Proactive planning and the all-important year-end financial planning review process
This is the time of year when our advisors are scheduling year-end planning meetings with clients. Year-end planning is more than just a pro forma check-in, it’s an important practice and an opportunity to make sure our clients are checking all of the important boxes each year. It’s crutial to not miss out on opportunities to minimize tax burden and to make smart and strategic decisions about how to handle assets.
The following items are at the top of the list of any comprehensive year-end review:
Review your estate plan and beneficiary designations
This is one of the most basic, yet commonly overlooked pillars of responsible financial and estate planning. There is an understandable tendency to feel as if simply having a will and a trust means that you don’t have to worry and that the hard work is done. Estate planning is a dynamic process, not a one-time event. Things like death, divorce, family issues, and other changing life circumstances can have a significant impact on how you wish to disburse your assets should you pass away. This annual review encompasses not only your monetary planning priorities, but also monumental non-financial decisions such as who you want to be the guardian of your children if you passed away.
Many people don’t realize that beneficiary designations on retirement accounts trump whatever is stated in your will or trust. The funding of an estate plan and titling of accounts is equally as important as the estate documents themselves. For example, if an account was intended to go to a trust, but the beneficiary designation states that it goes to an individual instead, then generally that account will go directly to the named individual and never make it into the trust. In that event, the trust has no control over the assets in that account. A periodic (ideally annual) review of the beneficiary designations across your accounts is imperative to ensure that your assets transfer as intended in your estate plan. Review your plan with your advisor to make sure your intentions today are the same as they were when you drafted the plan.
Consider Roth conversions
Make sure you consider Roth IRA conversions, especially during years of lower income and down markets. This is particularly relevant for those who may have a post-retirement year when your annual income is markedly lower than in prior years and converting a portion of your traditional retirement accounts to Roth accounts makes a great deal of sense.
The IRS has required minimum distributions (RMDs) on retirement accounts. That means that at age 72, you’re required to start drawing on your traditional retirement accounts, whether you like it or not—and those distributions generate taxable income. For those who have retired but have not yet reached the RMD cutoff age of 72, converting a portion of your traditional retirement accounts to a Roth may make sense. Even better, because you are taxed on the value of the funds at the time of the conversion, converting during periods when the market is down means that you won’t have to pay tax on the recovered amount if and when the market rebounds in the future.
Make your losses work for you
Year-end loss harvesting is another smart way to use the end-of-year planning and make unrealized losses work for you. If you have realized any capital gains throughout the year, consider mitigating the tax obligation on those gains by selling positions where you might be down before the end of the year. By selling those positions to “create” a loss, it can potentially offset some or all of your taxable gains and reduce or zero-out your tax liability. While the Wash-Sale rule forbids you from buying back into the same or “substantially identical” asset within 30 days of such a sale, there plenty of ways to reinvest your funds in a comparably smart and strategic manner.
Practice strategic philanthropy
Consider taking advantage of a donor advised fund or DAF for your charitable giving. Utilizing a donor-advised fund means you can receive a deduction based on your contribution and determine where and to whom you wish to donate those funds at a later date. In addition, it is generally most advantageous to make those donations to the DAF with appreciated securities. This enables you to contribute and get the tax deduction for the full value of the asset, assuming you held it for longer than one year. Now you not only won’t have to pay tax on those gains, but you can potentially reinvest your savings in other securities.
As always, use these suggestions as general guidelines, not as personal financial advice. Everyone’s circumstances are different, and it is critically important to conduct this kind of year-end proactive planning—and all wealth management decision-making—with the guidance and counsel of a trusted financial advisor.