End-of-the-Year Planning You Should Be Doing Now

By Russell W. Hall, CFP®


As we approach the end of the year and the arrival of the holiday season here in Orange County, it’s a good time to look over your finances and do some year-end planning. Here are five items you should check:

1. Retirement savings: Saving to a 401(k) at work? Make sure you’re contributing enough to get the company match (if available). And if you’re able to contribute the maximum amount—$18,500 if you’re under 50, or $24,500 over 50—double-check that you’ll meet those totals by the end of year.

We often get the question of traditional 401(k) versus Roth 401(k). The answer usually comes down to taxes—you’d usually use a Roth 401(k) if you are young, or if your income is low now and you expect it to be higher in retirement. However, most people will be better off using a traditional 401(k) because the tax benefits are more valuable to them today.

If you’re self-employed and want to set up an individual 401(k) plan, note that you have until December 31 to get that established. Other types of plans, like SEP-IRAs or SIMPLE IRAs, can be opened before filing tax returns.

2. Investment tax planning: If you have a non-retirement account (individual, TOD, trust) with investments, see if there are any losses available. You can sell the investment to take the loss, which will offset gains from other investments or up to $3,000 of ordinary income. Make sure you don’t repurchase what you sold for at least 31 days—and if you buy another investment in the meantime, make sure it is different enough to avoid running afoul of the IRS. Switching between two different share classes of the same mutual fund to take a tax loss wouldn’t work, for instance, and neither would selling a fund in a taxable account and buying it at the same time in an IRA.

If you expect to be in a lower tax bracket (under $77,200 for married, $38,600 for single), see if you have taxable long-term gains, since those can be sold at 0% federal tax. Note that in California and other states, you’ll still pay state income tax. Also, although the gains are taxed at 0%, the amount is included in your adjusted gross income and could increase taxes on other items. Another strategy with large capital gains is to gift them away to charity—see the comments on gifting below.

3. Required minimum distribution (RMD): Over 70 ½ and have an IRA, old 401(k), or other retirement account? Make sure you take the required distribution by the end of the year. If you don’t, the IRS can charge a penalty of 50% of the RMD amount not taken and then make you take the distribution anyway. This is also true for inherited IRA accounts, including inherited Roth IRAs. For more details about RMDs, see our article “Answers About Required Minimum Distributions.”

If you are over 70 ½ and charitably inclined, you can also give away part or all of your RMD directly to your favorite charities. This is called a qualified charitable distribution, or QCD. The QCD amount is not part of your taxable income, which can help lower taxation of Social Security and possibly lower Medicare premiums, among other things. If you’re interested in this, you’ll want to start the process as soon as you can because brokerage firms get busy at the end of the year. Note that you have to be over 70 ½ at the time of the distribution, not just anytime during the year, and that the QCD can come only from an IRA [including old SEP or SIMPLE IRAs, but not a 401(k) or 403(b)].

4. Gifting: Another option for charitable gifts is to give away appreciated stock or mutual funds from your taxable investment account (individual account, TOD, trust). Most charities are able to accept those investments, and there are no tax consequences for the charity to sell the holding. Doing this allows you to avoid paying tax on the gain, so it’s more tax efficient than selling the investment yourself and then donating the proceeds. If you are considering gifting appreciated stock versus doing a QCD from your IRA, check with your tax preparer. We have seen clients benefit more from one strategy over another.

For other types of giving, this year you are allowed to gift $15,000 to any person without tax consequences. For married couples, this means that they can give up to $30,000 to an individual without having to file paperwork or use up some of their lifetime gift exemption. This can be a good strategy for funding 529 college savings accounts for grandkids, because of a special rule for 529s that allows five years of gift funding in the first year.

5. Roth IRA conversion: Although not as attractive as before because of a recent tax law change, converting to a Roth IRA can be beneficial in some situations. A conversion involves transferring assets from an IRA or other retirement account to a Roth IRA. You pay income tax on the value of the conversion, but once the money is in the Roth IRA, it will never be taxed again.

Roth conversions can be a great strategy if your income is much lower during a particular year due to being out of work or for some other reason. However, you want to plan carefully since you can’t undo the conversion once it’s done.

These five items are among the many things that we consider for clients each year. If you’d like more information, schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.

Russell W. Hall, CFP®