As we just entered the fourth quarter of the year, now is the time to begin the year-end financial planning process. It’s time to get serious about both financial and tax strategy, evaluating open enrollment options at work, and reassessing your overall financial plan.
Getting started is October is perfect, as some of the more sophisticated or involved things require advanced planning to make certain all the pieces come together. Making a move in one area many times can affect other areas, and advance planning can help.
We recommend working with your tax advisor now, and start the conversation about year-end tax issues. There can be many specific, complex topics to be addressed. An example is anyone turning age 70 1/2 must devise a strategy for taking what is called a Required Minimum Distribution from traditional IRA and 401 (k) plans.
Those planning to make charitable donations need time to select the recipients they want to donate to, and determine how they want to contribute. They may choose cash, or it may benefit them to consider appreciated assets. Given the returns in stocks and bonds over the last few years, this could be an excellent option.
Another issue worth considering is whether it makes sense to do a Roth Conversion. In other words, converting a regular IRA or 401 (k) into a Roth IRA, and paying taxes. Conversely if this was done in the prior year, it’s possible to “undo” a conversion with a process called Recharacterization. This generally has to be set into motion by October 15 of the following year, just a week away.
Another thing on a “to do” list is making sure you are utilizing the available funds in flexible spending accounts or other tax-advantaged workplace health benefit plans. Generally you have to use it or lose it by the end of the year. If you put in $1,000 you don’t want $500 still sitting there at year end. This can be quickly addressed by getting new glasses, a medical checkup, or getting your teeth cleaned.
Advisors obviously use this time of the year to concentrate on year-end tax planning with their clients, and the conversation will focus on changes in tax laws. It can get complicated, which is why advisors stress to clients to address tax planning as early as possible.
Because of the disparity in stock and bonds performance this year, there’s a good chance an investor’s asset allocation needs adjusting, and rebalancing should be part of the year-end strategy
Another thing on the list is to remember to update will and estate plans to reflect any new tax rules adopted early in the year.
This time of the year is also good to discuss long-term-care insurance, review insurance needs, and to talk about budgeting, topics too easily left untended to. While not an exhaustive list, now is the time.
As the Nike commercials say: Just Do It! You and your family will be better off for it.