It’s the most wonderful time of the year! Sure, we have the holidays all around us, the smell of pine trees and nutmeg fills the air, the glow of the fireplace keeps our loved ones warm, and sparkling lights decorate our neighborhood streets. But let’s be honest, we all know everyone truly loves the end of the year because of all the year-end financial planning ideas to consider.
Required Minimum Distributions (RMDs)
If you are over age 70½, you likely need to be taking RMDs from your IRAs (including SEP and SIMPLE IRAs, but excluding Roth IRAs), 401(k) (including Roth 401(k)s), 403(b) and other retirement plans. If you have a 401(k), are still employed as a W-2 employee with the company providing the 401(k) and are not more than a 5% owner of the company, you may not need to take the RMD from that account. If you do not fall into an exception and have not already taken your RMD, please contact our office immediately. The IRS penalty for failing to take your RMD on time is an excise tax of 50% of the amount of the RMD that should have been but was not distributed. To ensure you take your RMD before the end of the year, and to avoid the 50% penalty, TD Ameritrade must receive paperwork by December 21. Forms received after that date will be processed on a best-efforts basis.
Employee Retirement Plan Contributions
With just a couple pay periods remaining, check to make sure you are on track to reach your target contribution goal for the year. In 2018, the employee contribution limits for 401(k), 403(b), and most 457 plans are $18,500. If you are age 50 or older, you can make an additional $6,000 catch-up contribution to a 401(k), 403(b), or 457(b). For the 2019 tax year, the age 50 and over catch-up remains unchanged at $6,000, but the IRS has recently announced a $500 increase in contribution limits for these plans, pushing the maximum contribution to $19,000. On a monthly basis, that is an increase of $41.66, bringing the total monthly contribution to $1,583.33 for those looking to max-out these plans next year. Now is a great time to contact your employer’s HR or Payroll department to make sure your desired contributions are set up.
For 2018, IRA contribution limits are $5,500. In tax year 2019, however, the contribution limits for IRAs are increased by $500 to $6,000. The additional catch-up contribution for people age 50 and over remains unchanged at $1,000. If you want to make Roth IRA contributions, now is a good time to consult with your tax professional to assess your eligibility. In 2018, the income phase-out range to make Roth IRA contributions for singles and heads of household is $120,000 to $135,000. For married couples filing jointly, the range is $189,000 to $199,000. In 2019, those ranges have been increased to $122,000 to $137,000 and $193,000 to $203,000, respectively.
Roth IRA Conversions
Clients who would like to make Roth IRA Conversions should be aware that the deadline to file the conversion paperwork at TD Ameritrade is December 21. Forms received after that date will be processed on a best-efforts basis.
Towards the end of the year, we will review our clients accounts for tax loss harvesting opportunities. If you have a specific gain/loss you are looking for, please contact us. Otherwise, we will take care of this for you.
Flexible Spending Account (FSA)
Many FSAs have a “use-it-or-lose-it” rule where you may need to spend all of your FSA money before the end of the year or risk losing it. Some FSAs allow for a $500 carryover from year-to-year, but now is a good time to look into your specific rules if you have an FSA.
Health Savings Account (HSA)
The HSA is one of our favorite retirement savings accounts. It is the only account where contributions get a tax deduction going in, grow tax-free, and then come out tax-free so long as the funds are used for qualified medical expenses. Those eligible can contribute $3,450 per year if they have self-only HDHP coverage, or $6,900 per year with family HDHP coverage. Eligible people age 55 and over can contribute an additional $1,000. If both spouses are eligible and age 55 and over, they each get an additional $1,000. The deadline to make HSA contributions for 2018 is April 15, 2019.
The recent tax reform brought many changes, including to the standard and itemized deductions. The standard deduction was increased to $24,000 for married couples filing jointly. Many taxpayers who used to itemize deductions will now be better off using the increased standard deduction. For those who are charitably inclined, consider lumping next year’s planned contributions together with this year’s to take advantage of the deduction rules. For example, a married couple filing jointly who makes regular charitable contributions throughout the year has itemized deductions totaling $23,000, so they will be better off taking the new standard deduction. If, prior to the end of 2018, they make the charitable contributions they were already planning to make in 2019, they could push their itemized deductions past the $24,000 threshold to take advantage of the itemized deduction in 2018 and use the new standard deduction in 2019.
Retirement investors age 70 1/2 or older can also benefit from making donations directly from IRAs, a strategy known as a Qualified Charitable Distribution. Please reach out if you think this may pertain to you.
Consult Your Tax Professional
Many of the ideas presented here revolve around taxes. As such, we strongly encourage each of our clients to contact their tax professional to make sure everyone is on the same page, and hopefully avoid any big surprises. You can get a good idea of where you stand tax-wise before the year ends, and trust us, your CPA would much rather have these conversations now than in April. We are always happy to meet with our clients and their tax professional – or introduce them to a tax professional – to help create an efficient tax plan.
If you would like to take advantage of any of these (or other) year-end opportunities, please feel free to contact our office. We continue to be honored by our clients’ trust and support, and we strive to help them achieve their financial goals however we can. In this holiday season we wish each of you a safe, warm, and happy new year, and once again would like to say: Thank you.
Internal Revenue Service, 401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000, IR-2018-211, November 1, 2018. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000
Internal Revenue Service, Correcting Required Minimum Distribution Failures, https://www.irs.gov/retirement-plans/correcting-required-minimum-distribution-failures
Internal Revenue Service, Issue Snapshot – 401(k) Plan Catch-Up Contribution Eligibility, https://www.irs.gov/retirement-plans/401k-plan-catch-up-contribution-eligibility
Internal Revenue Service, Publication 969 (2017), Health Savings Accounts and Other Tax-Favored Health Plans, https://www.irs.gov/publications/p969