Year End Financial Planning Tips


The end of the year is a great time to review your finances.  Whether you’re still working or retired, there are changes you can make to ensure that you’re not leaving any money on the table.  These changes can help reduce your 2018 taxes and set up for a more financially sound 2019.  It might seem easier to procrastinate and push these financial decisions into the New Year.  However, timing is important when it comes to making some of the tax-related adjustments, many of which have a deadline that must be met by December 31.

Check Your Beneficiaries

Life-changing events can occur throughout the year, such as a death in the family, a newborn child, or if you got married or divorced.  Conducting a beneficiary review of all your investment and bank accounts as well as any life insurance policies to ensure the listed beneficiaries are up to date and accurate is one of the most important tasks in a year-end review.  You wouldn’t want to have your ex-spouse listed as your beneficiary, would you?  This task can be done at any time of the year, however adding it to your year-end financial review checklist will insure that it is done annually.

Required Minimum Distributions

If you are over age 70 ½ or older and have a Traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b) and are retired, you must take a required minimum distribution (RMD) by December 31st each year.  The IRS penalty for failing to do so is 50% of the required amount not withdrawn.  In addition, an owner of an Inherited IRA, also referred to as a Stretch IRA, is required to take a minimum distribution.  The same December 31 deadline and 50% penalty apply to an Inherited IRA.  Keep in mind that most custodians do not send out notices about the Inherited IRA RMD, it’s up to the owner in most cases to stay involved with calculating the RMD amount and making sure it is distributed.  There is no need to wait until December to take the distribution and risk missing the deadline.  The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy.  We calculate the amount you need for your accounts with Provident.

Making the Most of Your Gifts

As long as you itemize deductions on your tax return, gifts that are made to charities are tax deductible.  Limits on charitable deductions can reduce the overall value of your deduction.  Donations of cash and appreciated securities to charitable organizations both qualify for a charitable tax deduction.  However, donating appreciated securities that were held for more than a year offers a greater tax benefit than giving cash.  The charitable deduction value for appreciated securities is the fair market value on the day you give it away.  For example, if you wanted to donate $20,000 to your favorite charity, you could simply write a check for $20,000, or you could donate appreciated securities that you purchased longer than a year ago for $5,000 and are currently valued at $20,000.  Either donation can be claimed as a $20,000 charitable deduction for your gift, but by donating the appreciated securities you will also avoid paying capital gains taxes on the $15,000 increase in value of the securities.

However, the new tax law increased standard deduction levels to $12,000 for singles, $24,000 if married filing jointly; it may work to your advantage to take the standard deduction over itemizing your deductions.  If looking for a strategy to boost your itemized deductions above the standard deduction, consider donating an amount equal to a few years’ worth of charitable gifts to a donor advised fund (DAF).  The tax deduction is taken in the year of the irrevocable donation to the DAF before the end of the year.  You can than spread out the giving from the donor advised fund over the next several years based on your charitable intent.  This is known as “bunching” your deductions.

If you are a Traditional IRA owner age 70 ½ or older and plan to claim the standard deduction, you may consider making a qualified charitable distribution (QCD).  A QCD is a tax-free distribution of up to the lessor of your RMD or $100,000 directly from your IRA custodian to qualified charities.  The distribution counts towards your IRA required minimum distribution and is not added to your gross income.

Converting Your Traditional IRA to a Roth IRA

Under current IRS guidelines there are income limits to contributing to a Roth IRA, however anyone can convert a portion or all of their Traditional IRA to a Roth IRA.  With the passage of the Tax Cuts and Jobs Act of 2017, federal income tax rates have been lowered starting in 2018.  After 2025, the current lower rates automatically revert back to pre-2018 rates unless Congress extends them.  This window of opportunity could be an ideal time to take advantage of a lower tax rate environment and convert a Traditional IRA to a Roth IRA in a more tax-efficient manner.  This action will give you a source of tax-free income in retirement.

Keep in mind that everyone has a unique situation.  It is important to consult your tax advisor to see which option is best for you:  Convert your Traditional IRA to a Roth IRA and pay the taxes now, stay the course with your Traditional IRA and pay the taxes upon distribution at a later date, or a hybrid, where you convert a portion of your Traditional IRA.

Tax Loss Selling

If you have investments with significant losses in your taxable accounts, selling them will let you offset realized capital gains.  If your losses exceed the realized gains, you are allowed to deduct $3,000 a year in capital losses against your ordinary income.  Any additional losses can be carried forward to future tax years.  Keep in mind, you cannot re-purchase the same investment within 30 days before or after the sale or you will trigger a wash sale and the loss will be disallowed tax write-off purposes.

Planning For 2019

There is no better time to start preparing your 2019 financial roadmap than the present.  Developing your 2019 budget while your 2018 spending is still fresh in your memory will give you a better chance to create a more accurate budget.

Dan Krstevski, CFP®