As we approach the end of the year, it’s time to get serious about reducing taxes. Dec. 31 is the deadline to take advantage of several money-saving opportunities you shouldn’t miss.
Use these four strategies to manage money wisely before ringing in the New Year.
- Review your retirement contributions.
If you have a retirement plan at work, such as a 401(k) or 403(b), review how much you’ve contributed for the year. You might log on to your online account or ask your benefits administrator for the total.
For 2019, you can save up to $19,000, or $25,000 if you’re over age 50, in most workplace plans. Consider increasing your final contribution for the year so you can max out the account — or get as close as possible to the annual limit before Dec. 31. If you’ve exceeded the limit, you can temporarily suspend contributions until after Jan. 1.
Every pretax dollar you contribute to a retirement plan is income you don’t pay tax on until you make a withdrawal. By deferring taxes, you keep more money in your retirement account that can grow over time.
Plus, many employers offer free matching for a percentage of your retirement savings. Those additional funds can help your retirement balance mushroom. Cutting taxes and saving for the future is a win-win for your finances.
If you have other retirement accounts, such as an IRA or a SEP-IRA, you have until the due date for your tax return (including any filing extensions) to make contributions for the previous tax year.
- Boost your retirement savings rate.
Year-end is also the perfect time to increase your retirement contributions for the next year. Make a goal to bump up your savings rate by at least 1% each year until you hit the maximum limit. You probably won’t even miss the money after a couple of paychecks.
Starting in 2020, the contribution limit for most workplace retirement plans increases from $19,000 to $19,500. And catch-up contributions increase from $6,000 to $6,500 for workers over age 50. So, if you reach 50 before the end of 2020, you can contribute $19,500 plus $6,500, for a total of $26,000 to your retirement account at work.
And if you aren’t participating in a retirement plan at work yet, don’t make the mistake of thinking you’re too young to plan for retirement, or you’ll make up the difference later. Young people have a lot to gain by starting the habit of saving early in their careers. You can build a massive nest egg by contributing even a small amount, such as $250 per month, over several decades for a modest investment return. Plus, you’re cutting your taxes at the same time.
- Spend your flexible savings account.
An FSA is a medical savings account you can use to pay for qualified expenses not covered by insurance, on a pretax basis. For 2020, you can contribute up to $2,570 to an FSA, up $50 from 2019.
However, it comes with an annual spending deadline, or you forfeit most of the excess. The FSA deadline is known as the “use it or lose it” rule. It varies by company but is typically Dec. 31.
However, if your employer adopts a grace period permitted by the IRS, you may have additional time to spend your FSA after the New Year or to carry over a small amount, such as $500. If not, be sure you drain the fund before the end of the year.
- Max out your health savings account.
Speaking of medical saving accounts, if you have a high-deductible health plan you purchase through an employer or on your own, you may be eligible for an HSA. Funds you contribute and their earnings are never taxed if you spend them on qualified health care expenses. You can use HSA withdrawals for a wide range of medical goods and services, including hospital stays, doctor visits, dental care, prescription eyeglasses, hearing aids, and chiropractic care.
If you still have funds in an HSA after age 65, you can even spend them on non-health care expenses without penalty. Your withdrawals would be subject to ordinary income tax, similar to taking distributions from a traditional retirement account.
For 2020, the increased HSA contribution limits are as follows:
- Individuals with self-only health coverage can save up to $3,550, up $50 from 2019.
- Families can save up to $7,100, up $100 from 2019.
Note if you have an HSA, it doesn’t have a spending deadline like an FSA. Funds can stay in your account indefinitely with no penalty even if you change insurers, become uninsured, or are unemployed. So don’t confuse these two medical savings accounts.
Using an HSA to pay for qualified health care expenses is a smart way to cut your taxes, prepare for unexpected medical bills, and sock away extra money for retirement.
It’s also always a good idea to meet with a tax professional who can review your situation and make recommendations. By doing some planning, you can avoid tax mistakes and save more money.