5 Financial Planning Topics You Should Consider Before Year-End.
Life coaches often say that the best New Year’s resolutions are those that everyone can start before January 1. Planners and doers may want to consider putting their finances in order to start off the new year on the right financial foot.
Here are five important areas for your consideration before year-end:
1. Required minimum distribution
It is typically mandatory to start withdrawing a required minimum distribution from 401(k)s or traditional IRAs once a person turns 70 ½. This minimum distribution varies depending on the person’s age, his or her spouse’s age, and the balance in his or her retirement accounts.
The distribution must be withdrawn before December 31st each year, but those who have turned 70 ½ this year have until April 1st.
It’s vital the right amount is taken in a timely fashion. If not, the tax penalties are severe. Individuals who fail to withdraw their distributions will be taxed 50 percent of the minimum amount they should have taken out of their retirement accounts.
2. Charitable gifting
Money and items donated to charity are tax-deductible as long as the donations have been made to a qualified charity. The IRS has an online database that lists which charities qualify for this.
Instead of donating cash, consider gifting appreciated securities or funding a Donor Advised Fund (see our blog post on the topic). These alternative gifting approaches can provide significant tax benefits.
Note that any gift worth more than $250 requires a written receipt from the charity.
3. Tax planning
It’s never too early to start planning one’s taxes. If you’re a business owner, think about paying bills and making investments before the end of the year so you can deduct more. Also, consider waiting until January 1 to invoice some customers if it might keep you in a lower tax bracket for 2017.
For taxable investment accounts, it may be wise to explore realizing capital losses to offset capital gains.
With new tax legislation on the table in Congress, year-end tax planning in 2017 may prove especially difficult. As always, we recommend you consult with your financial advisor and CPA to determine if any year-end actions should be taken
4. Gifts to family members
Consider tax-free gifting up to $14,000 per person before year-end ($28,000 maximum if married or $56,000 maximum if married and giving to a married couple). Staying at or below this threshold will ensure gift tax is avoided. As such, taxpayers should consider waiting until the new tax year to make new gifts if they have already reached this limit.
Keep in mind that any gift made directly to an educational or medical institution to cover a relative’s expenses isn’t subject to the gift tax.
5. Roth conversion
Using a Roth IRA to save up for retirement allows the money to grow tax-free (as compared to tax-deferred in a Traditional IRA). Money can be contributed directly into a Roth IRA only for those individuals with income levels below certain thresholds.
However, these restrictions do not apply to Roth conversions, which move money from a Traditional IRA to a Roth IRA. There is no limit on how much you can convert. However, remember that ordinary income taxes are owed on the amount of the conversion.
We hope you will consider the areas mentioned above as you plan for year-end. If we can offer additional information on any of the topics, please contact us directly. We strongly encourage you to contact your financial advisor, CPA, and other trusted advisors to better prepare your year-end financial plan.
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