT preference items that puts you just at the line for starting to pay AMT and then exercise enough options to put yourself at that point.

10. Roll Over Your Old 401(k) into an IRA

While you can do this anytime, people seem to think about big financial issues this time of year and really, as we see it the sooner the better. Why? Most 401(k) plans are pretty poor performers and the fees you pay on them add up (as we point out in Why Your 401(k) Plan Sucks). If you leave one company for another, it’s a bad idea to roll your 401(k) over into your next employer’s 401(k) unless you’re lucky enough to find one of the few good plans. Instead, seize the opportunity to find an investment company offering a low-fee IRA with low-cost, high-quality investment options and rollover your old 401(k) in it. Again, read and bookmark ‘When Do You Use a Traditional vs. Roth IRA?’ if you need an understanding of the differences between the two most common IRAs. If you are in the fortunate position of being beyond the income level for opening a Roth IRA but are still interested in the deferred tax option check out ‘High Income? Here’s How You Open A Roth’.

11. Give a Tax-deductible Charitable Contribution

As you are thinking about giving this season, now is a good time to donate to a cause you believe in and be able to benefit from it on your 2014 taxes. It’s especially advantageous to donate appreciated securities because you avoid having to pay taxes on the gains. Just remember, though, that a tax deduction is going to save you only a fraction of the total amount you donate. So in making that charitable contribution, do it because you really want to support the cause and not just for the potential tax write-off. Giving directly to causes was also deemed a good alternative for those wrestling with whether to pursue a socially responsible investing strategy. We covered this in a set of Q&A posts we produced with behavioral finance expert Meir Statman.

12. Buy that Electric or Plug-In Hybrid Car You’ve been Considering

Yes, there are a few models of electric or hybrid cars you can purchase and receive up to $7,500 in the form of a tax credit. This credit has been phased out for certain models in which the manufacturer has already sold 200,000 vehicles (A reduced credit is still available on some models beyond that limit). If you have your eye on a particular model check out its manufacturer’s listing on this IRS page to see if it can still get you a credit and for how much. Some of the better-known electric car models include the 2012-2014 Ford Focus Electric, the 2013 Ford Fusion Energi, the 2013 Ford C Max Energi and the 2011-2012 Nissan Leaf. See the IRS document Plug-In Electric Drive Vehicle Credit (IRC 30D) for additional information. 

13. Claim Your Residential Energy Efficient Property Credit

If you, as an individual homeowner have thought about purchasing residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment etc., you should consider looking into this tax credit. The credit runs through 2016, and is 30% of the cost of qualified equipment. According to the IRS you can generally include labor costs when figuring the value of the credit and you can carry forward any unused portions of this credit.

14. Review Your Spending, Plan Your 2015 Budget and Set Up Automated Savings

The holidays can be a good time of the year to reflect on your spending and develop a budget for next year. While it might seem contrary to the happy-go-lucky spirit of the holidays, chances are good that you and your spouse might have access to babysitting assistance from family or friends. It is also a very good time to finally bite the bullet, if you have not done so already, and set up automated savings — first and most importantly into #1’s Emergency Fund if you lack one — and second into your investment account(s). As our CIO Burt Malkiel likes to say “Start saving early and save regularly. You will do very, very well over time and likely have a very happy retirement when the time comes.” The Princeton emeritus economics professor and author of a Random Walk Down Wall Street discusses related suggestions in Burt Malkiel’s Rule for Young Investors: Save Regularly (yes, we are intentionally reiterating the point of saving regularly). And, as our CEO Adam Nash makes clear in ‘Does It Ever Make Sense to Stop Saving For Retirement?’ that it seldom does.


The information contained in the article is provided for general informational purposes, and should not be construed as investment advice. This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Financial advisory services are only provided to investors who become Wealthfront clients. Past performance is no guarantee of future results.

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About the author(s)

Davis Janowski is Wealthfront's editor. Before joining Wealthfront he was most recently technology columnist for InvestmentNews; prior to that he served in various roles with PC Magazine including editor, analyst and reviewer. He holds a Master of Arts degree in magazine journalism from the S.I. Newhouse School of Public Communications at Syracuse University. View all posts by Davis Janowski