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It’s a New Year, a New Decade … Are Your Finances Ready?

by Carolyn Walder

Many folks have probably read some version of the “2019 Year-End Checklist” that you need to consider for your finances. Well, this blog is going to take that one step further! While it is good to review these checklists to see if you have done what you wanted to accomplish this past year, it is much more helpful to start off the new year examining what you want to accomplish in the New Year so you have time to plan and schedule these events instead of frantically running around at the holidays! Here are some areas that you should consider …

Charitable Giving – A lot of people go into a year-end frenzy making charitable contributions that they either intended to do earlier responded to last-minute tugs at the heartstrings from the inevitable year-end solicitations. A better way to approach your charitable giving is to start at the beginning of the year and assess the amount of income/assets that you want to give to charity and which charities should receive your donation. Second, you need to determine the most tax-efficient way to get those funds into the hands of the charities. Two often-overlooked strategies are donating appreciated stock/securities and making a qualified charitable donation (QCD) if you are over the age of 70½ and must take required minimum distributions (RMDs). Donating stock (or mutual funds) that have appreciated greatly is much better than giving after-tax dollars and is usually a rather painless way to give. You can deduct the full market value of the charitable gift (rather than what you paid for it), and the charity gets to sell it with no tax consequences! Although it is a bit more time consuming than simply writing a check, it is worth the extra effort. You must find out whether the charity has a brokerage account at the same institution you do (for example, TD Ameritrade, Charles Schwab, or Fidelity). Most all charities do, but regardless, if you let them know you want to make a donation of stock, we have ever heard of a charity that didn’t open up that account! You then must decide how many shares of stock you want to gift and process the paperwork to have that completed. (Lifetime Wealth takes care of this paperwork for our clients.) If you have an individual retirement account (IRA) and are taking an RMD, it is much more advantageous to give directly to a charity through your IRA. (Note: you cannot use this strategy with assets in a 401k, and you cannot take a charitable deduction on your taxes because that would be “double dipping.”) Instead you get to avoid taxes on your RMD altogether by giving from your IRA. It is important to follow the rules and ensure that your QCD is sent directly to the charity from your custodian of your IRA. If the money comes to you first, it is not a QCD and it would negate the benefits of this strategy. (Lifetime Wealth processes all QCD requests for our clients.) We encourage our clients to use one of these tax-efficient methods of charitable gifting to satisfy annual tithing commitments to their church, synagogue, etc., as it provides the “biggest bang” for your taxable buck!

Retirement Plans – It is important to look at your retirement savings plans at the beginning of the year to assess your annual contributions. Are you going to turn 50 during the year? If so, you are eligible to make catchup contributions at any time during the year. This amounts to an additional savings opportunity of $6,000 for a 401k/TSP/403b and $1,000 for an IRA or Roth IRA. Do you receive employer matching funds on your 401k or other plan (403b, SIMPLE IRA, etc.)? If so, it is critical that you plan your contributions to capture all of the match money you are entitled to. This is generally an issue only if you save a percentage of your pay rather than make fixed-dollar contributions, because if your savings percentage is too high, your will have made all of your elective contributions before the end of the year, missing out on some employer match (because with no contribution there can be no match!). The best way to maximize contributions is to take the amount you plan to contribute for the year (including catchup contributions) and divide that by the number of pay periods in the year. For example, if you are paid every two weeks, you have 26 pay periods during the year. If you are over 50, making the maximum contribution ($26,000 for 2020!) and are paid every two weeks, you would want to designate $1,000 per pay period for your contribution amount. Do you have the opportunity to contribute to a Roth 401k? Even though you do not get an immediate tax deduction, you may wish to consider making a Roth 401k contribution (if available to you), particularly of you are not income eligible to make a Roth IRA contribution. Remember, you generally have the option of making elections to both your traditional and your Roth 401k up to the maximum amount allowed, so, for example, you could decide to split the contributions and make $13,000 to a traditional 401k and $13,000 to your Roth 401k.

Roth IRAs – Roth IRAs continue to be one of the best gifts that Congress gave the American people. If you are income eligible—modified adjusted gross income (MAGI) of up to $196,000 if married filing joint and $124,000 if filing single for a full contribution—then make a Roth IRA contribution any way you can. You can take money from taxable investments, savings, and even emergency savings to fund this account. The reason is that you can always take your contributions out of your Roth IRA tax and penalty free. However, if you use this strategy, then we suggest keeping the Roth IRA invested in a money market until you feel confident you will no longer need that cash for emergency expenses.

After you complete your 2019 taxes, you are in a good position to estimate your 2020 income to see if you can afford to pay any more taxes to fund a Roth IRA conversion in 2020. If you can, it is recommended, particularly if you will have pension income in retirement. Many folks have allowed their tax-deferred accounts (IRAs, 401ks) to grow significantly. If you are one of the lucky few to have a traditional defined-benefit pension, you may be able to live off your pension(s). However, once you approach 72 (the new age to start taking RMDs! ) you may find that your taxable income goes up dramatically. If you are able to pay the taxes on a partial Roth IRA conversion, you will be able to grow those dollars tax-free and decrease your required RMD and possibly even put yourself into a lower marginal tax bracket! Remember, you have until April 15, 2020, to make a Roth IRA contribution for 2019. If you are close to the income thresholds, then recheck after have completed your taxes to see if you qualify. Then make that contribution, even if you need to take it from cash savings!

Reconsider making nondeductible IRA contributions. While making a nondeductible IRA contribution does allow your account to grow without the annual drag of taxable income distributions (capital gains and dividends), if you are not getting a deduction for that contribution, then you should consider whether those dollars would be better directed to other investment options or even other goals. This is particularly true if you already have most of your retirement savings in tax-deferred accounts like 401k’s and traditional IRAs. If you do not keep track of those nondeductible contributions (by filing IRS from 8606) each year, you will end up paying income taxes on those contributions when you take them out! You also cannot just take out these basis contributions but must prorate them with every distribution. (For example, if you made a nondeductible $5,000 contribution, your IRA is worth $100,000, and if you make a $10,000 qualified withdrawal, your taxable distribution would be $9,500 not $5,000!) Instead, consider using those dollars for paying taxes for a partial Roth conversion! Of course, if you are in a very high marginal tax bracket, it would probably make sense to wait for the conversion, but it is an option to consider.

And lastly, why not consider making some long-put-off financial goals as part of your New Year’s resolution! The beginning of the year is a great time to contemplate what you want to accomplish in the coming year as well as the coming decade! Review savings goals: Did you just get a raise that you can immediately add to your monthly savings? Do you have enough in liquid savings to cover emergencies? Have you checked your credit report lately (use www.annualcreditreport.com for your free credit report). Have you reviewed your Will/Trust lately to see if it still accomplishes your estate planning goals? Have you reviewed your insurance coverage (life, disability, long-term care, home, etc.) lately to see if it still matches your needs? We welcome a call to discuss these issues/ideas/strategies to see if they are appropriate for you. Remember, we at Lifetime Wealth are ready to help you assess and plan your financial life so you can start this new decade out right!

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