By David Morton
The holidays are ramping up, and your time and energy will soon radiate in multiple directions as you balance commitments to work, family and everything else orbiting in your personal universe. Along with the holiday chaos, there are other considerations that need your attention during this short window before we close the books on 2019 and ring in the new year.
Below is a quick punch list of items to review and potentially act upon as you look to make smart financial decisions ahead of 2020. Because not all these items apply to everyone, this list is in no particular order of importance. Reach out to your advisor to discuss your year-end planning priorities.
Retirement Savings
Anyone participating in an employer-sponsored retirement plan (think 401(k), 403(b), Thrift Savings Plans, etc.) should review their year-to-date contributions in case there is still room to reach the maximum eligible contribution for the year. If you are not going to hit the IRS set ceiling of $19,000 (or $25,000 if you're 50 or older), then see if you are able to increase your contribution for the remaining paychecks in 2019.
Consider adjusting your contribution for 2020 as well because the limits are rising to $19,500 and $26,000. Some employers allow you to change contribution amounts only once per year, so be sure to check with your plan provider.
If you or your spouse do not participate in an employer-sponsored plan, look at contributing to a traditional or Roth IRA. Though limits are much lower ($6,000, or $7,000 if you're 50 or over), these plans can still make a difference in growing your retirement nest egg. Such contributions for 2019 are permitted up to the tax-filing deadline of April 15, 2020.
Business owners or those who are self-employed can also still set up retirement plans for the new year. Reach out to your advisor if you would like to discuss what options might be right for your situation.
Charitable Giving
The fourth quarter is often a busy one for charitable organizations as they ramp up fundraising efforts to round out their budgets for the new year. This is a great opportunity not only to donate to some great causes, but also to reduce your tax bill if you itemize deductions.
There are myriad ways to give beyond simply cutting a check and mailing it off. Anyone over 70½ can donate from their IRA directly to their charity of choice and thus avoid paying taxes on that money via a qualified charitable distribution, or QCD. This is particularly helpful for those who are taking IRS-mandated required minimum distributions, commonly referred to as RMDs.
Anyone with highly appreciated stock might consider donating that asset directly to the charity to avoid paying capital gains tax when the asset is sold. You can also boost your deduction by moving those assets to a donor-advised fund (DAF) this year while maintaining control on when those funds are transferred to their favorite charities.
For example, you could donate $30,000 in stock to a DAF this year and take the full deduction, but then have the money flow to the charity in $10,000 increments over three years.
If you want to create a gifting strategy or explore what might be the most tax-efficient way to give, speak with an advisor who can guide you to create maximum impact for both you and the causes you support.
Required Minimum Distributions
As mentioned above, RMDs must be taken from retirement accounts such as IRAs and 401(k)s annually starting at age 70½. The IRS levies some harsh penalties — currently at 50% — for those who don't take them in a timely manner. Note that Roth IRAs are exempt from RMDs; however, inherited IRAs and inherited Roth IRAs are not.
Tax Loss Harvesting
To offset any capital gains realized during the year, consider selling an underperforming asset in the portfolio. Psychologically, it never feels good to book a loss on an investment, but if it trims your tax bill, then you have essentially helped your overall financial position.
If you want to repurchase the underperforming asset, be sure to wait at least 31 days to avoid the IRS wash sale rule.
Estimated Taxes
If you pay quarterly estimated taxes, it is wise to compare your household income profile with the taxes you have already sent in to the IRS and state treasury so far this year. The fourth-quarter payment, due January 15, can be adjusted depending on how your expected income may have changed over the course of the year.
Also, if you receive a bonus at year-end, it might be worth deferring receipt of the payment to January to push taxes out further.
529 College Savings Plans
If you participate in a state-sponsored plan where you can deduct contributions on your state income tax return, those contributions are due by year-end.
Health Savings Account (HSA)
If you have an HSA (usually permitted under high-deductible health insurance plans), have you contributed the maximum annual amount? For 2019, maximums are $3,500 for singles and $7,000 for families, with an additional $1,000 permitted for those 55 and older.
An HSA is a great tax-friendly way to pay for medical expenses today, or in the future as unused balances carry forward and grow tax-free. For 2020, those limits rise modestly by $50 for singles and by $100 for families.
Flexible Spending Account
This type of account, loaded up with pre-tax dollars, has a use-it-or-lose-it stipulation, so be sure to spend those funds on qualified expenses such as medical or dependent care costs before year-end.
Medicare
This is the time for seniors to adjust Medicare coverage options such as Part D and Medigap policies. Medicare’s annual "open enrollment" period is from October 15 through December 7.
Mortgage Rates
Rates on 30-year mortgages have fallen over the past year by almost a full percentage point, recently sitting at or below the 3.75% level. If your mortgage is north of 4%, you might want to explore if refinancing makes sense, but be wary of various fees and closing costs associated with such a move.
Your advisory team and tax preparer can assist you with many of the items above. Please reach out if we can help lower your stress level so you can better enjoy the holidays and close the year out with confidence.
Schedule a complimentary consultation with a fiduciary financial advisor to discuss your personal situation.