It’s that time of year again when sweatshirts and winter jackets come out of storage. With the chaotic holiday season approaching, it’s easy to push aside any thoughts relating to financial planning, which is why we created this list of five year-end financial planning strategies and tips for you to consider before the new year.
1. Make your charitable gifts
If you are planning to make year-end charitable gifts, it is important to evaluate the most tax-efficient way to make those gifts. Charitable contributions continue to be deductible under the new tax law, but many individuals and families will not be itemizing their deductions anymore due to the increased standard deduction.
One option, if you are not itemizing and are over age 70½, is to make your charitable gifts from your IRA. This is known as a Qualified Charitable Distribution (QCD), and you can read more about this strategy in by clicking here.
But what if you will itemize or if you are younger than age 70½? Then it might make sense to “bunch” your charitable gifts to maximize your tax benefit. We think of the increased standard deduction of $12,000 for an individual and $24,000 for those married filing joint as a “free deduction” the IRS provides for doing nothing. In order to continue to see significant tax benefits from your itemized deductions it might make sense to combine multiple years of deductions into one year. For more on this, please see our previous blog on “Bunching Charitable Deductions.”
2. Make retirement plan contributions
Business owners with self-employment income can reap tax benefits by contributing to a Simplified Employee Pension (SEP) or Individual 401(k) plan. You may be able to deduct up to $55,000 ($61,000 for those 50 and older), depending on your earnings in 2018.
Employees participating in a company 401(k) plan can defer $18,500 of their salary ($24,500 for those 50 and older). These funds will continue to grow tax-deferred until distributions are required at age 70 ½ or later if you are still working at that time. Some employers also offer a Roth 401(k) option, which might be appropriate depending on your tax picture.
For those contributing to traditional or Roth IRAs, you have until the April tax deadline to do so. The contribution limit is $5,500 ($6,500 for those 50 and older) for 2018.
3. Max out your Health Savings Account (HSA) contributions
At RegentAtlantic, we view HSAs as powerful retirement savings vehicles. HSAs allow you to contribute to the account, get a tax deduction, and invest the money tax-free for future use. There is no requirement to spend the money by year-end (like there is for FSAs), and any withdrawals for healthcare expenses in the future are completely tax-free!
HSA holders can contribute up to $3,450 for an individual and $6,900 for a family in 2018. While the numbers are not huge, we still recommend maximizing your contributions and investing the account. Ideally, you will not actually use this money for near term medical expenses so the money can grow tax-free for years to come.
For more on this and to find out if you qualify for a HSA, please see our blog on the topic: “Health Savings Accounts – Have Your Cake and Eat It Too!”
4. Manipulate and accelerate your income
If you find yourself in a year of low income, there might be an opportunity to accelerate income and take advantage of a lower-than-usual tax bracket. This could come in many forms, depending on your personal financial picture. See below for some of the potential strategies and a couple of blogs that delve into more detail.
Intentionally realize long-term capital gains and pay $0 tax. This is possible if your taxable income is low enough. Read more about it in our recent blog post here.
Make a Roth conversion. My colleague, Mike Pappachristou, wrote a blog explaining this strategy and some of the recent law changes pertaining to it. Check that out here.
Take a traditional IRA distribution. If you are between ages 59½ and 70½, then you are not required to take an IRA distribution, but you can do so without penalty. We typically recommend delaying your IRA withdrawals, but it might be to your advantage to take a withdrawal if you are in a year of low income. The idea would be to “fill up” your low tax bracket, so you are not stuck paying extra tax when you are 70½ and are required to start making IRA distributions (known as “Required Minimum Distributions”).
Exercise stock options. It might make sense to sell some of those stock options you have been holding onto if you can do so at a lower-than-usual tax rate.
5. Consider contributing to a 529 plan, especially if your state offers a tax deduction
Some states, including New York and Pennsylvania, allow a tax-deduction for 529 Plan contributions. So, if you are funding a 529 Plan for your children, grandchildren, or other beneficiary, then it might be appropriate to contribute more before year-end to maximize your 2018 tax benefit.
This strategy has become an even higher priority under the new tax law because 529 plan distributions can now be used tax-free for private elementary and secondary school expenses. If you have a child or grandchild that is currently attending private elementary or secondary school, then you might have an opportunity to “funnel” those tuition payments through a 529. In other words, contribute to the 529 and receive the tax deduction, then pay the tuition from the 529 plan.
The true benefit of 529 Plans is saving for future education costs and allowing the assets to grow tax-free within the 529. So, if you are already saving into a 529 for college (or beyond), then the “funneling” approach might not be necessary. No matter the situation, you might want to consider adding to a 529 if you can still increase the 2018 tax deduction If your state offers one.
These financial planning strategies are not intended to be a specific recommendation for all individuals. Instead, it’s a short guide to help you brainstorm possible options that may be appropriate for your situation. As always, it’s important to discuss these strategies with your Wealth Advisor and tax professional before making any final decisions.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.