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10 Year-end planning tips

The end of the year is a good time to see if there are steps we should be taking so we stay on track with our finances.  It’s also a great time to map out a plan going into the new year.  

 Here is a list of 10 year-end planning tips to use as a reference:

1.  Review your Financial Plan. Are you reaching a milestone in your life such as retirement or a change in your personal circumstances? Recently have a child, enter a divorce, start a business? All of these life changes warrant a second look into your finances.

 Remember, your financial plan is the roadmap to your financial goals. It is designed to remove the emotional component that may sabotage your finances.

 Long-term academic data and my own personal experience tell me that the shortest distance between an investor and their financial goals is adhering to a well-diversified holistic financial plan.

2. Rebalance your portfolio. Stocks have performed well this year. We may need to trim back on certain investments. However, we need to take a close look at the tax implications. Splitting capital gains of more than one year may make sense or doing so when one’s tax rate might be lower.  

 3. Beneficiary Review.  I recently met with a woman that recently moved to Newton,  had been divorced for over a year yet still had her ex-spouse named as beneficiary.  It is a good idea to review these each year.

 4. Note the tax loss deadline. You have until December 31 to harvest any tax losses and/or offset any capital gains. It may be advantageous to time sales in order to maximize tax benefits this year or next. We may also want to book gains and offset with any losses.

 But be aware that short- and long-term capital gains are taxed at different rates. And don’t run up against the wash-sale rule (see IRS Publication 550), which could disallow a capital loss. 

 A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days, either before or after the sale date

https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales A Primer on Wash Sales

 Did you know that you pay no federal taxes on a long-term capital gain if you reside in the 10% or 12% federal income tax bracket? It may be worth harvesting a long-term capital gain]]. In other words, you may sell the stock, take the profit, and pay no federal income tax.


 But be careful. 

 The sale will raise your adjusted gross income, which means you’ll probably pay state income tax on the long-term gain. By raising your AGI, you could also impact various tax deductions or receive a smaller ACA premium tax credit if you obtain your health insurance from the Marketplace.

 5.  Mutual funds and taxable distributions. This is best described using an example and ONLY applies to non-retirement accounts. 

 If you buy a mutual fund on December 15 and it pays its annual dividend and capital gain on December 20, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just five days.

 It’s a tax sting that’s best avoided because the net asset value hasn’t changed. It’s usually a good idea to wait until after the annual distribution to make the purchase. Again, this rule does not apply to retirement accounts.

 6.  Required minimum distributions (RMDs) are minimum amounts the owner of most retirement accounts must withdraw annually.

 The SECURE Act made major changes to RMD rules. If you reach age 70½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions   IRS: Retirement Plan and IRA Required Minimum Distributions FAQs. 

Some plans may provide exceptions if you are still working.

https://www.fidelity.com/retirement-ira/required-minimum-distribution-faq   for  IRA FAQs: Required Minimum Distributions

 If you reached the age of 70½ in 2019 the prior rule applies.

 For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.

 While delaying the RMD until April 1 can cut your tax bite in the current year, please be aware that you’ll have two RMDs in the following year, which could bump you into a higher tax bracket.

 The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs. 

 They do not apply to ROTH IRAs. (Unless inherited from a non-spouse)

 Don’t miss the deadline or you could be subject to a steep penalty.  Here is another piece I wrote with more detail. 

"Wait.  A 50% tax penalty on top of regular taxes?"

 7.  Contribute to a Roth IRA or traditional IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met. 

 You may also be eligible to contribute to a traditional IRA. Contributions may be fully or partially deductible, depending on your income and circumstances. Total contributions for both accounts cannot exceed the prescribed limit.

 There are income limits]], but if you qualify, the annual contribution limit for 2021 and 2022 is $6,000, or $7,000 if you’re age 50 or older.

 You can contribute if you (or your spouse, if filing jointly) have taxable compensation.

 Starting in 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs. 

 As of now, you can make 2021 IRA contributions until April 15, 2022 (Note: statewide holidays can impact final date).


 8.  College savings. A limited option called the Coverdell Education Savings Account (ESA) allows for a maximum contribution of $2,000. It must be made before the beneficiary turns 18. Contributions are not tax deductible. 

 Distributions are tax free if used for qualified education expenses. But beware of income limits

https://www.irs.gov/taxtopics/tc310 IRS: Coverdell Education Savings Accounts

 Contribution limits are phased out if the contributor has an AGI of $95,000 to $110,000. For joint filers, the AGI is between $190,000 to $220,000. 

 A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. 

 As with the Coverdell ESA, contributions are not tax deductible.

 9.  Charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.  

 Did you know that you may qualify for what’s called a qualified charitable distribution (QCD) if you are 70½ or older

https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics https://www.schwabcharitable.org/non-cash-contribution-options/making-qcds 

 A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity.

 A QCD may be counted toward your RMD up to $100,000. If you file jointly, you and your spouse can make a $100,000 QCD from your own IRAs. This becomes even more valuable in light of tax reform as the higher standard deduction may preclude you from itemizing. 

 You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made. 

 You can also give any individual you like up to $15,000 in 2021.  This amount is increasing to $16,000 in 2022.  However, before writing that check, give me a call as there can be some tax advantages to gifting different assets.

10.   Call me.  Over and above the tips listed here, please don’t hesitate to reach out to me if you have any concerns or want to just bounce something off me.  I much prefer, “Rick, I was thinking of doing……” than, “Hey Rick, guess what we just did!”

 As always, when making big financial decisions, it is always best to speak with and take the advice of a Certified Financial Planner® practitioner. Any questions, we are here to help you figure it all out.

 Want to schedule a quick complimentary call with me?  Click HERE to see my online calendar

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 All the best,

Rick Fingerman, CFP®, CDFA™, CCFS®




Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

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