Financial Planning: Getting Your Year-End Financial House in Order

Year end is fast approaching. Once we pass Thanksgiving, the holidays will compete for our attention.  While it’s a joyous season, it can be hectic, and year-end financial planning sometimes takes a backseat.

Don’t let that happen to you. It can turn into a costly mistake. Today is the perfect time to assess your year-end financial strategies.

First, a quick caveat. Tax law is complex. The ideas highlighted are for informational purposes only. If you have questions, please reach out to us or contact your tax advisor.

6 smart items to consider

  1. Harvest your tax losses. Are there gains you would like to take? If so, you can offset capital gains by selling investments that didn’t pan out, or ones that no longer meet your investment criteria.

Think about netting your loss against short-term gains (held less than one year) because any short-term gains are taxed at your higher marginal rate. Long-term gains are taxed at a lower rate. Be sure any sales occur on or before December 31.

One thing to keep in mind is the wash-sale rule, which prevents you from taking a loss on a particular security if you buy a “substantially identical” security 30 days before or after the sale.

  • Maximize your retirement contributions. The contribution limit for employees who participate in a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $18,500 to $19,000 in 2019, according to the IRS. While you can make a 2019 contribution up to Oct 15, 2020, including extensions, solo 401(k) plans must be set up by December 31.

The limit for all IRAs will rise by $500 in 2019 to $6,000. if you are 50 or older, it is $7,000. The limit remains the same in 2020, per the IRS.

Traditional and Roth IRAs must be opened and funded by the April 15 tax deadline. Yes, you have time beyond year-end, but consider the appropriate vehicle and contribution well before the deadline.

  • This leads us to the required minimum distribution (RMD) for traditional IRAs. The IRS requires that you begin taking minimum distributions from a traditional IRA (including SEP and SIMPLE IRAs, and 401(k), profit-sharing, 403(b), or other defined contribution plans)

by April 1 of the year following the calendar year in which you reach age 70½. Subsequent RMDs must be taken by December 31.

For example, you turned 70 on July 1, 2018. You reached age 70½ on January 1, 2019. You do not have a RMD for 2018. But you must take your first RMD (for 2019) by April 1, 2020. However, you’ll be required to take two distributions in 2020, which could push you into a higher tax bracket next year.

Miss the RMD and the IRS could hit you with a 50% penalty!

Good news: Proposed RMD rules will trim mandated distributions by taking take longer life expectancies into account (Kiplinger, If finalized, the new tables will go into effect in 2021.

  • Consider philanthropy. If you itemize tax deductions, a charitable donation must be made by December 31.

Have you thought about a donor-advised fund? You make the donation to the fund and realize a tax benefit in the year of the donation, but you may recommend a grant to a charity at any time. It doesn’t have to occur this year.

Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70 ½ years old? A QCD is a direct transfer of funds from your IRA that is payable to a qualified charity. QCDs can be counted toward satisfying your RMD, as long as certain rules are met (Fidelity).

If you no longer itemize, this may be a valuable tool to reduce your taxable income.

  • Defer income, accelerate expenses. Do you own a business? Can you defer income until next year and pull expenses into 2019? If so, this is a popular way to limit your tax liability.
  • Position rebalancing. Over time, assets appreciate or depreciate, leaving you with excess risk in overweight or underweight positions. Rebalancing allows you to get back to your target portfolio allocation. If you are sitting on gains in taxable assets, consider rebalancing early next year, which will allow you to avoid any capital gains tax in 2019.

Use these smart tips as a guideline, and you’ll be well-positioned in the new year.