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4 Retirement Financial Planning Moves to Consider Before New Year's Eve

Retirement Planning
Young businessman thinking about a retirement financial planning strategy

As open enrollment season concludes, many workers have already assessed their insurance needs and workplace benefits for the new year. But you may want to use these last few weeks of the year to review another important topic: your retirement financial planning.

This retirement planning guide covers four strategies to consider taking before December draws to a close.

1. Adjust Your Contribution Level

The amount of each paycheck that needs to be put away for a comfortable retirement varies from person to person. But for a typical investor, many financial professionals recommend putting 15% of your net earnings into a retirement account, including employer contributions. If you're not reaching that target yet, the end of the year might be a good time to up your contributions.

Keep in mind that retirement financial planning is similar to dieting — becoming too aggressive in your goal can potentially lead to discouragement. Try to make changes that are meaningful but sustainable. Because of compound interest, even increasing your contribution rate by one or two percentage points can make a big difference, particularly for younger workers. So, if you get an annual raise of, say, 3%, you might consider using some of the money to bump up your 401(k) or individual retirement account (IRA).

MORE How Much Should I Contribute to My 401(k)?

2. Rebalance Your Portfolio

Chances are that your target asset mix isn't going to change dramatically from one year to the next. But because of volatility in the markets, your actual holdings can get knocked askew throughout the year. For instance, consider an investor aiming for a 75/25 split between stocks and bonds. If the stock market has a great year, they may suddenly find themselves with a portfolio composed of 85% stocks and only 15% fixed-income assets.

In this example, selling a portion of your stocks and using the proceeds to purchase an equal amount of bonds could help you to realign. Plus, you'd be locking in whatever gains (if any) you made throughout the year in case the market suddenly moves in the other direction.

3. Are Roth Accounts an Option?

Traditional 401(k)s and IRAs can be solid retirement financial planning vehicles, allowing you to deduct all or some of your contributions from your taxable income. But in many cases, Roth versions of these accounts may provide an even bigger advantage.

Unlike traditional retirement accounts, those making Roth contributions must forgo tax breaks now. However, you won't owe taxes on the money you pull out in retirement if you meet certain qualifications. Plus, you won't have to make required minimum distributions starting at age 72, as you would with traditional accounts. It's often a winning trade-off for those in a relatively low tax bracket who expect higher earnings — and a corresponding higher tax rate — later in their career.

Unfortunately, not every employer who's putting money into a 401(k)-style plan offers that option. But if you work for one of the roughly 75% of organizations that offer Roth contributions, you might want to contemplate moving at least some of your money into that category.

MORE 7 Common IRA Terms to Understand

4. Think About Tax-Loss Harvesting

If you have additional retirement assets earmarked in a brokerage account — for example, perhaps you've maxed out contributions to a 401(k) and IRA — the end of the year can be a good opportunity to potentially minimize your tax bill. One of the most effective ways to do so can be via something called tax-loss harvesting.

Any capital gains you've accrued throughout the year can be offset by losses, resulting in a lower capital gains tax. And if your losses exceed your gains, you may be able to count those net losses against your ordinary income up to allowable limits.

Year-end may be an opportune time to sell stocks or mutual fund shares that have lost money and you plan to shed anyway. Say, for example, that you've accrued $10,000 in gains from a stock. If, before January 1, you sell shares of another company that have lost $6,000 since your purchase, you'd only have to pay capital gains tax on $4,000.

However, there is one caveat: You don't want to run afoul of the IRS wash-sale rule. If you buy "substantially identical" securities to the ones you sold within a 30-day window, those losses are disallowed. So, you'll want to keep that in mind if you plan to effectively replace those shares afterward.

If you're unsure about whether or not to proceed with a sale or if you have other questions regarding your retirement planning, you may want to speak to a financial professional. They can offer a personalized retirement planning guide and recommend a strategy that makes the most sense given your unique circumstances.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.