It is amazing to consider the new decade is just a few weeks away. Before the bells of midnight close out 2019, there are a few key considerations you may need to review to optimize your financial situation. These suggestions require no market prognostication, and no sooth-saying of what the future has waiting for us. If these action items are applicable to your unique situation, acting upon them will result in an unquestioned objective win, a rare certainty in this uncertain world in which we live.
Many tax strategies only need to be acted upon before the April tax filing deadline of next year, but here are several important considerations that require attention before the New Year’s Eve revelry.
Maximize funding to Employer-Sponsored Contribution Plans (401k’s, 403b’s, etc.):
While each employer-sponsored contribution plan may have slight underlying differences; traditionally, every employee can contribute $19,000 per year to their company retirement plan. Workers aged 50 and older can contribute an additional $6,000 for a total contribution of $25,000. It is important to contribute to these tax-friendly plans throughout the year. But it is also prudent to review balances before the end of the calendar year to see if you have additional assets available to contribute that will correspondingly benefit you from a tax standpoint. Also, many company plans offer matching contributions up to a certain amount. If you don’t at least fund your retirement amount up to this matching level, you are essentially refusing free money. Don’t forget to also look for other efficient vehicles your employer may provide like HSA’s and flexible spending accounts that may assist with your unique needs.
Confirm you are contributing appropriately to your Employer Sponsored Contribution Plans:
Many employer retirement plans allow contributions to be made in either a ROTH contribution manner or a Traditional contribution manner. The major difference in these two options is how they are taxed. Roth contributions are taxed in real-time, but grow permanently tax-free from that point forward. Traditional contributions are not taxed at the time of contribution, but they are taxed at your ordinary income tax rates upon withdrawal. The majority of employer sponsored plan contributions are made in Traditional form; however, for many plan participants the optimized manner of contributing to a retirement plan should be in Roth form. Again, not every plan provides these two options, and every participant’s tax circumstances are different. So please talk with our team and your tax counselor as well.
For those over 70.5 years old who are forced to take required minimum distributions (RMD’s) from their IRA accounts, Congress recently made permanent a fantastic tax advantaged way to donate to your favorite charity. If you were born in 1949 or earlier, you can contribute directly to a charity of your choice and reduce tax consequences at the same time. If you fit the parameters above and make sizable contributions to a qualified charity, this is unequivocally the best option at your disposal. There are specific requirements for how these gifted assets need to be withdrawn from your retirement accounts, so please reach out to us for assistance in this process.
Charitable Gifting Part 2:
With recent changes to tax-code, the standard deduction for tax-payers has doubled. Thus, the number of households that will itemize their deductions will drop correspondingly. Look at options for bunching charitable gifting amounts together; meaning pool multiple years of charitable contributions in to one particular year in order to further assist in exceeding the standard deduction. While tax considerations should never be the primary force behind any charitable gifting, this bunching strategy can create greater tax efficiency.
Gifting To Loved Ones:
An annual gift from you to any individual can be as much as $15,000 in 2019 without triggering any tax consequences for either you or the recipient. If you’re blessed to be in a financial position to help your beneficiaries reduce their own financial stresses now, this may be a tax efficient way to help out instead of an eventual one-time lump sum gift in the future when it may not be as helpful.
Funding 529 College Education Savings Accounts:
Every individual state has their own laws in place, but most provide excellent opportunities via 529 College Education Savings Accounts to allow parents, grandparents, or whomever to contribute, (for example, Kansas is $6,000 per child beneficiary). This amount can be deducted from state income taxes if applicable. Most importantly, these contributions then grow tax-free with no future capital gains consequences, as long as the assets are used for qualified education expenses (tuition, books, etc.). Recent tax law changes also now allow $10,000 per year to be used for education expenses which are incurred before college. Thus, if you have education related expenses in the immediacy and live within a state that does have state income tax related deductions, you are failing to optimize your education related costs if this strategy is not implemented.
Pre-Payment & Additional Payment Plans:
Again, if you’re blessed enough to have a little extra money lying around at the end of the year, it is prudent to pre-pay or make additional payments where possible. Making an extra payment on your mortgage or if you make estimated quarterly tax payments, getting these payments in before the end of calendar year 2019 may provide extra tax related benefits.
The above list is not all-encompassing, and more importantly, needs to be discussed with your tax professional. We do not hold ourselves out as tax professionals, and we recommend consulting with your tax expert based upon your particular circumstances. In our opinion, tax advice and investment advice should come from separate sources. Our job as your dedicated investment team is to manage your investments and strive for efficiencies. These are important discussions to have, and we would not be doing our job if we failed to encourage you to put the puzzle pieces of your financial life into the correct tax positions.
If you have any questions, comments, or would like to discuss further please do not hesitate to reach out.
As always, we thank you for your continued trust, confidence, and support in our investment process, long-term strategy and constant vigilance.
Your Investment Team
One Strategic Capital, Inc