If you’re searching for smart year-end financial moves to make, the following items may help you save money on this year’s taxes or get on track for a better 2020. The below are not in any order of importance, and we are happy to help qualified prospects with an assessment of their needs with regard to each one.
1) Review your actual spending to date against what you had budgeted.
Life seldom goes as planned. We all know this, but sometimes we can fail to update our financial assumptions for present reality. This can be a serious mistake because you often won’t realize the severity of a spending problem until your lifestyle has become unsustainable and beyond repair. A best practice is to update your financial plan in light of your actual spending and portfolio size annually.
2) Revisit your financial plan annually.
Don’t just consider your own contribution to your financial success (spending, assets, and income), but also remember that the market never does exactly what we expect. Checking and updating your financial plan against your goals ensures you will have ample time for any needed adjustments. Proactive decisions are generally more pleasant than reactive ones!
3) Review taxable accounts for losses you can bank during the tax year to offset capital gains.
The government subsidizes your market losses by allowing you to write them off, so you can take losses in a gain year or even bank them for future years to reduce your capital gains taxes. But you can harm yourself if you handle the repurchase incorrectly or sell something very unique. Guidance from an advisor or a tax professional can help, as can IRS Publication 550 (make sure to consult the most recent version!).
4) Avoid “buying” a dividend or capital gain in a taxable account.
This isn’t something to do but something to avoid. If you are about to purchase a mutual fund in a taxable account, call your broker or the fund company to find out if a distribution is pending for December. The IRS doesn’t care how long you have owned the fund. If you get a fund dividend or capital gains distribution, you may owe taxes on the full amount even if you have just purchased the fund. To add insult to injury, the fund price gets adjusted down when there is a distribution, so you essentially get taxed on your own money.
5) Plan charitable contributions.
You should be tracking your charitable contributions throughout the year. If you are behind in your giving goal, now is the time to make it up so that you have the amount of deductions you had planned. Pay attention to the new tax rules that might limit your ability to itemize. And consider whether your federal marginal rate will be higher or lower next year. You may want to delay or accelerate a charitable gift so that it applies to the higher-tax year. There are even “donor-advised” accounts that allow you to make a large contribution in the current tax year but to pay out the money over time. We can discuss these with you if you are interested in making a large contribution to reduce this year’s taxes.
6) Take your Required Minimum Distribution (RMD).
If you are over 70 ½ years of age and have qualified retirement plans or traditional IRAs, then you are generally required to take out a minimum amount each year. Forgetting to do this can incur significant tax penalties. Your advisor should be staying on top of this for you, but if you have retirement accounts that your advisor isn’t managing, it’s important to calculate and withdraw the RMDs on these accounts yourself so that you don’t incur penalties.
7) Adjust your 401K contributions for 2020.
The allowable contributions to a 401K float with inflation, so if you have static paycheck deductions scheduled, now is the time to adjust them to ensure that you max out your contributions next year without missing a beat. Also, be sure that you are contributing enough to earn the full employer match contribution. Failing to contribute enough may be leaving “free money” on the table.
8) Rebalance your portfolio.
A year goes by fast, and your asset allocation can get out of whack because different kinds of investments move differently over time. Rebalancing naturally tends toward buying lower-priced investments and selling higher-priced investments, which may produce an extra return for you when the market oscillates. If you are unsure about your rebalancing strategy or don’t have a planned asset allocation, we can help.
9) Make gifts.
Large taxable estates can be reduced by equalizing ownership between spouses, placing assets in charitable trusts, and making outright gifts or forgiving debt within the annual limits for gift reporting. There are rules governing how much you can give each year to an individual without having to file a gift tax return. Smart planners know how to use these limits to their greatest advantage.
10) Start organizing your receipts for next year’s taxes.
Tax time will be here before you know it. Why not take advantage of the holiday down time to locate your major purchase receipts, pay stubs, charitable giving receipts, and other information related to your upcoming tax filing so that in April (or whenever you file) you are ready and less stressed? In addition, if you keep organized records, personal accounting services may charge you less.
11) Fund a Health Savings Account (HSA).
Financial planners, tax professionals, and HR departments all strongly support the use of HSA’s. In many ways an HSA (if available) is the perfect trifecta in terms of tax benefits – you get a deduction to fund the account, the funds grow tax deferred, and withdrawals are tax free if used for qualified medical expenses. HSAs permit individuals to contribute a maximum of $3500, while a family can contribute a maximum of $7000 in 2019. One nugget many people don’t realize about the HSA is that if you don’t need the accumulated funds for medical expenses, you can still take them out tax-free after age 65 with no penalty or tax due on the gain. This little gem is worth exploring!
Addressing Your Financial Goals the Right Way
No online list of top moves can perfectly address your goals. For that, you need to speak with a competent financial planner or advisor who can get to know your situation well enough to provide advice that brings the greatest benefit.
Our advisors have experience guiding many kinds of clients through many different kinds of markets and would love to speak with you if you have a portfolio of $750,000 or more. An initial consultation and discovery meeting is complimentary, so contact us today!