13 Year-End Financial Strategies

Speaker 1 (00:00):

Welcome everyone to the Retirement Power Hour. My name is Joe Allaria, and this is episode 13. And today we are going to be doing a, a special episode where we're gonna be talking about year end planning strategies, year end planning strategies. And this topic came about because we received a listener question about this topic. So if you listen to the show, you know that every episode we will do a listener question and then a main topic. But when this question was asked, it is such a meaty topic and there's so much to it, I figured we should just do a whole show on this so that I'm not short changing the person who asked the question. So I'll get to that in just a second. For all of those that are out there that you're listening, don't forget. If you want to go back and listen to other episodes, if you want to tap all of the resources that we share on the podcast, you can go to retirement power hour podcast.com.

Speaker 1 (00:54):

You can submit a question there for future shows. You can click work with me. If you've had questions yourself and you need help and you want to get help and you want a free retirement analysis, we do that through the show Retirement power hour podcast.com. And please like, subscribe, share, and help spread the word about the show, and we would greatly appreciate your help in that. So with that being said, again, uh, we got a question from a listener. Beth. Beth says, I am 55 married with a portfolio of IRAs, brokerage accounts, and a 401k. We are just wondering what financial strategies we should be considering before year end. So Beth, thank you for that question. And like I said, there is a lot that goes into this question. So I've, I've made a list and as of right now, I've got about 13 things on the list and I'm gonna go through all 13 of those things and I may add some bonus things if I think of them as we go.

Speaker 1 (01:54):

But there, there's a lot of things that we, we don't, right now, we don't have a lot of time before the, before the year's over, but we have enough time to get a lot of these things done if they can be helpful to you. So let's just jump in and pick off the first one. The first thing that you can consider doing is adding to your 401k. Now, why do we say this is a year end strategy? Well, if you add more to your 401k, um, adding money to that is gonna lower your income. So if you have a few payroll cycles left and you've got extra money laying around that you could contribute to a 401k, you still have time, go into your 401k portal or request it through payroll and have them increase your contribution rate. And you may need to do so.

Speaker 1 (02:43):

You may need to do it pretty drastically because you may only have one or two payroll cycles left. And if you really wanna make a big dent and get as much in as you can before the year's over, then you'll have to go in and tell them to raise that contribution rate as high as it can possibly go. But be sure you, you know what you're, you're talking about there, you don't wanna overdo it, not have enough to live off of. So that's, that's one thing. Some of you out there, you don't have a 401k, you have a simple IRA, same thing to contribute to those accounts, you have to do it through payroll deferrals and that has to be done by the end of the year. The limits for making contributions to those accounts are gonna vary based on what type of account you have.

Speaker 1 (03:24):

For example, if you're looking at a 401k, the deferral limit is 20,500 for 2022. And if you are 50 years of age and older, then you get an extra 6,500 that you could do to those accounts. A total, uh, 20,500 plus 6,500 is 27,000 that you could do this year. So maybe you can get nowhere even close to that, but if you can throw a couple thousand extra into your 401k before the year's over, it could save you a little bit on your taxes. Now, just as a side note, next year, 401k deferral limits are going up to instead of 20,500, it'd be 22,500. And the catch up goes from 6,500 to 7,500. So some decent increases to think about there for next year. So we talked about 401k. We've talked about, you know, maybe you have a simple IRA, what about a SEP IRA?

Speaker 1 (04:23):

Well, a SEP IRA is a little bit different and you would have until April 15th to make a contribution to your SEP IRA. So that's something you don't have to do before the year's over. Okay, so that's, that's the first strategy. Let's go to another one. How about adding money to a health savings account or an HSA And not everyone out there listening and watching is gonna have an HSA, but if you do have one, I think it's one of the best places you could put money before the year's over. And the reason that I say that is an HSA has more tax benefits really than any other account that's out there because when you put money in you, you can get pre, you will get pre-tax treatment on the money you put in. So it's almost like putting money in that pre-tax 401k most or some HSAs can be invested as they grow.

Speaker 1 (05:15):

The growth can occur tax deferred and it would occur tax deferred. And then if you pull the money out for health expenses for qualified health expenses, then it is tax free when you withdraw. So it's the only vehicle out there that I'm aware of where you can put money in, you know, you get a tax break on the front end, you get tax deferred growth and then you get tax free withdrawal. A Roth IRA has only got half of that. A pre-tax. IRA only has half of that. You pay tax on one end HSA you can get away with paying no tax if you have qualified medical expenses. Now there is a difference here between making HSA contributions through payroll deductions and not through payroll deductions. You don't have to make your HSA contribution by the end of the year. You actually have until April 15th.

Speaker 1 (06:03):

But if you want to do so via payroll deductions through your employer, it must be done by the end of the year. That is generally more beneficial because when you do that, you're gonna get that the break on the social security and Medicare tax as well. If you're 5% more, 5% owner or more in a company, it doesn't matter. You're not gonna get that break. You, you can contribute by by April 15th and it all count the same. But if you don't have that offer through your employer, you have until April 15th to make that contribution. So a really good one to think about on that front. Contrary to to HSAs, we have FSAs flex spending accounts. Any money in an HSA will carry over year to year. If you don't spend it, it's still there for you next year. That's not the case with an FSA.

Speaker 1 (06:51):

So HSAs, FSAs spend the rest of your FSA before the end of the year. The next one, charitable contributions. So this is something that needs to be done by the end of the year if you want to get a tax break on it for this tax year. There are so many ways to do charitable contributions and unfortunately I think a lot of people just miss out on a lot of those really creative and tax efficient ways to contribute to, uh, charitable organizations. One of the ways to do this is through donating appreciated shares of stock. Now, most people, when they donate to charity, what do we do? We write a check and you know, we drop it in the bucket at church or we send it in the mail, whatever. And we, and that's fine. Any type of giving is good. But if you have individual stocks, if you have mutual funds, if you have exchange traded funds in a taxable brokerage account and they have what's called an unrealized gain.

Speaker 1 (07:51):

So I, I bought them here, they're worth this. Now, you know, even with 2022, maybe the market's down, but I still have an unrealized gain. I was gonna give $5,000 to the charity of my choice. But instead what I could do, I could give $5,000 worth of worth the stock or the security, I can gift that directly to the charity. Don't wanna sell it. If you, if you sell it, you're gonna realize the gain. But if I give the shares of appreciated stock, if they are long-term gains, then you'll still get full credit for the gift. Whatever you value the security at on the date that you gave those shares, you'll still get credit as a charitable contribution, charitable donation, but you'll also avoid capital gains tax. So there's multiple tax benefits in doing it that way versus just paying cash. Now some people might say, well I don't want to get rid of my shares of stock.

Speaker 1 (08:46):

Let's see if Apple shares, I don't want to get rid of my Apple shares, I like my Apple shares. But you don't have to part ways with him Forever gift, however many shares you want, let's say $10,000 worth of Apple stock gift that whatever money you were gonna use to give in the first place, just write a check back to your account. So take the shares out of your account, donate and then write a check to your account and you can buy those shares right back. So if you just do it that way, you're gonna get more tax benefits. Another thing you can do is use a donor advise fund. Without getting too far into the details there, you basically can bunch several years of giving into one year. And when you do that, you're gonna get a massive deduction in this year. But when you put it in a donor-advised fund, you put the money in the fund, that's what gives you the, the big tax break.

Speaker 1 (09:39):

Just like you gave all the money to a charity, but you're able to do it without giving all that money to a charity at one time or to a series of charities at one time. I can put a hundred thousand dollars in a donor-advised fund and then I can divvy that out over the course of 10 years to whatever charity I choose at the time that I, that I want to do so. But it just gets it outta my name, gets it into a donor-advised fund gets me that tax benefit. And it, it can be a huge benefit if, if I have a large, a high income year, say I have an, uh, extraordinarily high income year because I, I moved, I got, my company paid me a bunch of moving expenses, I got a huge bonus. We had a great year in the business, whatever it may be.

Speaker 1 (10:21):

I had a big tax year. And so now I need to use, i, I need a little bit more than my annual charitable giving deductions. I need like 10 years of, of deductions or five years of deductions. That's when you can use the donor-advised fund. So we're through four, I said I have 13 nine more to go. I better pick up the pace here a little bit. The next one, bunching medical expenses. And this isn't maybe something fully in your control, but just like we talked about, bunching, charitable contributions, you can bunch medical expenses po potentially. Um, if you've got bills that you know are coming due or maybe, maybe you've received them, maybe you can pay a month early, there is a chance that you can gain a benefit there because if your medical expenses are above 7.5% of your adjusted gross income, then that would count as an an as an itemized deduction, just like a charitable contribution.

Speaker 1 (11:15):

So if you had the opportunity to do it, consider doing that before the end of the year. Maybe you're gonna have a bunch extra, maybe you can push some expenses off until next year. Consider doing that. Bunch those together. The next one I number six on my list, tax loss harvesting. Now this has become more, more relevant this year because we've had a down year in the market more so than any other year. You can't look at tax loss harvesting and say, I'm gonna have an opportunity to do this every single year at the end of the year. Some years you may not have the opportunity to do this if you have all gains. But this year we've seen it more than most recent years because we've had, you know, markets been down and we've had many sectors across the market being down this year.

Speaker 1 (12:03):

So there have been opportunities for us to harvest losses for clients and lock in the tax benefit without fully getting out of the market. So what is tax loss harvesting again? You bought a, you bought a fund and you bought it here. Now the fund's worth this. So you have a loss if you sell it, you're gonna realize a loss and that actually helps you from a tax standpoint. It will either offset capital gains you may have or up to $3,000 per year. We'll offset your ordinary income. And then if you still have losses after that, you had no gains. Let's say you had 20,000 of losses used 3000 to offset your income, you still have 17,000 that you can carry forward to following years to next year to the year after that. So you can carry 'em as, as long as you need to use those losses.

Speaker 1 (12:55):

And so it's a tax benefit. Now, we don't wanna sell investments when they're down. That goes against everything we know as investors don't sell something at a loss, right? And that's true. We don't wanna sell it at a loss and forget it and be out of the market. But maybe you could sell something that's down 20%, buy something else that's down 20% or buy, you know, if it's a large cap fund that you sell, maybe look at other large cap funds that aren't identical, but maybe they're similar and, and look at purchasing that. And this is not, none of these things are recommendations 'cause every one of these things we recommend you get an advice and get and, and work with an advisor, work with a tax consultant, an investment professional, someone to help you through these things because there are ways to screw these things up that you don't wanna do.

Speaker 1 (13:43):

For example, you can't sell your, you know, your large cap fund, take a loss and buy it tomorrow. You cannot do that. You have to wait a period of 30 days before you can buy that same security back. So the last thing in the world that, that I would want is for you to hear about tax loss harvesting and say, I'm gonna lock in that loss and just buy this thing right back. Well, you can't do that. It's gonna negate your loss. It's called a wash sale and it violates the wash sale rule. So get help before doing any of these things. Get professional help from people that have done this before and know how to avoid those pitfalls. The next idea or year end strategy that I had in mind was number seven on the list. Instead of harvesting losses, maybe you can harvest some gains.

Speaker 1 (14:28):

And what does that mean? Well, we talked about harvesting losses so that it can offset future gains. You can carry the losses forward. So what does it mean to harvest a gain? Don't I not want from a tax standpoint? Don't I wanna avoid capital gains? Maybe it depends on your income. And what I mean by that is there are capital gains tax brackets, you have marginal brackets for, for ordinary income and you have capital gains tax brackets. And a lot of people aren't aware of this, but if you are married filing jointly, for example, in 2022, you can have income of up to $83,350. If your, if, if, if your income is below that number, you actually pay 0% capital gains tax 0%. And if you're single, it can go up to 41,675. So if your income's below that, you pay 0%. So let's just say I'm a married, you know, a a married my spouse and I have income of $60,000 and I've got some gains out there on some, some of my, my apple stock or my large cap value fund or whatever.

Speaker 1 (15:36):

It's, and let's say I have $20,000 of unrealized gains, meaning I haven't, I haven't taken 'em yet, I haven't sold yet. Well, if I had $60,000 of income and $20,000 of capital gains, I can realize all those gains and not pay any tax on. So maybe you've owned some stocks for a long time, maybe you've owned some funds for a long time and they, even though they're down right now, they, they have gains. Well, if your income is, is in that 0% range, then absolutely consider selling and locking in enough gains to keep you in the 0% range. But now you have to pay, you don't have to pay any capital gains tax. Again, get help with this consult with, with a tax professional or an investment professional. These are things we look at all the time. We're very accustomed to it. We know what to look for.

Speaker 1 (16:25):

But you have to be careful, you know, with some of these strategies. 'cause you, you could have your heart in the right place, but it's easy to make a mistake. And on that front, I wanna, I wanna pause here. We're about halfway through and I just wanna remind all the listeners if, if I've said something where you think that sounds like something I could do or that I should do, but I, I would like to get some help. Or maybe you just say to yourself, I'm getting close to retirement or I am retired, I don't have a plan, I want a retirement plan. I wanna know where I stand. You can go to retirement power hour podcast.com and get a free retirement analysis. We're gonna set up, the first step is a 30 minute phone call. We're gonna talk with you, ask you a few questions, gather some information, and then do an analysis to show you where you're at and show you some of the strategies and recommendations that we see, ways that we think can improve your bottom line.

Speaker 1 (17:17):

So go to retirement power hour podcast. If that's you, go there right now, click work with me and you'll see a place there where you can schedule that phone call and share this with someone else if you think it could help them. By all means, share this episode with them and encourage them to take advantage of the free retirement assessment that we would provide. Okay, we got a few more here. Number eight on the list. Roth conversions. It, it's uh, it's an even better strategy to do in a down market and it is something you could look at doing every year, but it's basically taking money from an IRA and putting it into a Roth IRA that's a Roth IRA conversion. And when you move that money over, say it's $50,000, you're gonna pay taxes on that 50,000. The benefit, now the money's in a Roth IRA when it grows, it's growing tax free.

Speaker 1 (18:07):

So gen generally, there's a break even point in that where, you know, you might have a little bit less money in the early years because you did have to pay extra tax. But as the money grows over time there may be a point at which you know, you end up coming out ahead. You need to look at this, you know, you need to analyze this. This doesn't make sense for everybody, but it could make sense for you and it especially could make sense again in a Dow market. And if you had a low income year, say you didn't have a high income, again, you could harvest some gains. That's something to think about. You could do a Roth conversion, you know, if you have a low income year, maybe you can move over 40,000, 50,000 into a Roth IRA and not pay much tax on it.

Speaker 1 (18:48):

So it's something that again, needs to be analyzed. It doesn't make sense for everyone. Deadlines on all these things are coming up very soon. I wanted to bring this up. IRAs, technically IRA contributions Roth IRA contributions you have until April 15th of the following year. So you have until April 15th of next year to make those contributions. I just wanted to bring it up because I'm sure that if I didn't address it, someone would've asked the question or, or would've wondered, how come you talked about 4 0 1 Ks and not IRAs. That's why you do have until April 15th to get that done. Let's say you own a business and there's this one strategy here that I wanna share. There's lots of strategies related to business owners, but I'll just share one. And that is, do you have any expenses that you, you know, you could run through the business because they are business expenses.

Speaker 1 (19:37):

Anything that you're planning on getting in the near future or you might need for your business, depending on what kind of business it is, you know, the larger expense, the better. If it's something again that you're gonna need and you're gonna use for your business. I'm not an accountant, I'm not a CPA. This is something you need to talk with your CPA about to make sure it's a legitimate bus, uh, legitimate business expense. A lot of times people will buy and put anything and everything through their business and they may have a hard time justifying that it's an actual business expense. But vehicles, large pieces of equipment could be depending on your business, legitimate expenses to consider before the year is over. The next one, number 11 on the list withholding analysis. I see this a lot for retirees. You know, you, when you're working, you've kind of got your withholdings figured out, but then you retire and you're getting distributions, you've got pensions coming in, social security, and you really have no idea what you should be withholding doing it withholding analysis now to say how much income have I had?

Speaker 1 (20:35):

Uh, how much have I withheld so far? Uh, do a tax projection. See what your total tax is projected to be and see what kind of track you're on. I just got done doing one today where we actually found that client was ahead of schedule and they're getting ready to take a distribution. So guess what, why withhold more money when we're already, we've already withheld what we need to withhold. But on the other side, what if you're behind? If you can figure that out sooner than later, you still got a little bit of time, adjust your W2 withholding, adjust your pension withholding, adjust your social security. Make an estimated payment maybe if you need to do that to avoid late payment penalties. And then any IRA distributions, you could do it that way as well and withhold through those. So I got two more. Uh, the 12th one RMDs required minimum distributions.

Speaker 1 (21:20):

This is an easy one. It's, it's, it's something that if you are at that point that you are taking required minimum distributions, it's a no brainer. You need to do that before the year's over, otherwise you're gonna be penalized for not taking what you were supposed to take. So make sure you take those. That's a, that's a simple one. The last one, last but not least, gifting. Gifting strategies. So a lot of people misunderstand gifting and they don't know what it means. And it's, I'm not talking about charitable gifts, I'm talking about gifting to a child usually is how that works. Gifting to someone in your life. A lot of people don't understand how that works. They think if I gift someone that they have to pay tax, that that's not true. There is an annual gift tax exclusion amount and what that means is I can give up to, in 2022, it's $16,000 so I can gift up to that amount and not have any estate tax implications when we all pass away.

Speaker 1 (22:19):

You, you may have heard of estate tax, if you have right now it's something like in federally speaking over 22, 23 thou, 23 million, excuse me. Um, then you would have to pay estate tax. Okay? But each year I can gift up to $16,000 for 2022. It's going up next year and not affect that number. Now if I give more than the 16, now my, my personal estate tax exemption amount is gonna be reduced by whatever amount I give above that estate. Uh, annual gift tax exclusion amount. So this doesn't affect a lot of people. I mean, again, like I said, 2022, the federal estate exemption amount is 12.06 million. So I was off by a couple million there, but 12.06 million. So if I die with less than that, I don't really have much to worry about. But in Illinois, that number's only 4 million. So if I die with over 4 million in Illinois, I'm paying or my heirs will pay Illinois estate tax.

Speaker 1 (23:19):

And it is actually calculated going back to the first dollar. It's not just anything above 4 million. If I surpass 4 million, then I'm taxed on the entire amount. And it's more than people think, more than beneficiaries think. And when we share this with clients, it's a little bit of a, of a shocker to learn that. 'cause most people focus on that federal amount and don't think about the Illinois amount. So a long way of saying if you want to address that problem, if you think I, I need to get money outta my estate 'cause my heirs are gonna pay estate tax, one way to do that is gifting. And I can gift $16,000 from me to, let's say my son, my wife can give $16,000. So that's 32,000. We can get, you know, out of our estate to a child, uh, to someone in our family.

Speaker 1 (24:03):

And let's say my child is married, which he is not. They, I have two boys, they're not married, they're six and three. Uh, but what, let's say my child was married. Now we can, I can also give 16,000 to the spouse. So 16 to my son, 16 to my spouse, my wife, 16 to to the son, 16 to the spouse. And that's $64,000 now that we just got out of our estate. What we're trying to do there is avoid state taxes. Probably an entire show in, in and of itself doesn't affect as many people, but once January one rolls around the 2022 annual gift tax exclusion amount is gonna go away. And we're gonna be in 2023, just like is the case with a lot of these things that we discussed today. So that's a lot of information and if you stuck around the whole time, kudos to you for, uh, taking the time and investigating all the things that you could do.

Speaker 1 (24:56):

If there's any of these things that we can help you do, please go to retirement power hour podcast.com. Don't forget, subscribe, share. Again, we go to the website, submit your question, we can feature it on a future show. Click work with me and schedule a 30 minute phone call and you're gonna talk to me. I'm gonna be the one you talk to and asking you a few questions, getting to know you a little bit, seeing what you are wanting to get help with and hopefully we can help you. I, I've really enjoyed this episode and I thank you very much for listening. Please tune in next time to our next episode of the Retirement Power Hour podcast. We're gonna be talking about the myths of retirement. I'm gonna be doing so with co-host Jay Waters, so make sure you tune in with that, everyone, thanks for listening to the Retirement Power Hour, where we help listeners invest wiser and retire better. Take care.

Speaker 2 (25:47):

Thank you for listening to the Retirement Power Hour podcast. All material discussed on this podcast is for educational purposes only. It should not be construed as individual tax, legal or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but Carson Allaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.