There is nothing magic about year’s end when it comes to wealth management. It is, however, a time that coincides with tax planning, so it’s often an opportunity to consider financial planning moves.
John Schuman, chief planning officer at Budros, Ruhlin & Roe, Inc., says there are considerations to make at year’s end, but none that couldn’t have been decided much earlier.
“Consider your year-end opportunities, but find an adviser to work with so your planning isn’t crammed into the last month or quarter of the year. Advisers can make planning a lot easier and less stressful,” he says.
Smart Business spoke with Schuman about year-end wealth management tips and how to avoid an end-of-the-year rush in 2015.
What should be done before the calendar turns?
From a wealth management perspective, the end of the year is a time to think about maximizing contributions to qualified plans, making sure you’re putting away money in your 401(k) plans and other retirement planning vehicles such as Roth IRAs.
The general rule is to defer income and accelerate deductions. Following that logic, retirees experiencing a low income tax year, who are not withdrawing from their IRAs and have little or no earned income, can convert IRA accounts into a Roth IRA. Basically, you’re paying your tax early, but you’re choosing to pay your tax in the low bracket when having a low bracket year.
For those still in the workforce, there’s an opportunity to move money into a Roth IRA. A nonworking spouse can make a nondeductible IRA contribution and convert it tax-free to a Roth IRA.
It’s also a time to accelerate any tax deductions to offset income, like paying real estate taxes in December rather than January, and paying any local or state taxes in December and not waiting until the next year.
What else might be to an investor’s advantage at the end of the year?
Since 2006, qualified charitable distributions (QCDs) from IRAs have allowed people aged 70.5 or older to make up to $100,000 in charitable contributions and have that count toward their required minimum distribution. The benefit is that instead of having to take the distribution into income and then taking a charitable deduction, the QCD excludes it from your income altogether. This, in turn, eliminates state income taxes on the distribution and reduces the various phase-out limits. QCDs have not been extended for this year, but are expected to be. It’s advisable to make a QCD this year anyway, in anticipation of the legislation being extended.
On the estate planning side, we now have portability, which allows a spouse to inherit a deceased spouse’s unused estate tax exemption. Historically, each individual had to use their own estate exemption (currently $5.34 million). Now, any unused exemption can be passed on to the surviving spouse.
Further, the IRS says it’s permissible to go back for those who have died between 2011 and 2013 and retroactively take advantage of this portability election, but that has to be done before the end of the year.
Lastly, Congress has been focused on compliance with disclosing foreign-owned assets and accounts. A new amnesty program, which allows disclosures with reduced penalties, opened in July of this year. Failure to make a disclosure during the amnesty period can result in penalties larger than the account balance itself.
What would help people avoid having to make a year-end push?
Planning should be an ongoing process, not an event-driven reaction. If your investments get most of your attention during the last quarter, you’re being transactional, and probably not making the best decisions. It’s best that investors have an ongoing dialogue with their wealth management adviser throughout the year.
It’s common for people to procrastinate. But deep within procrastination is confusion, and that can freeze decision-making. People often aren’t aware of the full landscape of investing factors to form a strategy, so they get stuck. Most wealth managers do this for several hundred people every year, and know how to gather the facts and perform the analysis that help their clients avoid confusion, correct misinformation and make better decisions.
Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.