Final Year-End Planning

Financial planning usually isn’t a preferred item on your to-do list this time of year, so I’ll keep this brief and limited to the most important year-end planning work. In the final weeks of 2013, here are a few financial planning items that may need your attention. In my office, we have implemented recurring processes to take care of each of these tasks for clients automatically each year, so feel free to call me to ask which items you might need to attend to, or to learn how to set the same automation in your own finances.

Required Minimum Distributions (RMD)
There is a ridiculously stiff tax penalty of 50% for missing the year-end deadline on annual required distributions from IRAs, so make very certain this is done before year-end. This applies if you have a Beneficiary IRA, or if you are age 70 1/2 with any IRA accounts. There are a lot of nuances to the rules, so seek counsel to make sure this is done properly.

529 Plan Contributions
Annual 529 Plan education savings contributions must be deposited to your account by year-end. In some states, including Indiana, missing this deadline will mean the loss of significant tax benefits and credits. This applies to anyone saving for college using a tax-free 529 Plan.

Charitable Donations with Appreciated Investments
After the last few years, most investment accounts have substantial gains. If you are making year-end gifts to charity, using appreciated investments instead of cash will provide you with a charitable tax deduction and avoid capital gains tax. These gifts take a little longer to process than cash, so the gifting paperwork should be started by Christmas.

Managing Capital Gains Tax
While we are talking about investment gains, a little planning can go a long way when managing the gains and losses in your accounts. Capital gains receive favorable tax rates of 15% and even 0% in certain tax brackets. Realizing just the right amount of gains, offsetting gains with losses, and other strategies can maximize these favorable rates. Conversely, realizing too much of your capital gains can escalate the tax rate applied to your income and trigger an additional Medicare surplus tax. Make sure your advisor knows the details of your tax situation before making portfolio changes.

Rebalance Your Portfolio
Finally, a significant rise in certain asset types during 2013 has likely caused your investment risk exposure to become unbalanced. Now is an excellent time to rebalance your various investment accounts, including trust accounts, IRAs and your employer retirement plans. Rebalancing your accounts while simultaneously taking care of the RMDs, charitable gifts and capital gains items above will achieve the holy grail of tax, trading cost and portfolio management efficiency.

With all of these strategies, I highly recommend that you consult with a qualified tax or financial planning professional to ensure that the strategy is right for your unique situation and that you execute it properly. My door is always open, so please don’t hesitate to call or write if you have any questions about these or other financial planning concerns.

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