Financial Planning Year-End Checklist

As we head into the final stretch of 2021, there is some uncertainty in the air, the euphoria we felt in early summer has changed like the leaves on the trees. The Delta variant has surged just when we thought Covid was going to be fading from our everyday existence. Tax ambiguity dominates the headlines as both the House of Representatives and the Senate are taking up legislation that could greatly impact individual tax rates, corporate tax rates, capital gains rates, and even the step-up in basis when someone passes away. The political scene in Washington D.C. continues to deteriorate as the two parties seem to be drifting further apart, if that were possible. The best antidote for avoiding sliding backward is to take control of what we can control. Take action!

The Bedell Frazier Financial Planning department narrowed a laundry list of year-end action items to the following select checklist that we feel should be top of mind as we approach year-end. Consider taking some of these steps over the next 3 months to put yourself in a better financial position heading into the new year.

“Start where you are. Use what you have. Do what you can.”

Arthur Ashe

Required Minimum Distributions (RMD)

They are back on the table for 2021 after having the option to skip them in 2020 with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Required Minimum Distribution (RMD) is the minimum amount you are required by law to withdraw annually from your retirement accounts (IRA’s, 401k’s, 403b’s) once you have reached the required age. That age was bumped up to 72 years old from 70.5 with the 2019 passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. You do have the option of delaying your first-year RMD and taking two distributions in the next year. Congress is considering lifting that required age again, with both the House and the Senate proposals looking to raise the age to 75 years old by 2032. The distributions of pre-tax contributions are taxed at ordinary income rates, so understand the tax consequences of the withdrawals.

Qualified Charitable Distributions (QCD)

One option for those charitably inclined to avoid those ordinary income taxes is to give part or all of your Required Minimum Distributions (RMD) to an eligible public charity via a Qualified Charitable Distribution (QCD). A Qualified Charitable Distribution (QCD) can be made from IRAs and IRA beneficiary accounts only, due to the IRS tax code. Each individual can donate up to the $100,000 limit, which applies to the sum of all of the QCDs taken from across all of your IRAs in a tax year. You must be over age 70.5 years old to make a QCD.

There is no need to itemize deductions on your tax return for the amounts given away via the QCDs, because the tax treatment is such that the amounts given are excluded from income. The QCDs don’t increase your Adjusted Gross Income, your taxable income, or your Medicare income-related monthly adjustment amount, they simply transfer to the charity. It is important to realize that the first Dollar out of an IRA is considered to be the Required Minimum Distribution (RMD), so the timing of executing the Qualified Charitable Distributions (QCD) is critical. Contact the Bedell Frazier Financial Planning team for assistance on this topic.

Roth Conversion

As a hedge against the risk of higher taxes in the future, a Roth Conversion is a strategy to consider. Higher taxes seem inevitable in an environment where a Presidential administration wants to increase spending, there is an unprecedented federal budget deficit and the expiration of many current tax policies in 2025 is on the horizon.

The process for a Roth Conversions is as follows, you take a distribution from your current IRA and Roll it over into a Roth account. You pay taxes on that distribution in the current tax year while creating a Roth Tax-Free bucket for the remainder of your lifetime (under current tax law).

Some potential Benefits:

  • Tax diversification – As you diversify your investment portfolio, you should also consider diversifying your tax liability. Many investors have a disproportionate amount of the wealth tied up in tax-deferred accounts such as traditional IRAs and 401(k) plans.
  • No required minimum distributions (RMDs).
  • Generation planning – With no RMDs required from the account owner or spousal beneficiary, there is more time for assets to grow tax-free. When passed to the next generation, assets are withdrawn tax-free, and the account must be emptied in 10 years or less under current law.

Contribute and Convert Last Dance?

We are tracking the developments in Washington D.C. very closely with the news on the important tax legislation before Congress evolving rapidly. In mid-September, the House Ways and Means Committee released a proposal that would eliminate the backdoor Roth IRA. This is a popular financial planning tool that allows those whose incomes exceed certain thresholds ($140,000 single filers and $208,000 for married couples filing jointly) to still get money into a Roth IRA on an annual basis. The process for a backdoor Roth IRA is fairly simple, you contribute after-tax Dollars to a regular contributory IRA (no tax deduction) and then convert those Dollars into a Roth IRA.

The current proposal from the House Democrats would disallow the conversions of after-tax Dollars in IRAs starting next year. Investors with tax-deferred IRAs, meaning taxes haven’t been paid yet, would still be eligible for Roth Conversion. This proposal would also eliminate after-tax 401(k) contributions from being converted to Roth Accounts.

“Only put off until tomorrow what you are willing to die having left undone.”

Pablo Picasso

Fill Those Retirement Buckets

Contributing to retirement accounts is one of the best saving options to increase the probability of a successful retirement plan. For 2021:

  • IRA limits are $6,000 under age 50 and $7,000 for age 50+ (must have earned income).
  • Employer plans (401k, etc) limits are $19,500 under age 50 and $26,000 for age 50+. You can find out how much you have contributed year to date by checking your paycheck stub or logging on to your account.

Personal Gifts

You may give away up to $15,000 per person ($30,000 if gift splitting with a spouse) each year tax-free and without filing any gift tax forms with the IRS. If you wish to use your 2021 annual exclusion, gifts need to be completed before year-end. You can make unlimited direct payments for medical and tuition expenses.

529 Accounts

A 529 can be a great way to save for education spending for your children or grandchildren. The growth of the investments in a 529 account is tax-free if used for qualified education expenses. The contribution is considered a personal gift with the $15,000 per person ($30,000 if splitting with spouse) annual exclusion, must be completed by year-end.

Charitable Giving

Consider donations of appreciated securities held more than a year to avoid capital gains. The charitable contribution deductions are based on the fair market value of the security on the date of donation. If you are using the standard deduction on your taxes, you might not be receiving the full tax benefit of your charitable gifts. We can help with a strategy called “gift bunching.” Contact us and we will be happy to explain.

Last Chance for Mortgage Refinance

We anticipate higher rates in the years ahead as the recovery continues and the Fed Reserve begins to taper its asset purchases. This could be the last great opportunity to lock-in at these historically low rates. If you think you can lower your mortgage interest rate by 0.50% to 0.75%, you may substantially lower your monthly payments. There are many reasons to refinance your mortgage, depending on your goals.

Beneficiary Review

In the age of Covid, beneficiaries have taken on heightened importance. Take the time to verify that your beneficiaries on your investment accounts, life insurance, and other financial accounts still reflect your wishes and are aligned with your full estate plan.

As you make your list of action items to complete before year-end, keep in mind that while the IRS deadline is December 31st, the custodian broker’s deadline is often in early December.

While uncertainty persists – there is no time like the present to control what you can and to continue to plan for your financial dreams and goals. Contact the Bedell Frazier Financial Planning Department to learn more!

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