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Beyond the Numbers

Beyond the Numbers

Trusted advice to help you think big and plan bigger.

Year-End Planning Checklist

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Director of Northeastern Ohio Market, Portfolio Manager
Wealth Advisory Services, Cleveland-Akron

Dark mornings, early sunsets and beat-up paper calendars remind us the end of 2018 is rapidly approaching. For most of us, this means it’s time for annual rituals like putting patio furniture away or searching the house for holiday decorations. Retailers are well ahead of the dwindling daylight indicator as usual; it seems holiday decorations have been for sale since Labor Day.

Alongside these preparations, the change of seasons provides an opportunity to take stock of various aspects of our financial lives. There are several financial-maintenance tasks we should never allow to collect as much dust as the artificial Christmas tree.

It’s not too early to work through the Year-End Checklist. Taking care of these items now brings peace of mind, allowing us to fully enjoy the season knowing the financial “house” is in order. In addition, initiating year-end financial transactions now will help avoid the year-end rush common to financial institutions and charitable organizations.

So what are the top year-end items to review and update?

1) Required Minimum Distributions (RMDs): IRA owners over the age of 70 ½ who haven’t already taken the RMD need to do so now. This should be a top priority because the IRS penalty for not doing so is 50% of the missed RMD amount. For a 75 year old with a $2,000,000 IRA, the RMD is about $87,366 and the penalty would be $43,668! This type of bill is the IRS version of coal in the stocking, but it’s easily avoidable. We work with clients to ensure these distributions are executed, and when appropriate, factor in tax withholding to avoid an unwelcome surprise come Tax Day.

2) Harvest Capital Losses in Taxable Accounts: Late Fall is “harvest” season so it seems to be the perfect time to revisit taxable investment accounts and consider selling positions with unrealized losses. In doing so one can reduce or even completely offset realized capital gains, up to a limit of $3,000 of deductible capital losses. It’s also a good idea to refer back to last year’s tax return to look for capital loss carryforwards that can be used in the current tax year. We help clients with this process by reviewing gains and losses in the context of the overall portfolio, and making decisions in relation to each clients’ unique tax situation.

3) Spending Reality Check: Now that the year is almost over (and holiday shopping hasn’t started for most of us), this is a great time to revisit estimates for annual expenditures. For those who aren’t diligent spending trackers, this can be an overwhelming exercise. But a decent estimate can be calculated by adding up the monthly bills paid from checking accounts, the monthly credit card payments, and annual expenses like insurance premiums, tax estimates, and don’t forget holiday gifts! While this isn’t perfect, it’s at least a starting point to determine if your spending can be supported by your retirement income & distributions. For more insight on the importance of The Number (your annual spending) check out our article “Your Wealth: The Number” from July of this year.

4) Think Charitably: For those taking RMDs from IRAs, consider making Qualified Charitable Distributions (QCDs) with some or all of your RMD. This directly reduces your adjusted gross income dollar-for-dollar. This has multiple tax benefits. It lowers the taxability of Social Security income and could add to itemized deductions.

Donating appreciated stock from taxable accounts comes with two benefits – the tax deduction on the amount of the gift, and the ability to avoid paying capital gains tax on those positions. In addition, the basement clean-out might yield some valuable charitable donations.

With the nearly-doubled standard deduction in 2018, these donations might be saved for next year in anticipation of “bunching” deductions every other year to optimize tax liability over a multi-year period.

5) Review Workplace Retirement Plans: November is a good time to tear open that 401(k) or 403(b) statement (or log in online) and revisit the asset allocation and the mutual fund selections. Too often these critical investment decisions are set-it and forget-it to the detriment of the investor, who may not realize how their asset allocation affects their ability to meet their goals.

6) Review Beneficiary Designations and Asset Titling: The most basic estate planning practice is as simple as ensuring the beneficiaries on various accounts are up-to-date and accurate. Simply making a list of accounts, then ensuring you have a primary and contingent beneficiary is the foundation of any well-structured estate plan. Without these simple designations, these accounts pass through probate upon the account owner’s death. Probate court costs, delays, and administrative headaches are an unwelcome surprise in what is already a difficult time.

7) Calculate Employer Stock Exposure: For those whose compensation includes some form of company stock (directly or through 401(k) matching), it’s easy to lose track of how exposed a family can be to the success or failure of their employer. It’s a good idea to add up the value of this holding as a percentage of total net worth. In general, limit such exposure to 5-7% of net worth if possible. If needed, consider paring down and diversifying these positions to maintain a well-diversified portfolio.

8) Purposefully Practice Gratitude: Thanksgiving is a wonderful holiday in part because it is an opportunity for us to step back, take a deep breath and appreciate all our blessings, despite the inevitable challenges life throws our way. The fact that most of us can enjoy an extended weekend and a feast with family and friends only adds to the appreciation of this uniquely American holiday. This year, purposefully take time to acknowledge life’s many blessings.

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