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8 Must-Do Financial Tasks Before the End of the Year

By U.S. News & World Report

With only one quarter left in 2016, it’s about time to begin thinking about year-end planning strategies. While you still have a few more months, keep in mind that nearly all of the strategies that can reduce taxable income must be complete by Dec. 31. These eight tips can help you avoid leaving money on the table.

Contribute to a health savings account. If you have a high deductible health plan, an HSA can help you pay for medical expenses and reduce your taxable income through pre-tax contributions. When the funds are used for qualifying medical expenses the earnings won’t be taxed. Although you aren’t required to use all of the funds annually, HSAs offer investment options, allowing your pre-tax contributions to grow tax-free.

Annual HSA contribution limits for 2016 (under age 55) are $3,350 for an individual and $6,750 for a family. Consult the IRS guidelines for details.

[See: 13 Ways to Take the Emotions Out of Investing.]

Use your flexible spending account. Flexible spending accounts are similar to HSAs but differ in a few key ways. Medical FSAs can help offset qualifying medical expenses with pre-tax contributions. Unlike HSAs, FSAs must generally be depleted during the calendar year or your contributions will be forfeited. FSAs do not have investment options but also do not require participants to have a high deductible health plan.

The dependent care FSA is a unique benefit not available in HSAs. Qualified dependents are typically your children younger than 13. The expenses must be incurred to enable you (and a spouse, if married) to work, look for work, or enroll in school full time. If so, babysitters, summer day camp, and after-school programs could be reimbursable. Annual contribution limits for 2016 are $2,550 for the health FSA and $5,000 for dependent care if married filing jointly. Consult the IRS guidelines for full details.

Maximize contributions to a tax-advantaged retirement plan. Reduce your taxable income while saving for retirement. For participants of employer-sponsored retirement plans like a 401(k) or a 403(b), you may contribute up to $18,000 in 2016. Individuals older than 50 may make an additional catch-up contribution of $6,000.

If you can’t afford to contribute the full amount, try to contribute enough to get the full employer match. Also consider annual increases to contributions by 1 percent or more. While anyone may contribute to a traditional IRA, there are income limitations on who may deduct their contributions, which depend on marital status and if you (and your spouse if applicable) are covered by a retirement plan at work. You have until April 15, 2017, to make additions to an IRA for the 2016 tax year. To determine your eligibility, review the IRS guidelines.

Rebalance your portfolio. The underlying asset classes in a portfolio rarely perform in the same manner — some may experience strong growth while others could remain flat or negative. Portfolios are constructed with this in mind, to diversify the risk and create an asset allocation consistent with the investor’s risk tolerance. As the various asset classes experience different growth levels, rebalancing may be required to revert to the original asset allocation. Rebalancing isn’t always necessary and there may be costs to doing so. In a taxable account, selling securities you’ve held for less than a year will result in short-term capital gains taxes.

[See: 10 Ways to Buy International Small-Cap Stocks.]

Consider working with your financial advisor beforehand to avoid unintended consequences. For example, mutual funds issue their capital gains distributions in fourth quarter based on the year’s trading. You could find yourself owing capital gains taxes on those distributions despite just purchasing the position.

Use tax-loss harvesting. Tax-loss harvesting involves selling underperforming securities in a taxable account and buying similar replacement securities to take the loss in the current year. If, after netting short-term and long-term gains/losses against each other, a loss results, the loss can be used to offset taxable income in the current year or carried forward if over the $3,000 maximum. Whenever possible, tax-loss harvesting should be done in conjunction with portfolio rebalancing to minimize the potential for unintended tax consequences, wash sales, and additional trading fees.

Consider a Roth IRA conversion. There are income limitations on regular contributions to a Roth IRA. However, these restrictions do not apply to Roth IRA conversions which are available to all earners once a year. For many reasons, individuals choose to roll their old 401(k) out of a former employer’s retirement plan. Among the options for the retirement funds is a conversion to a Roth IRA. With a Roth IRA you will pay income taxes now and won’t owe any tax on qualified distributions later. However, a Roth conversion doesn’t always make sense. You’ll need sufficient non-retirement funds to pay the tax due on the converted dollars and believe you’re in a lower tax bracket today than you will be in retirement.

Roth IRAs can be a powerful tax-diversification tool, but only if executed as part of a larger financial strategy. A one-time Roth IRA conversion may have little impact if it only represents a small portion of your retirement assets. Like the other strategies outlined in this article, consult a financial advisor and tax professional first.

Give back. If you itemize deductions on your tax return you may be eligible for a charitable deduction. Making a sizable contribution? Consider donating appreciated securities instead of cash. Appreciated securities in a brokerage account can be donated directly to a charity. You can receive a deduction for the full fair market value on the date of the gift while avoiding capital gains taxes. Talk to your financial advisor for details.

Watch the timing of 529 plan distributions. To avoid a portion of your 529 plan funds being accidentally classified as a non-qualified distribution and potentially subject to income tax and a penalty, make sure to carefully plan the timing of withdrawals. For example, if you withdraw money from a 529 plan in December, but don’t pay the tuition bill until January, a portion of the funds may be considered a non-qualified distribution if the total 529 plan withdrawals for the year exceeded the qualified higher education expenses paid.

As you compare distributions to expenses, remember not to double count the American Opportunity Tax Credit/Lifetime Learning Credit and don’t include any expenses covered by tax-free scholarships in your calculations.

[Read: 5 Common Investment Mistakes That Couples Make.]

Some of these strategies may take longer than others to research and execute. Getting a head start can help ensure you don’t miss out on any planning opportunities or chances to put some more cash back in your pocket.

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8 Must-Do Financial Tasks Before the End of the Year originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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