Your Year End Retirement Planning & Tax Saving Checklist

Happy holidays – give yourself the gift of tax savings

As we head into the holiday season and New Years it can pay big dividends to spend a little time seeing if any year end moves can help you save a lot on taxes or improve your financial situation. 

This month I asked people in our community and on our team for their top end of year retirement and tax planning tips. Here they are:

Build a plan 

This simple step can help you get organized, see what your levers are and make smart decisions today and in future years. In a few minutes you can build a plan that lets you:

• See your net worth today and over time.
• Build a projection of what your retirement income will be and what drives it (such as Social Security, part time work, any pension, Required Minimum Distributions (RMDs).
• Project your expenses based on your current lifestyle, future moves, healthcare and taxes today and into the future.
• Think through Social Security and Medicare claiming strategies.
• Explore “What If” scenarios – for example what happens if you retire at 60 vs 65, go part time at 55, move abroad for a few years or do a series of Roth conversions to minimize taxes.
• Make smart choices around the things you can control (savings, investing, when you retire, where you live) and understanding your options to manage the risks you can’t control (inflation, market returns and longevity). 

If you want to get started on your own plan you can check out this new free retirement planning tool.  

Maximize your company plan contributions

If you haven’t reached the contribution limits on retirement savings plans like 401ks and IRAs, then you should try to find a way to save the maximum here. Putting money into a retirement saving plan can have multiple benefits. You can:

• Defer paying taxes on the amount contributed.
• Build your retirement savings and compound those savings with future investment earnings.
• Boost the value of your savings if your employer makes 401(k) matching contributions.

The 2019 contribution limits are:

• $19,000 for 401ks, 403bs, 457s as well as Thrift Savings Plans. And, if you are 50 or older, the catch-up contribution is an additional $6,000. So, you can save a total of $25,000!
• $6,000 for IRAs. And, the catch-up contribution for people 50 or older is $1,000. So, you can save up to $7,000 with tax advantages.

Review health insurance and your health savings account 

If you can contribute the maximum to a health savings account (HSA) it offers a triple tax benefit – the money is saved pre-tax, grows tax free and isn’t taxed when used. 

Rebalance your investments

You may have put together an asset allocation strategy that seemed perfect for your financial situation before, but as time goes by your allocation will drift and should be rebalanced. 

By rebalancing your investments, you can effectively minimize risk. Rebalancing essentially involves buying and selling portions of an investment portfolio to bring the weight of each asset class back to its original state. This process will help to maintain the original asset-allocation strategy of the portfolio to help you stick to your investing plan.

Do a Roth Conversion

By transferring some of the money from your traditional IRA into a Roth IRA, you not only turn the money you moved into nontaxable wealth & income in retirement, it also helps to reduce your RMDs by lowering the balances in your traditional IRAs.

However, there’s one big catch: when you do a Roth conversion, you have to pay income taxes that year on the money you moved to the Roth account. If you have a huge balance to convert, you may not be able to afford to do it all in a single year.  Many people who plan ahead will do a series of Roth conversions in lower tax years up to the marginal tax limit they are comfortable with to optimize this conversion process.

One gotcha to watch out for: If you are planning a Roth conversion in the year that you turn 70.5 – then you need to take your RMD first before you do the Roth conversion in that year – typically RMDs aren’t due until April 1 following the year you turn 70.5.

TRY IT OUT: Are you curious about how a Roth Conversion will impact your finances? You can model a Roth Conversion in the Retirement Planner.  Then, look closely at your tax estimates, cash flow and net worth at different points of time to assess whether this might be a good move for you or not

Prepare charitable donations and planned giving.

Increasingly people are opening Donor Advised Funds which allow you to immediately deduct the full amount of any contribution in a given year – note any donation does need to be done by year end. Additionally assets grow tax free and at any time and you can recommend grants from your account to qualified charities.

Turned 65 – Sign up for Medicare 

Regardless of your health care coverage outside of Medicare – if you have turned 65 – check in with Medicare.gov. There is actually a 10% premium penalty for life for every 12 months that you could have been registered for Medicare Part B but were not enrolled. 

Over 70.5? Be sure to take your Required Minimum Deductions

A report from Fidelity Investments says 61% of their account holders who are older than 70½ have not yet taken their Required Minimum Deductions (RMDs).

Don’t overlook this important yearly retirement checklist task. If you are older than 70½ — and required to withdraw from your retirement accounts — you need to do so before the end of 2019 or else you will owe hefty penalties.

Assess if you need a Financial Advisor

As you review your retirement finances, you may find that you could benefit from the help of a financial advisor, which you can often get with a retirement plan.

Here are 5 reasons why you might want to seek help from an advisor:

• Have a 3d party expert review your plan – just make sure they are a fiduciary (they put your interests first).
• Get confidence and peace of mind about your retirement finances.
• Reduce tax liabilities and maximize wealth.
• Construct and maintain an optimal asset allocation strategy, including a well-defined action plan for using assets for retirement income.
• Help with making and acting on rational decisions — not emotional ones.
• Keep your finances up to date and making sure you don’t miss opportunities due to indecision or procrastination.

Review Estate Plans

An estate plan can insure that your loved ones are cared for. A good estate planner or financial advisor will also help you maximize your wealth.

Check Beneficiary Designations: Ensure that all beneficiary designations on life insurance policies, annuities and retirement accounts like IRAs and 401(k)s are up-to-date. Beneficiary designations govern how these assets pass to heirs and they supersede any other directives like a will.

Make Sure Wills and Trusts Are Updated: In the wake of recent celebrity deaths, we have learned how common it is for people to have neglected estate planning. Prince, Aretha Franklin and Michael Jackson died without a will.

Review any Power of Attorney and Medical Directive documents you have.

Get a Jump on 2020 and the next decade

Good job making it this far. People tend to jump on the financial planning band wagon as part of their New Year Resolutions, but by taking some early action most can position themselves much better for 2020 and beyond.