The beginning of each year presents a unique opportunity to self-reflect about whether your Financial Plan is on track. Many of us set “New Years Resolutions” with no true actionable goal or follow-through. Remember a goal without a plan is just a wish!
With that in mind, especially given recent tax law changes and the passage of the retirement SECURE Act, now is an excellent time to review your plan to see if you are on track to meet your short and long-term goals. Below are some important areas which you should contemplate and plan before we get too far into the year.
Income Tax Planning – Make sure you are implementing tax reduction strategies such as maximizing your retirement plan contributions, HSA contributions, FSA distributions, ROTH conversions, tax-loss harvesting your portfolios, making smart tax-efficient charitable contributions, and understanding all the new tax benefits, can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from previous years. We talk about many of these in our year-end tax planning checklist.
Estate Planning – Examine a flowchart of your current estate plan to visualize what would happen to your assets and how the current estate tax law will impact you. For some taxpayers with large taxable estates, the time is now to review your estate plan to maximize the increased estate tax exemption set to expire in 2026! You want to be sure that your estate planning documents are up to date. In addition to your will, it is important to review your power of attorney, health care documents, trust agreements, and beneficiary designations to assure they all coordinate together according to your desired estate distribution. If you have recently been through a significant life event such as marriage, divorce, or the death of a spouse, this is especially important right now.
Investment Planning – Recently, we’ve seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing and understanding the importance of maintaining your investment discipline during these times is vital. We have always suggested that it is important to “Stress Test” your portfolio to see how it would respond if, for example, there were to be a recession. We talk about how to navigate recessions in our Recession Survival Guide. Review your Portfolio Allocation to reaffirm that your current investment allocation and discipline are aligned with your financial plan. Regular portfolio rebalancing and reviews will keep the appropriate amount of risk-balanced in your portfolio. If you are retired and living off your portfolio assets, you need to maintain an appropriate cash reserve to cover expenses. You don’t want to be forced to sell equities in a down market. Check out our Retirement Survival Guide where we discuss this in more detail. It is also a good idea to look at expected distributions from mutual funds. If you recently purchased a mutual fund (or have a fund with a holding-period loss or small gain), you can check with the fund company to see if there will be a large capital gain distribution that will be taxable. If you sell the fund before the distribution, you can avoid the tax hit. TIP: These occur annually – typically in December.
Charitable Giving – There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock would allow for a full deduction of the value and avoid paying capital gains taxes. Maybe you have some high concentrated stock positions on a low-cost basis. These securities are excellent candidates for charitable contributions. Plus, you can always buy back the stock if you really insist on owning it. Another great option is to make direct gifts to charities from your retirement accounts if you are over age 70 ½ known as Qualified Charitable Distributions (QCD). Doing so will not add income to your return AND qualify towards your required minimum distributions for the year. You may also want to consider bunching charitable deductions by deferring donations to next year or making your planned donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor-advised fund for your charitable giving. These contributions need to be locked-in by year-end to get a deduction, so now is a great time to start considering your plan. For more advanced charitable giving, consider Charitable Remainder Trusts that can provide a stream of income while you’re alive, but leave the remainder to charity.
Retirement Planning –Think about your future when working becomes optional. Whether you expect a typical full-retirement or maybe a career change to something different, determining an appropriate balance between spending and saving for now and the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you. We have a great Retirement Planning Checklist for you to see if you are on track!
Cash Flow Planning – Review your annual spending and plan for next year. Understanding your cash flow needs is an important aspect of determining if you have enough assets to meet your goals. If you are retired, it is particularly important to maintain a tax-efficient, safe, and sustainable withdrawal strategy to cover your spending needs. This is addressed in our Retirement Survival Guide and described in Planning for Retirement the R.I.T.E. Way® (R.I.T.E. stands for “Retirement Income Taxed Efficiently” – see the image in the link from the guide). If you have not yet reached age 70 ½, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70 ½ make sure you are taking your required minimum distributions. Otherwise, the penalties are significant if – up to 50%! This may also include reviewing strategies to maximize income from Social Security and Pensions.
Risk Management – It is always a good idea to periodically review all your insurance coverage. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property and casualty insurance coverage are available when you need it. If you are in a Federal disaster area, there are additional steps to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life, long-term care and/or disability insurance. There are both term and permanent options are available for life insurance and under certain situations, some policies may even help you save tax-deferred for retirement.
Education Funding – Funding education costs for children or grandchildren is important to many families. While the increase in college costs has slowed some lately, this is still a major expense for most families. It is important to know all the options available to save for education to determine the optimal strategy. Funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous. For those with kids in college, it is also important to understand the rules when it comes to taking 529 Plan withdrawals tax-free. Don’t forget to submit your reimbursements prior to year-end.
Elder Planning – There are many financial planning elements to consider as you age, and it is important to consider these things before it’s too late. We have talked about planning for incapacity several times on the STA Money Hour radio show. There are many issues to consider when caring for aging parents or other loved ones. Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understands your plans will help reduce family conflicts and have your wishes considered.
Business Planning – If you own a business, you should especially be paying close attention to your year-end. Why? Congress is constantly making tax law changes that impact many businesses and the tax they or their owners pay. A new tax code section for businesses, 199A, gives business owners who are structured as an S Corp, Partnership, Single Member LLC or Sole Proprietor the benefit of deducting an additional 20% for the net income of their taxes! For many, this can be a huge saving. The rules are very complicated and require that you plan at year-end to maximize your potential deduction. The new tax law includes two new changes that limit the amount of interest you may be able to deduct and no longer allows net operating losses to be carried back to prior years. You can only carry them forward with a limit of what you can deduct in any year. Also, if you are looking to start giving your employees more benefits and are considering setting up a qualified retirement plan, some options are required to be in place before the following calendar year depending on which plan is right for you. Whether it’s a 401K, SEP IRA, Defined Benefit Plan or Simple IRA plan, we can help you determine which plan is right for your business.
Conclusion – In addition to the ideas above, earlier this year we listed our Top 10 Tax Planning Ideas for 2019. The decisions you make each year with your personal finances will have a lasting impact on your long-term financial plan. Don’t leave tax benefits behind. Don’t miss out on savings today. If you don’t have a financial plan, here is a short video that shares Avidian Wealth’s Financial Planning Process. We hope this letter has begun to generate some insight into areas of your personal finance that need attention. Please contact us when you are ready to talk through year-end planning.
Financial Planning and Investment Advice offered through Avidian Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Use only at your own peril. As always, a copy of our current written disclosure statement discussing our services and fees continues to be available for your review upon request.