Time flies, and the holiday season is already upon us. But pay attention, because if you miss these key financial deadlines you are going to be crying to your CPA when you get hit with substantial penalties or lose the opportunity to take advantage of some smart money-saving moves.
Depending on your situation, make a note of these deadlines and the strategies:
- Are you are self-employed? Set up a one-person 401(k). So long as you create it by Dec. 31, you can make contributions for 2014 until the due date of your 1040 with extensions – as late as Oct. 15, 2015 (for all of you procrastinators!). Are you a W-2 employee? Fund employer-sponsored retirement plans by Dec. 31. For 2014, you can contribute up to $17,500 to a 401(k) plan, or $23,000 if you will be 50 or older by the end of this year.
- Do you have your own IRA? You are considered the owner of an IRA that you set up and funded – either through annual contributions or the rollover of a 401(k). Unless the account is a Roth, you must take yearly minimum distributions starting at age 70½. You have until April 1 of the year after you turn 70½ to take the first one. After that, you must take distributions by Dec. 31 of each year.
- Did you inherit an IRA? Generally, non-spousal IRA heirs must withdraw a minimum amount each year, starting by 31 of the year after the IRA owner died. Note: This is true whether it’s a traditional IRA or a Roth (a common misconception). Co-beneficiaries must take distributions over the life expectancy of the oldest beneficiary. It’s better to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer payout period for the younger heirs. But you must take this step before Dec. 31 of the year following the year of the IRA owner’s death. If you don’t, the payout schedule will continue to be based on the life expectancy of the oldest beneficiary.
- Did you convert a traditional IRA to a Roth? If you want to leave retirement assets to family (and particularly to grand kids) a Roth conversion is one of the simplest, best planning tools available, as explained here. Of course, this assumes that assets will go up in value after you convert to a Roth and pay the associated tax. If they didn’t and you’re not prepared to wait things out, you may want to put things back the way they were. The process of undoing a Roth is called re-characterization. To do this you need to contact the financial institution that is the custodian of the account by yesterday Oct 15th.
- Do you want to benefit friends and family?You can give anyone and everyone $14,000 annually without eating into your lifetime exemption from gift or estate tax. Couples can combine this annual exclusion to jointly give $28,000. Just make sure 2014 gifts are complete (received and, in the case of a check, either deposited or cashed) by Dec. 31. A popular use of the annual exclusion is to fund 529 plans. The main appeal of a 529 is income tax savings: You put money in one of these plans and you don’t have to pay federal or state income tax on the earnings, provided the cash is withdrawn to pay for college or graduate school tuition, fees, room and board, or books. In some cases you also get a state income tax deduction for your contribution. To take advantage of that tax break your contribution checks must be postmarked by Dec. 31; if you contribute by electronic bank transfer, your online request must be submitted before 11:59 p.m. on Dec. 31.
- BONUS: Did your spouse recently die? Widows and widowers can now carry over the estate tax exemption of the spouse who died most recently and add it to their own – tax geeks call it “portability.” At current rates, this enables married couples to transfer $5.34 million apiece ($10.68 million together) tax-free. The exemption is expected to rise to $5.43 million in 2015. To take advantage of this relatively new tax break or “elect portability” (in legal lingo), the executor handling the estate of the spouse who died must file an estate tax return (IRS Form 706), even if no tax is due. This return is normally due nine months after death with a six-month extension allowed. But you can get an extension of time until Dec. 31, 2014 if your spouse was a U.S. citizen or resident and died between Jan. 1, 2011 and Dec. 31, 2013.