Impactful Financial Planning for Year-End
It always seems that once the Thanksgiving holiday passes the remainder of the year goes by very quickly. Now is a great time to start planning for things that have calendar year deadlines, so we don’t feel rushed in the final weeks of the year.
Some sections include a link to Certified Financial Planner Board of Standards’ blog called, ‘Let’s Make a Plan.’ It is a very helpful resource on financial planning topics.
Note: The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially affect investment results. Consult an attorney or tax professional regarding your specific situation.
Individual Retirement Accounts
For traditional and Roth IRA accounts, you can contribute a maximum of $5,500 for 2017 if you are under age 50, and $6,500 if you are over age 50. Fortunately, you can make contributions for 2017 up until the tax filing deadline of April 17, 2018. However, from a financial planning viewpoint, it is advisable to make your contribution prior to the holidays. Before you spend on holiday gifts and parties, make your contribution.
SEP IRA (self-employed and small business owners)
For SEP IRA accounts, you must have the account opened by your company’s tax filing deadline (plus any extensions) for the tax year a contribution is made. As such, if your company filed for an extension of 2016 taxes to be filed in October 16, you can still open and fund a SEP account for a 2016 contribution. This can be a significant tax planning tool for small business owners. For 2016, you can contribute the lesser of 25% of compensation (20% if self-employed) or $53,000. For 2017, this number increases to $54,000.
401k & 403b
For 2017, the maximum employee contribution is $18,000 (under age 50) or $24,000 (over age 50). The amount that you defer from your paycheck must be done before year-end. If you are not on track to max out your contributions, I would recommend assessing your current savings to see if you can increase your salary deferral for the remainder of the year. This will not only build your account balance quicker it will also save you money on taxes.
Here is a blog post about investing in your future through saving via various retirement accounts.
Required Minimum Distributions (RMD) from your IRA (age 70 ½)
Don’t forget that the distribution needs to occur by December 31st or you face a 50% penalty on the amount not distributed. Paperwork takes time and errors can occur, and the last work week of the year will be shortened due to the Christmas holiday.
Also note, that you can use all or part of your RMD to make a qualified charitable distribution (QCD). This is beneficial as a normal RMD is fully taxable. If you do not need the funds and would like to give to a charity, the qualified charitable distribution will now make the RMD non-taxable. Note, you do not receive an itemized charitable write-off for the amount given to the charity, rather the RMD amount is not included in your taxable income. This can be very beneficial if you do not normally itemize deductions. Since charitable contributions are itemized, only those that itemize receive tax savings benefits. Furthermore, the QCD is not subject to the maximum amount of 50% of your adjusted gross income. Finally, the funds must be transferred directly from the IRA custodian to the charitable organization. Remember, start the paperwork early.
Tax-loss harvesting
Within taxable accounts, smart use of capital losses may provide you with some tax savings, however, they should not supersede your overall investment objective in portfolio management.
Selling a position at a capital loss can be used to offset capital gains, up to $3,000 from your regular income, or be rolled over into future years for offsetting. Take into account all costs when analyzing the transaction. This includes fees or commissions to sell the position as well as any impact in the price of the shares if you are selling a large amount of a particular company.
Be aware of the ‘wash-sale’ rules- states that if you sell a security at a loss and buy the same or "substantially identical" security within 30 days, the loss is typically disallowed for current income tax purposes. The definition of what determines two securities to be “substantially identical” is not exact. However, remain on the conservative side of the equation to avoid possible disallowance.
Charitable contributions
if you are planning to make any charitable contributions here are some things to think about.
Contributions are deductible in the year made. As such, plan to take any action by December 31st.
You must itemize deductions to claim a charitable contribution. The standard deduction for 2017 rises to $6,350 for single filers, and $12,700 for married filing jointly.
Gifting cash versus an appreciated stock held for longer than a year
You may be able to save on capital gains tax by donating appreciated stock. If you donate the appreciated stock directly, you do not have to pay the long-term capital gains tax.
Annual Spending Check-up
This is something I like to do in the last quarter of the year and prior to Christmas. This gives me a summary of not only spending habits from the year, but also how much discretionary income I have for Christmas spending. Further, this helps with deciding if you can increase your 401k salary deferral for the remainder of the year to reduce taxable income.
Here is a blog post about when to save versus splurging.
Life Insurance Policy Review
Check beneficiary designations
Is the coverage still needed, and if so, are you getting the most bang for your buck?
Do you need more coverage due to an event such as a new child, a mortgage, etc.?
If you own a life policy with an underlying investment component (variable life, universal life), it is prudent to check on the performance of the funds and if they are appropriate
Cory Nakamura CFA, CFP® Chief Investment Strategist and Financial Advisor CFA Charterholder Why Choose a CFA® Charterholder to Manage Your Wealth?
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