The end of the year is upon us and now is the perfect time to review financial opportunities you might want to consider as 2017 begins. If you see something of interest to you, remember, my job is to assist you in creating financial peace of mind. Please reach out to me with any questions you may have concerning the following information.
Investment and financial planning
Is it time to rebalance your portfolio? Changes in the market can cause you asset allocation to shift. As we head into the homestretch of 2016, taking into consideration the modest gains, now is a great time to review your portfolio and make any necessary adjustments. In doing so, be careful about taking profits in December when we can take them in January and push any capital gain into 2017.
Review your income and portfolio strategy. Are you approaching a milestone in your life? Retirement is a big one, but any change in your circumstances may call for a review. Has your tolerance for taking risk changed? If so, this may be a good time to reevaluate your approach.
Take stock of changes in your life. Even if it may seem unnecessary, review your insurance and beneficiaries. Let’s be sure you are adequately covered to meet all of your needs and update beneficiaries if the need has arisen.
Tax Planning
Tax reform. The possibility of tax reform looms large over 2017. What shape it will take and how it may affect a various array of investments and tax-deferred accounts is an unknown. While headlines suggest that terms will be more favorable, the devil is in the details.
Furthermore, Republicans have long wanted to kill the estate tax. And Donald Trump has said he would like to repeal the gift tax. Until Congress passes the appropriate legislation, estate and tax planning in general will be a murky endeavor.
Tax loss deadline. You have until December 31st to harvest any tax losses and/or offset any capital gains. But be careful, there are distinctions between short- and long-term capital gains, and you must be aware of wash-sales rules (IRS Publication 550) that could disallow a capital loss.
Mutual funds and taxable distributions. This is best described using an example. If you buy a mutual fund on December 15 and it pays a dividend and capital gain December 17, you will be responsible for reporting the entire distribution, even if that distribution covers the entire year. Following that payment, the net asset value of the fund will fall by the amount of the distribution; yet, your investment in the fund remains the same. That’s a tax sting that’s best avoided. So it may be a good idea to wait until after the annual distribution to make the purchase.
Take Required Minimum Distributions (RMDs). RMDs are generally minimum amounts that a retirement plan account owner must withdraw annually starting with the year he or she reaches 70 ½ years of age or, if later the year in which he or she retires (IRS Retirement Plan and IRA Minimum Distributions FAQs).
However, the first payment can be delayed until April 1 of the year following the year in which you turn 70 ½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31st of the year.
The RMD rules also apply to 401(k), profit sharing, 403(b), 457(b) or other defined contribution plans as well as SEP IRAs and Simple IRAs.
Missing the deadline could leave you subject to steep penalties.
Contribute to a Roth IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax-free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500 or $6,500 if you are 50 or older (IRS Retirement Topics - IRA Contribution Limits).
If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70 ½ and there are no requirements to take mandatory distributions.
Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform next year, but if the situation is right, it can be advantageous to convert to a Roth IRA.
College savings. Explore the advantages of a 529 college savings plan for your child or grandchild. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.
Another option is a Coverdell Education Savings Account. Total contributions for a beneficiary of this account cannot be more than $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.
Contribution limits get phased out after hitting the respective limits.
Achieving a Better Life Experience (ABLE) account. This is a new savings account for individuals with disabilities and their families. For 2016, you can contribute up to $14,000. Distributions are tax-free if used to pay the beneficiary’s qualified disability expenses, which may include education expenses.
Charitable giving. Whether it is cash, stock, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. You may qualify for what’s called a “qualified charitable distribution?” A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70 ½ or over that is paid directly from the IRA to a qualified charity. The IRA owner must at least be 70 ½ when the distribution is made.
You may also want to consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made. Setting up a private foundation is another option that many find philanthropically pleasing while also enjoying the tax benefits from doing so.
Year-End Review
As the year draws to a close it is important to review all of your financial options and make sure nothing needs to be updated or changed to maximize your opportunities. If you have any questions regarding any of the information provided please contact us, I would be happy to review the options that are best suited to your situation.
**Before making any decisions that may impact your taxes, please consult with your tax advisor.
