For most people, the flurry of activity between November and New Year’s doesn’t leave much room for non-holiday errands. And yet right now is a crucial window for reviewing your goals and engaging in strategic tax and financial planning. If you’re not already in the habit of semi-annual check-ins with your financial advisor, December is prime time to schedule your next meeting. Here are five items that should be on the agenda:
1. Budgeting and Cash Flow
At least two things happen at the end of each year that can affect your budget and your cash flow. First, holiday gift lists emerge. The inclination to spoil kids and grandkids is at peak level, which isn’t necessarily a bad thing, so long as savings goals aren’t getting thrown out the window for a two or three month stretch. Think of December as a natural pause point—a good opportunity to examine spending and saving that happened throughout the year, and realign those inputs and outputs if necessary.
The second thing that happens in December is that you and/or your spouse likely receive some kind of year-end bonus. If you haven’t already identified a priority for this influx of cash, your advisor can help you make sure it’s allocated strategically.
2. Tax Management
Taxes may literally be the last thing on your mind while preparing for the holidays. But these few remaining weeks of the year provide opportunities (potentially significant opportunities) to lower tax burdens in April.
For example, it might make sense for you to prepay next year’s state tax obligation, thereby saving on your federal tax return. A more advanced scenario might involve prepaying your real estate tax. A lot of people have charitable goals that play into tax plans as well. Making sure you’re fulfilling those goals as tax efficiently as possible often means your generosity can go even farther—especially if you’re giving more complicated gifts like stocks/appreciated securities or putting together a multi-year pledge. Every family and individual has a unique situation, but everyone can benefit from taking a multi-year approach to tax management.
With the post-election publicity and discussion about potential changes to the tax code, here are several specific areas to consider before year end. Please keep in mind that these are NOT recommendations, but ideas for you to review or discuss with your advisor:
- Acceleration of your income tax deductions and payment of your January estimated taxes in December. Make your January mortgage payment in December. Make your 2017 charitable donations in 2016.
- Harvest losses to offset capital gains. Be aware of the capital gains that may be distributed to you from your mutual funds near the end of the year. Take advantage of those securities that are experiencing a loss, using the tax savings to offset your gains.
- Make annual exclusion gifts to chosen loved ones of $28,000 (per married couple).
3. 401K Contributions
Even though most families have this action item on their radar, it bears repeating: make sure you’re hitting the annual cap on your 401(k) and other retirement accounts. (You have until April to max out IRA contributions.) You should also be reviewing last year’s goals for these accounts and looking at related opportunities for next year—perhaps a health savings account, for example. December is also a good time to review your children’s 529 plans. Understand the gift tax limits and include these buckets in your 2017 savings goals.
4. Required Minimum Distributions
If you are age 70 ½, you’re already in the habit of taking required minimum distributions (RMDs). But keep in mind you also have the flexibility to withdraw more than the minimum. It’s worth talking to your advisor about why and if this might benefit you.
RMDs are also very important if you inherited an IRA. In this case, even if you are under 70, you’re required to take that distribution out. Failure to do so by year’s end could result in a penalty equaling 50 percent of the amount you should have taken. So, if you don’t already have an inventory of your retirement accounts, talk to your advisor about getting organized and potentially consolidating.
5. Retirement Plans
As noted earlier, year end is a good time to review budgets and spending—not just from a savings perspective, but from a retirement planning one. Your current spending levels are a good indicator of what your retirement spend rate will look like, especially if you are only a few years removed from your target retirement age. It’s important to reset any assumptions that don’t jibe with how you’re actually living, while making sure your portfolio is still appropriate.
When you make it a priority to get in front of your advisor at the end of the year, you have a clearer view of your projected income, expenses, and deductions. And while we would encourage people to be proactive about financial planning throughout the year, you still have to look at “actuals” in December to confirm everything is on track.
The information provided above is general in nature and is not intended to represent specific investment or professional advice. Any results cited do not necessarily represent the experience of other GW & Wade clients. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:
Neil l. Goldberg, Principal
GW & Wade, LLC