It’s hard to believe that we’ll soon be turning the page on another calendar year! Amidst all the approaching holiday hustle and bustle, however, there are a few financial matters that also warrant your attention. Some are essential, others are important; but all have the potential to be beneficial to your long-term financial plan. So, somewhere in between carving the turkey and settling on your New Year’s resolutions, try to set aside a little time to address the following:
- Max-out your retirement and health savings accounts
Don’t wait until the April tax deadline is here to fund your IRAs or “top off” your 401k contributions to the maximum allowable. In 2019, you can contribute up to $6,000 in pre-tax dollars to your IRA ($7,000 if you are 50 or older), and up to $19,000 in your 401k (plus an additional $6,000 in “catch-up contributions” if you’re age 50 or older). Also, make sure you at least take advantage of any and all company match contributions that may be available. For 2019, the maximum HSA contribution amount is $3,500 for single coverage and $7,000 for family coverage along with a $1,000 catch-up amount for those who are age 55 or older. The sooner you can get money working inside those valuable tax-deferred accounts, the better.
- Defer income and/or accelerate expenses
If you’re a business owner or self-employed professional and you also experienced an unusual spike in revenue or income in 2019, you may want to consider deferring some Q4 income to 2020 by delaying invoicing and accruals of late-year projects or sales. Similarly, you might want to explore the possibility of accelerating expenses, putting new assets into service, and/or extending payment terms. For salaried employees, if you receive a year-end bonus, you might want to ask your employer about the feasibility of deferring payment until January. You should also be thoughtful in managing the timing around exercising any stock options. Your tax advisor should be able to advise you as to whether any of these strategies are appropriate for you.
- Actively manage your RMDs
If you’re age 70½ or older, don’t forget to take your annual required minimum distributions (RMDs) from all qualified retirement accounts (including any IRAs and employer-sponsored plans) by December 31st. The only exceptions are any tax-free Roth IRAs you own as well as your current employer’s 401k plan if you are still working. Forgetting can be costly, as the IRS will hit you with fines and penalties of up to 50% of the amount you should have taken.
In addition, make sure you factor this income into your tax considerations. For those of you with significant qualified plan assets along with other major income sources, annual RMDs could potentially push you into a higher tax bracket as well as trigger additional Social Security taxes and Medicare surcharges.
- Explore year-end philanthropic strategies
If RMDs aren’t needed for income, you may want to consider donating a portion or all of them (up to $100K annually) to a qualified charity. Not only does this afford you an easy way to support the causes that matter to you most, it may help you avoid the aforementioned higher bracket and surcharges.
Other strategies you may want to discuss with your BLBB advisor include donor advised funds (DAFs), charitable remainder trusts (CRTs), charitable gift annuities and even a family foundation if your planned giving intentions are large-scale. Each of these has the potential to improve your tax situation – especially when funded with shares of highly appreciated stock you may own in a taxable account.
- Fund any 529 Plan accounts
In 2019, you and your spouse can each give up to $15,000 per child that qualifies for the annual gift tax exclusion. If you experienced an unusual spike in income this year, you may want to consider taking advantage of the IRS rule that allows you to make five years’ worth of 529 plan contributions (up to $75,000) in a single tax year and treat it as if it were spread out over the 5-year period.
- Spend down any remaining Flexible Spending Account funds
If you participate in a Flexible Spending Account (FSA) through your employer to set aside pre-tax dollars for out-of-pocket medical expenses or to cover the cost of childcare, don’t forget to spend down that money before the end of the year. FSAs are considered “use it or lose it” accounts. If you still have money in your account, consider accelerating any medical or dental appointments that may be scheduled for early next year, update your glasses or contacts, or pre-order any prescriptions if your doctor will allow it.
- Explore tax loss harvesting opportunities
After another strong year for the stock market, you may be able to offset some of your taxable capital gains by selling securities that have fallen in value from their purchase price (i.e., their “cost basis”). These sales, however, must occur prior to the final business day of the year. Selling securities for tax purposes alone, however, is rarely advisable. Talk with both your BLBB advisor as well as your accountant about whether tax loss harvesting makes sense, and how it might affect your overall portfolio allocation and tax situation.
- Consider a tax-free Roth IRA conversion
Certain tax-aware investors who find themselves in a lower 2019 tax bracket and expect to be in a higher bracket in future years, may want to consider converting some of their traditional IRA assets into a tax-free Roth IRA. However, Roth conversions (which must be undertaken before the end of the calendar year) can be complex and should therefore be carefully analyzed by your financial advisor and CPA before they’re enacted.
- Review allocations and beneficiary designations
The end of each year is an ideal time to review the asset allocation mix in your employer sponsored retirement accounts and make any necessary adjustments. Especially after several years of market gains, you may find that you’re assuming significantly more risk in your portfolio than you initially intended. It’s not at all unusual for a 60/40 stocks to bonds allocation to gradually shift to 75/25 due to the more rapid growth of stock prices. Rebalancing back to your desired asset allocation should help reduce risk in these accounts.
It’s also a great time to review the beneficiary designations on your accounts and insurance policies to ensure that they still reflect your wishes. This is particularly important if you’ve experienced any life changes (birth, death, marriage, divorce, etc.) over the course of the year.
As with all planning concerns, the sooner you address these considerations, the more options you will have available to you. Talk to your BLBB advisor about your expected tax situation for both 2019 and 2020. We may be able to suggest a number of strategies that will improve your overall wealth picture while helping to lessen your tax burden.
The ideas provided herein are for educational purposes only. BLB&B Advisors recommends you consult an attorney, accountant, tax professional, or other appropriate industry professional prior to implementing any of the ideas contained in this material.