With the year coming to a close, planning for the holidays might be consuming most of your spare time. However, the end of the year is also an excellent time to get your financial house in order.
Here are three smart money moves you can make before the end of the year that will help set you up for 2015 and beyond.
Do you have a Flexible Spending Account?
If you have a Flexible Spending Account, or FSA, you might be in danger of losing some of your unused funds at the end of the year. The IRS allows for up to $2,500 in FSA contributions each year, and only $500 of this amount can be rolled over to the following year, if your plan allows for it.
Not all plans allow for the $500 rollover, and some have lower amounts, so check with your benefits administrator for details on your specific plan, but if you have any funds that could expire at the end of the year, you either need to figure out a way to use them before the end of December, or let them expire.
Fortunately, there are plenty of expenses that qualify for FSA spending. The full list is available from the IRS, but there are a few that could be particularly good for end-of-year purchases. For instance, if you don't have a first-aid kit in your house, that qualifies.
Do you need a new pair of glasses, or are you running low on contact lenses? Have you been thinking about seeing a chiropractor for back pain? Or maybe you have been thinking about finally quitting smoking and want to join a "stop-smoking" program. All of these can be qualified expenses.
Again, check with your plan for any specific exclusions or limitations, but now is a good time to come up with an end-of-year FSA plan.
Sell your losers, but hang on to the winners
If any of your investments didn't quite turn out like you wanted, the end of the year is a good time to consider cutting your losses and selling losing investments.
The IRS allows you to use investment losses to offset any capital gains. If you don't have any capital gains, you can use up to $3,000 in losses to reduce your taxable income. If your losses are more than this amount, any extra can be carried over to next year.
On the other hand, if you have any winning investments, you may want to hang on for a little while longer, unless you feel like paying taxes on your gains this year. This is especially true if you have held the winners for less than a year, as short-term capital gains are taxed at a higher rate than long-term.
Put your holiday bonus to work
If you are expecting to receive a holiday bonus this year, it can be tempting to splurge a little bit. While there is nothing wrong with treating yourself a little at the end of a successful year, you should consider putting some of that money to work for your future.
One way to do this is by contributing a little extra to your 401(k) at work. You'll need to speak to your payroll department to increase your contribution for December, but the IRS allows up to $17,500 in elective deferrals during the 2014 tax year, and up to $23,000 if you're over 50.
Contributing to a 401(k) lets you set aside some money for your future without the guesswork involved with choosing individual investments. So, if you still have some room under the IRS limits, this may be the way to go.
On the other hand, if you prefer to take a more active role in your investments, or would like to get started doing just that, you may want to put some of your holiday bonus into an IRA. There are two types to choose from, a traditional or Roth IRA, and the main difference is the tax treatment of each.
With a traditional IRA, you may be able to deduct your contribution from your 2014 taxable income, depending on how much money you make and whether or not your employer offers you a retirement plan. If you prefer to take your tax break later on, a Roth IRA lets you take withdrawals tax-free once you reach retirement age.
With either account, you can contribute up to $5,500 for the 2014 tax year ($6,500 if you're over 50), and you are free to invest in virtually any stocks, bonds, or mutual funds you want. Plus, if you may want to contribute more but can't afford to right now, you can actually contribute retroactively for 2014 until the tax deadline in April.
End 2014 with a bang
In a nutshell, the best thing you can do to set yourself up for a financially successful 2015 is to end this year on a high note. With a little effort, not only can you possibly lower your tax bill and get stocked up on your medical necessities, but a little bit of money now can go a long way toward setting you up for the rest of your life.
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