Your 2017 Year-End Personal Finance Checklist

As the year comes to end, most of us are thinking about the holidays — the shopping, the parties, the travel. It’s human nature to get distracted and place thinking about your personal finances on hold.  However, this is a critical time to get organized and practice some good financial hygiene to set yourself up for a more productive 2018, especially at tax time. To help you make some meaningful decisions, we’ve once again put together a checklist of important tasks you should consider before the new year.

The Basics

Review your spending and set up automated savings

As our CIO Dr. Burt Malkiel says, “Start saving early and save regularly. You will do very, very well over time and likely have a very happy retirement when the time comes.” To do that, you need to reflect on your spending and develop a budget for next year. So, take advantage of the time you have during the holidays and bite the bullet. A great step after setting a budget for 2017 is to take the pressure off and just automate your savings to your emergency fund and your investment accounts. You can read more of Dr. Malkiel’s suggestions at Burt Malkiel’s Rule for Young Investors: Save Regularly. Yes, we are intentionally reiterating the point of saving regularly. Saving regularly might seem obvious, but it’s amazing how often that gets deprioritized.

Pay down your credit card debt

Sometimes holiday shopping gets the best of us, and nothing is easier than swiping your credit card today and worrying about the balance later. Credit cards typically charge as much as 18% on your outstanding balances, so paying off your debt would be like getting a risk free 18% return. There is no investment product that offers that kind of risk adjusted return, so you should pay off as much of the balance as you can every month.

Top off your emergency fund

The holidays typically mean splurging, but don’t let that result in depleting your emergency fund. Give yourself and your family the gift of an emergency fund. We typically suggest you set aside three to six months of your monthly spending at all times. However, everyone’s situation is different, so to help determine what’s right for you , we suggest you read Build the Emergency Fund That’s Right for You. Our recommendation is to keep your emergency fund in a low-risk, liquid account such as a money market fund or savings account. In other words, do not invest your emergency fund in the market.

Pay down your student debt

If you have money left over after paying down your credit card debt and contributing to your emergency fund, then you should consider paying down or refinancing your student debt if it charges an interest rate of 6% or more. Similar to the credit card example above, paying down debt with a 6% interest rate would be like getting a risk-free 6% return, which even Wealthfront can’t match. You might also consider refinancing your student loans through companies like Earnest or SoFi.

Your Job

Contribute to your 401(k) account

As we explained in Why Your 401(k) Plan Sucks, it makes tremendous sense to contribute at least as much this year to your 401(k) account as your employer is willing to matchIf your employer does not offer matching contributions, then you may well be better served investing your savings in a Wealthfront IRA or taxable account. Fortunately, you have until April 15th of next year to contribute to an IRA and still get the tax deduction for 2017, so you don’t need to be in a rush if you’re still debating whether to  choose the IRA over the 401(k) option.

Roll over your old 401(k) into an IRA

If you recently changed jobs or are considering changing jobs, you should consider a rollover. The reality is most 401(k) plans are poor performers, and the fees you pay on them add up (as we pointed out in Why Your 401(k) Plan Sucks). If you leave one company for another, it’s usually a bad idea to roll your 401(k) over into your next employer’s 401(k) unless you’re lucky enough to find one of the few good plans that offer Vanguard index and target date funds. Consider rolling your old 401(k) over into a low cost, “set it and forget it” Wealthfront IRA.

Spend down your FSA

Don’t give away your hard earned money! If you have a flexible spending account for health care expenses (usually referred to as a health flexible spending account, or FSA) and you haven’t used all the money in it, you’ll need to use the bulk of it before the end of the year. If you don’t use of it by year end, most plan sponsors have the option to allow employees participating in health FSAs to carry over, instead of forfeiting, up to $500 of unused amounts remaining at year-end. But you should check with your plan sponsor to see if this option is available to you. A key difference between these types of accounts and a health savings account (HSA) is that the latter allows you to roll over all your funds year- to- year (the HSA is also usually tied to High Deductible Healthcare Plans, or HDHCs). But no matter what, you should understand your outstanding balance and put it towards something before the year is up. Some providers even allow purchasing a gift card or store credit for later use.

Don’t exercise your stock options if you can wait

Unless you are worried about your employer’s stock price dropping precipitously before year end, you should consider deferring your exercise until after December 31st. Waiting until the new year means you’ll defer the tax you owe from exercising your options until the 2018 tax year, which you may not have to pay until April 2019.

Your Family

Review your insurance policies

Make sure you and your loved ones are well protected if something happens to you. Now is a good time to consider whether any major life changes, like the birth of a child in the past year, might mean the need for insurance. If you do have enough coverage, it’s still a good time to review the different types of coverage you have. As we explained in Why Whole Life Insurance Is a Bad Investment, term life insurance makes more sense for most young people than whole or universal life insurance. And while it might seem like a bad time to do so, it is actually a good time of the year to gently review with parents or elders their own coverage. Long-term care coverage for older parents is an often overlooked area, even by many financial advisers. Also, many retiring boomers fail to consider how much they will have in the way of out-of-pocket healthcare costs post-retirement.

Consider a 529 college savings plan account for your kids

If you have kids, the IRS has the ultimate gift for you this holiday season: the 529 college savings plan. When it comes to planning for your child’s college education costs  few things have the potential to prove as financially rewarding as enrolling early in a 529 and growing your savings tax free. That’s why Wealthfront offers its own 529, as well as the college planning feature within Path, our financial planning product. For those new to how the 529 works, we cover the basics in 529 Plans and Saving for College, from the types of accounts available and their pros and cons to giving you an idea of how much you’ll likely need to save.

Superfund your 529 college savings plan

If you are fortunate enough to have a more substantial amount of money available, superfunding a 529 offers significant benefits both in terms of objective savings results, as well as from a behavioral finance perspective. For example, instead of the $14,000 annual contribution limit, each parent can pre-fund up to five years’ worth of contributions, up to $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000 for each child and get even more value from compounding the larger contribution from the outset. We explain the benefits of superfunding in greater detail in 529 Plans: The Benefits of Superfunding.

Your Taxes

Harvest your losses to lower your tax bill

Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss and replacing it with a highly correlated though not identical investment. In doing so, you maintain the risk and return characteristics of your portfolio and generate losses that can be used to reduce your current taxes. The tax savings you generate can then be reinvested and will compound over time. Some financial advisors will harvest around this time every year as part of their advisory fee. Because it’s such a powerful strategy, we offer our clients daily tax-loss harvesting, which could add significantly to the average value of what you would receive from year end tax-loss harvesting over the course of a year. In fact, we recently published our analysis of the value of our tax-loss harvesting benefit.

Give a tax-deductible charitable contribution

Now is a good time to donate to a cause you believe in and simultaneously benefit from it on your 2017 taxes. Just remember: a tax deduction only saves you a fraction of the total amount you donate, so make that charitable contribution because you really want to support the cause, not just for the potential tax write-off. This year has been a difficult one for many around the world, so you could consider giving donations to help the Northern California fire recovery efforts, Hurricane Irma relief in Puerto Rico, and victims of the Las Vegas shooting. Giving directly to legitimate organizations in support of causes is also deemed a good alternative for those wrestling with whether to pursue a socially responsible investing strategy.

Claim your residential solar energy property credit

Unfortunately the tax benefit for residential alternative energy equipment terminated for property placed in service after December 31, 2016. However, the credit for solar electric property and solar water heating property is available for property placed in service through December 31, 2021, based on an applicable percentage. The applicable percentages are can be found here.

Our Thanks

As an unprecedented 2017 comes to an end, we want to sincerely thank all of our clients who trust us every day with their hard earned money. We promise to continue to deliver value to you in 2018 and beyond. In the meantime, happy holidays!

Disclosure

Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront clients. This article is not intended as tax advice, and Wealthfront does not represent in any manner that the tax consequences described here will be obtained or that Wealthfront’s investment strategy will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences of investing with Wealthfront and engaging in a tax strategy, based on their particular circumstances. Actual investors on Wealthfront may experience different results from the results shown. Total fees incurred will include the underlying ETF expense ratio, program management fees, Wealthfront advisory fee and the board fee.

This blog was prepared to support the marketing of Wealthfront’s investment products, as well as to explain its tax-loss harvesting strategies. Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.

Wealthfront does not represent in any manner that the tax consequences described herein will be obtained or that Wealthfront’s tax-loss harvesting strategies, or any of its products and/or services, will result in any particular tax consequence. The tax consequences of the tax-loss harvesting strategy and other strategies that Wealthfront may pursue are complex and uncertain and may be challenged by the Internal Revenue Service (IRS). This white paper was not prepared to be used, and it cannot be used, by any investor to avoid penalties or interest.

Prospective investors should confer with their personal tax advisors regarding the tax consequences of investing with Wealthfront and engaging in these tax strategies, based on their particular circumstances. Investors and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction.

The table showing the Harvesting Yield for daily tax-loss harvesting clients is based on Wealthfront’s estimates from existing client data for accounts opened between October 1, 2012 (the launch of asset-class tax loss harvesting) and October 31, 2017. The table was based on the subset of our clients with tax-loss harvesting enabled in their accounts. Past performance is not indicative of future results.

When Wealthfront says it replaces investments with “similar” investments as part of the tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower an investor’s tax bill while maintaining a similar expected risk and return on the investor’s portfolio. Expected returns and risk characteristics are no guarantee of actual performance.

Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.

Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that Wealthfront trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.

Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse’s accounts outside of Wealthfront to ensure that transactions in the same security or a substantially similar security do not create a “wash sale.” A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes. More specifically, the wash sale period for any sale at a loss consists of 61 calendar days: the day of the sale, the 30 days before the sale, and the 30 days after the sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time. Wealthfront may lack visibility to certain wash sales, should they occur as a result of external or unlinked accounts, and therefore Wealthfront may not be able to provide notice of such wash sale in advance of the Client’s receipt of the IRS Form 1099.

The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). Except as set forth above, Wealthfront will monitor only a client’s (or client’s spouse’s) Wealthfront accounts to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions outside of Wealthfront accounts may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner.

A client may also request that Wealthfront monitor the client’s spouse’s accounts or their IRA accounts at Wealthfront to avoid the wash sale disallowance rule. A client may request spousal monitoring online or by calling Wealthfront at (844) 995-8437. If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days.

For more information about the Wealthfront 529 College Savings Plan (the “Plan”), download the Plan Description and Participation Agreement (to be made available on Plan launch) or request one by emailing support@wealthfront.com or calling (650) 249-4250. Investment objectives, risks, charges, expenses, and other important information are included in the Plan Description and Participation Agreement; read and consider it carefully before investing. Wealthfront Brokerage Corporation serves as the distributor and the underwriter of the Plan.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

The Plan is administered by the Board of Trustees of the College Savings Plans of Nevada (the “Board”), chaired by the Nevada State Treasurer. Ascensus Broker Dealer Services, Inc. (“ABD”) serves as the Program Manager.



Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.

The calculation for the benefits of diversification is a hypothetical calculation that does not take into consideration the effect changing risk profiles, or future investment decisions. Several processes, assumptions and data sources were used to create one possible approximation of how a Wealthfront 529 plan with 9 assets classes might have benefited investors in the past, and a different methodology may have resulted in a different outcome. This simulation does not represent actual client accounts and may not reflect the effect of material economic and market factors. The results are hypothetical only. The results of this simulation should not be relied upon for predicting future performance and is not a guarantee of actual performance. A different methodology may have resulted in different outcomes. Actual investors on Wealthfront may experience different results from the results upon which we based our calculations. Hypothetical results are adjusted to reflect the reinvestment of dividends and other income and, except where otherwise indicated, are presented net of fees.


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