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ACM Journal - Investment Management
17 Oct

Chris’ Corner – Year End Planning – Q3 2019 Newsletter

As the days grow short and foliage begins to change, our thoughts naturally are drawn to year-end financial planning.

Maxing out contributions to 401(k) or IRA accounts (2019 limit is $19,000, plus $6,000 catch-up), making sure your beneficiaries are up to date on your accounts, and satisfying your Required Minimum Distributions (RMDs) if you are over age 70.5, are popular items to consider. However, a few lesser known topics are also worthy of consideration:

Fund Non-Deductible IRAs and Convert to Roth

Although your income may be too high to make a direct contribution to a Roth IRA (the income limits are $137,000 for single folks and $203,000 for married couples), you can indirectly fund a Roth IRA by making a non-deductible contribution to a traditional IRA and immediately converting it to a Roth. Even though you’ll be using after-tax dollars to fund the Roth, the benefit is long-term, tax-free growth on these assets.

Roth IRAs for the Kiddos

If your children or grandchildren have earned income, you can fund a custodial Roth IRA for them. Just make sure to stay under the $15,000 annual limit for tax-free gifts. Again, this is a good strategy for tax-efficient, long-term growth.

Roth IRA Conversion

As we’ve noted, a Roth IRA can provide some significant income tax advantages over time for you and your beneficiaries. If you have a large traditional IRA balance, it may make sense to convert some or all of that to a Roth IRA. Any converted amount will be subject to ordinary income taxes, so it doesn’t always make sense. But, if you retired early, haven’t yet started to draw Social Security and your RMDs, or otherwise are in a low-income tax bracket, there may be an opportunity to do a conversion. There are lots of variables with this one, so it’s likely worth a conversation before acting.

Qualified Charitable Distribution (QCD) from your IRA

For those who are charitably inclined and required to take a Required Minimum Distribution from an IRA, consider a QCD. This is a non-taxable distribution from your IRA directly to a qualified charity. The distribution still counts towards your RMD but won’t get added to your gross income. The distribution is limited to $100,000 per year. Side note for those of us who have TD & Schwab accounts: you can have a checkbook attached to your IRA account and write checks directly from your account to charities.

Donor Advised Funds (DAF)

Most of us can no longer itemize deductions on our tax return, including charitable contributions. You can get around this by creating a DAF and bundling several years’ worth of gifting into a single year if it gets you over that itemization threshold. The DAF can then be used to fulfill your gifts over time. For extra bang, use appreciated securities to fund the DAF and never realize the capital gains.

Other ideas include using your $15,000 ($30,000 per couple) annual gifting exclusion, funding 529 college savings plans for the New York State tax deduction and/or “superfunding” to reduce the value of your estate, and maxing out your capital gains tax brackets. Other good practices: taking a look at your credit report, updating your major passwords, having access to a HELOC for quick liquidity, and shopping for better rates on your savings accounts.

Dinner party fun fact: Since 2004, captains of whaling boats have been able to deduct up to $10,000 per year for repairs, equipment purchases, and other expenses associated with the business. Whaling, however, has been banned in the U.S. Since 1971.

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