There is still time to take advantage of last-minute financial planning opportunities before 2019 comes to a close. While you may have to act fast, the following year-end strategies could have a substantial impact on everything from next April’s tax bill to your retirement portfolio.
Max-out retirement plans
Unlike IRAs, 401(k) contributions have to be made by Dec. 31. With the maximum contribution for 2019 being $19,000 plus a catch up of $5,000 for those older than age 50, substantial tax savings could be realized by taking full advantage of your plan.
Consider contacting your plan administrator or payroll department to determine how much you have contributed year to date and make any last-minute contributions before year end.
For entrepreneurs, contributing to a profit-sharing plan may help supercharge your savings with total contribution limits as high as $56,000 for those under age 50 and $62,000 for those age 50 and above. Additionally, incorporating a cash balance plan can allow for even greater tax-deferred savings.
Also be sure to speak to your financial or tax advisers to determine whether pre-tax traditional 401(k) contributions or post-tax Roth 401(k) contributions are more advantageous for you.
Unfortunately, the IRS will not allow you to defer taxes on your retirement accounts forever. Instead, they require that you must begin taking distributions by the time you reach age 70½.
Your first required minimum distribution (RMD) must be taken by April 1 of the year following the year you turn 70½. Future RMDs must be taken by Dec. 31 of each year. Be careful though: If you fail to take your RMD, a 50 percent penalty may be assessed on the value of the amount that should have been withdrawn.
For example, if a taxpayer is required but accidentally fails to take $10,000 from their IRA account by Dec. 31 of this year, a $5,000 penalty may be owed. Take action to ensure that you do not miss this important deadline.
A Health Savings Account (HSA) is a savings account that allows you to contribute money on a pre-tax basis to pay for qualified medical expenses. Not only may contributions be tax deductible, the account grows tax-deferred and no taxes are paid when withdrawn. HSA accounts are only available to those with a High Deductible Health Plan. For 2019, those with self-only coverage can make pre-tax contributions of $3,500 and family coverage allows for contributions of up to $7,000. While you can contribute to an HSA as late as your tax filing deadline of April 15, 2020, it may be beneficial to start budgeting for contributions before year-end.
Last-minute charitable contributions
Charitable contributions are a fantastic way to help others while potentially minimizing your tax liability. However, changes in the tax code which increased the standard deduction has led to fewer tax payers itemizing their deductions and taking advantage of charitable deductions.
However, in an effort to maximize the tax benefits of your giving, you may want to consider “bunching” contributions in a particular year rather than spreading out smaller contributions each year. This may allow you to itemize your deductions in certain years and take advantage of the tax benefits of charitable deductions.
Consider speaking to your tax adviser to determine if you should rush to make your contribution for this year or whether it may be in your best interest to consider another approach. Remember, the deadline for gifts of cash, property or appreciated stock is Dec. 31.
Many investors are familiar with tax loss harvesting, which is the process of selling investments in non-retirement accounts that may have lost money to help offset gains on other investments. However, tax-gain harvesting can be helpful too.
Depending on your individual goals and circumstances, it may actually be even more beneficial to harvest gains. You may be wondering how selling an investment to take a capital gain can be helpful. For 2018, if you earned $78,750 or less and you are married filing jointly, or $33,375 if you are a single filer, you may be eligible for a 0% long-term capital gain rate. Remember, this powerful strategy only applies to investments held for greater than one year within a taxable account.
This may be especially useful if you find that your income has suddenly declined in a given year as this could allow for the sale of appreciated assets at very attractive capital gains rates. While there are no wash-sale rules that prevent selling investments for a gain and buying them back immediately, realizing gains can impact the taxation of social security and various deductions and tax credits, as well as state income taxes. As a result, be sure to coordinate the realization of capital gains with other financial strategies you may be considering including any Roth conversions. Bottom line – harvesting gains up to the maximum 0 percent threshold can provide tax savings for some taxpayers.
While you may not want to allow taxes to be the overriding factor when making investment decisions, paying a capital gains tax at a lower rate could help you save substantially in the future.
Rather than allowing procrastination to get the best of you, consider taking a pro-active approach to addressing the planning opportunities noted above. Since everyone’s situation is unique, consider speaking to your financial advisor to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com,www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.