Soon we will flip our calendar pages to the last month of 2015. Now is a great time to give your financial plan a quick review, before holiday parties and vacation time intervene.
If you are a Republic Wealth client, we review your plan regularly and consult with you on any moves we think would help. Here are five questions we always ask as year-end approaches.
Is your asset allocation plan still suitable?
The assets you own – your home, other real estate, stocks, a small business, etc – add up on the asset side of your balance sheet. Do you have the right mix, considering your personal situation and long-term goals?
Everyone should ask this question each year. Circumstances change. If nothing else, you are now a year closer to retirement age than you were twelve months ago. You might have made significant changes that would affect your plan. Events like marriage, new children, buying or selling a business, receiving an inheritance, changing jobs, moving to a new city are all important to consider.
You want to consider both your liquid and illiquid investment. By “liquid”, we mean those you can easily sell, like stocks or mutual funds. The portfolio should be diversified and have an appropriate risk profile
Your illiquid investments, like real estate or privately held businesses, are equally important. They may have great potential, but don’t let yourself become “land poor.”
Do you want to make any charitable gifts?
Once you and your family are secure, you may want to use part of your wealth to help other worthy causes. Using tax advantages strategically can enhance your donation’s value to the charity while reducing your own tax liabilities.
Donations to “Donor advised funds” can be an excellent move at year-end. You can decide later exactly which charity receives your gift, but receive the tax deduction right away – for tax year 2015 if you donate by Dec. 31.
Most donor advised funds can accept either cash or “in-kind” securities. Donating a stock in which you have an unrealized long-term capital gain offers a double benefit. You avoid capital gains tax on the gain while also receiving a deduction for the stock’s full value.
Can you harvest any capital losses to reduce this year’s tax liability?
Active investors know that occasional losses are inevitable. The best response is to acknowledge any mistakes, learn from the experience and move on. At the same time, you don’t want to be impatient and give up too soon. The result can be a portfolio of unrealized losses.
While such stocks might recover eventually, they can offer immediate value when paired with realized gains. If you booked a capital gain in 2015 and have unrealized losses as well, selling them by year-end can help reduce or even eliminate your capital gains tax liability.
We call this “tax loss harvesting” because it truly is a harvest. Just as farmers harvest food from bare ground, you can harvest tax benefits from your unprofitable investments. (As always, consult your CPA before making any important tax decisions.)
Have you made the maximum yearly contribution to your retirement plans?
Contributing as much as possible to tax-advantaged retirement plans like your 401k is the best way to insure your older years are comfortable. Maximum contribution limits vary by plan type. We listed them all for you back in January, so check out 2015 Brings Expanded Retirement Saving Opportunities to learn more.
If your contributions so far, plus whatever is scheduled by year-end, are less than the limit, try to find additional cash you can move into the retirement vehicle. Once there, it can grow either tax-free or tax-deferred, boosting your retirement income down the road.
Incidentally, most of the 2015 contribution limits will be the same in 2016. This year’s unusually low inflation means there is no need to bump them up to keep pace with living costs.
Should you move assets outside your estate?
Investors with sizable assets should already have a detailed estate plan that ensures minimum tax liability or other problems for your heirs. One way to do this is to “gift” assets to family members long before you die.
Under current law, an individual taxpayer can give up to $14,000 per person, per year, without incurring gift tax. A married couple can give up to $28,000 per person, per year. This is a simple way to move assets out of your estate and reduce estate taxes in the future.
Many wealthy investors find that giving assets to children and grandchildren in this way teaches them how to manage money and make good financial decisions. The sooner you do this, the better, so you can be here to watch the results.
While the five points above don’t include everything you should consider at year-end, they are a good start. You still have plenty of time to make any necessary moves. We suggest doing it now so you can then relax and enjoy the rest of 2015. Feel free to call on Republic Wealth if you have any questions.
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