Overconfidence and bias are among the biggest mistakes for investors who want to protect their 401k savings.
Act now, before it’s too late.
As 2018 winds down before our eyes, now’s the time to jump on the money moves you may have previously been putting off.
Here are a few key items to tackle before we ring in the new year:
1. Max out your 401(k) – or get as close as possible
The more money you pump into your 401(k), the more you’ll have in retirement. But that’s not the only reason to max out this year. If you’re saving in a traditional 401(k), as opposed to a Roth, the money you contribute goes in on a pre-tax basis, thereby saving you on taxes this year. If you’re 35 years old and in the 32 percent tax bracket, maxing out your 401(k) this year at $18,500 will automatically shave $5,920 off your 2018 tax bill.
That said, it’s hard to max out a 401(k) if you’re a low- to middle-income earner. So if you can’t hit the annual limit (which, if you’re 50 or older, is actually $24,500 when you factor in your catch-up), do your best to get as close as you can. Even a few hundred dollars more could provide some near-term tax relief, not to mention help your retirement. But don’t delay – chances are, at this point you have only one more paycheck from which to have those funds withheld. So put in that change with your payroll department right away.
2. Sell some loser stocks in your portfolio
If you’ve been following the stock market lately, you probably know that much of this year’s earlier gains were wiped out in recent months. That means there’s a good chance you’re sitting on some losses in your portfolio, which might seem like a bad thing – but if you made money on investments earlier in the year, selling some lower-value, underperforming stocks is a good way to avoid paying taxes on those gains.
Any investment losses you take can be used to offset investment gains in the same year. So if you made $6,000 by selling a certain stock and then take $6,000 in losses, you won’t be liable for taxes on that initial $6,000. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year, and then carry the rest of that loss forward to future tax years.
3. Accelerate some medical expenses
If you’ve incurred a large cumulative healthcare bill this year, you might be able to use it to lower your 2018 taxes, provided you’re planning to itemize. (If you plan to just take the standard deduction, this advice won’t apply to you.) It used to be that you could only deduct medical expenses that exceeded 10 percent of your adjusted gross income (AGI), but thanks to the recent tax overhaul, that threshold has been lowered to 7.5 percent of AGI. This means that if your AGI is $80,000, you can deduct medical expenses once your spending for the year surpasses $6,000. Therefore, if you’re close to that mark, it might pay to push up some medical appointments or procedures to December so you get more out of the deduction this year.
To be clear, you’re only allowed to deduct your medical costs in excess of that threshold. In our example, if your spending for the year is $6,500, you only get to deduct the last $500. But if your other expenses – mortgage interest, charitable contributions, and state and local taxes – put you at a point where it pays to itemize on your 2018 return, then you might as well get as much out of the medical expense deduction as you can.
The end of the year will be here before you know it, so don’t put off any of these moves. If you act quickly, you’ll set yourself up for a financially healthy start to 2019.
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