1. Review your income or portfolio strategy
Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? While market sell offs this year have been modest by historical standards, did you take volatility in stride, or did you feel any uneasiness? If so, this may be the right time to evaluate your approach.
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring or one that prods us to sell when volatility surfaces.
2. Rebalance your portfolio
Market performance has been good this year. While U.S. equities have provided a nice lift to your portfolio, you may have too much exposure to stocks. Simply put, you may be taking on too much risk. If that’s the case, we may need to trim back on equity exposure. Given this year’s run-up in stocks, we may want to wait until January in non-retirement accounts so that any gains are booked in tax year 2020.
3. Take stock of changes in your life
Review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
4. Mind your RMDs
Required minimum distributions, or RMDs, are the minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year that he or she reaches 70 ½ years of age. Some plans may provide exceptions if you are still working.
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. 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 this year, please be aware that you’ll have two RMDs in 2020, which could bump you into a higher tax bracket.
The RMD rules applies to traditional IRAs, SEP IRAs. Simple IRAs, 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plan. They do not apply to ROTH IRAs.
Don’t miss the deadline or you could be subject to a steep penalty.
One other matter, the IRS issued a draft of new life expectancy tables for RMDs that will lower the annual required distribution. The tables are simply a proposal, but if finalized, they could take effect in 2021.
5. Contribute to a Roth 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, and 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, you may contribute $6,000, or $7,000 if you are 50 or older. This is up $500, respectively, from 2018.
You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. You can contribute at any age to a Roth if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts.
You can make 2019 IRA contributions until April 15, 2020 (Note: State holidays can impact final date).
6. Contribute to college saving
A limited option called the Coverdell Savings account did not get axed by the new tax law.
Currently, total contributions for a beneficiary cannot exceed $2,000 in any year and must be made before the beneficiary turns 18.
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For those filing joint returns, the amount is $220,000.
The $2,000 limit is gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers).
You have until April 15, 2020 to contribute for tax year 2019.
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.
Contributions to both accounts are not tax deductible.
7. Do your 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," or QCD if you are over 70 ½ years old? 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. This becomes even more valuable in light of the recent tax reform, as more taxpayers will no longer be able to itemize.
Given the increase in the standard deduction and limits on state income and property taxes, annual year-end gifts to your favorite charity may not exceed the higher thresholds. Therefore, you may consider giving an annual gift in early January. When coupled with an annual gift next December, you might reap the tax advantages from itemizing in 2020.
You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but then it is up to the donor when distributions to a qualified charity will be made.
I trust you’ve found these planning tips to be helpful. Again, please let me know if you have any questions, thoughts, or concerns