Year-End Financial Planning
While many of us will no longer be able to itemize deductions due to recent tax law changes, there are credits for things like child care and education expenses which you may still be eligible for.
I usually cover the topic of year-end planning in my December column, but with rampant inflation, economic uncertainty, geopolitical strife with no end in sight and, most recently, a divisive election season, putting the year 2022 in the rearview can’t come soon enough for many of us. In preparation for closing out the year, let’s discuss some important steps you should consider.
The first order of business is to make sure you’ve made the Required Minimum Distribution (RMD) from your IRAs and other retirement plans for the year.. If you’re age 72 or older, or have certain inherited retirement accounts, you will need to make minimum distribution by year’s end. The penalty for non-compliance is 50% of the amount you should have distributed, so check and double-check that you’ve distributed the proper amount.
If, like many, you don’t need the RMD to make ends meet, and would prefer not to take any distribution at all, consider donating it to a charity of your choice. The IRS allows you to distribute funds directly from your IRA to a charity, and not pay taxes on the distribution, even if you aren’t eligible to itemize deductions on your federal taxes. This is called a Qualified Charitable Distribution (QCD), and it’s important to remember that funds must be cut directly in the name of the charity; you cannot act as an intermediary and qualify for a QCD.
If you’re not subject to an RMD, but are charitably inclined, you can still utilize a QCD to benefit your charity of choice in a tax-favored way.
The next piece of financial housekeeping will be to begin to gather documents you’ll be needing just after the new year to prepare your taxes. Compile receipts for medical bills, tuition payments, child care and charitable contributions, among others.
While many of us will no longer be able to itemize deductions due to recent tax law changes, there are credits for things like child care and education expenses which you may still be eligible for. For those with large medical bills, mortgage interest, or who have been particularly philanthropic this year, you may still be able to itemize, so it is important to have those receipts handy.
When it comes to planning for your retirement, this is the perfect time to evaluate contribution levels to your retirement plans at work. If you have the ability, and you’re not yet contributing to the maximum levels allowed, consider topping these accounts off to take advantage of the possible tax deduction this year, as well as the ability to simply squirrel as much away for the future as possible. Even if you can’t contribute to the maximum, be sure to at least contribute enough to take advantage of any employer matching contributions.
You may not be aware, but once you reach age 50, you are eligible for higher catch-up contribution levels than in prior years. So, if you’ve turned 50 this year, consider increasing your contributions. For 401(k) and 403(b) plans, you can contribute an additional $6,500 to a max of $27,000 from $20,500 for those under 50. For SIMPLE plans, you get to contribute an additional $3,000, up to a max of $17,500.
In 2023, limits are increasing again. 401(k) and 403(b) limits increase to $22,500 (plus $7,500 catch-up) and $15,500 (plus $3,500 catch-up) for SIMPLEs. Take advantage of this opportunity to catch-up on contributions you may not have been able to make when you were younger.
The end of the year is a good time to review your various forms of insurance, including your home and auto. Take note of various coverage limits and deductibles. If you can, consider a higher deductible in order to save on premium expenses.
As home values have increased dramatically in recent years, ensure that your homeowners coverage amounts reflect the value of your home. You may also want to consider an umbrella policy, which provides additional personal liability coverage, in excess of your home and auto limits.
An often-overlooked task is to review your beneficiary declarations each year. Families grow, as new members are added, and shrink with death and divorce, which means that beneficiary and Transfer-on-Death declarations can easily become outdated and no longer reflect your true wishes.
Since these declarations are a matter of contract, they will overrule what your will may say. So, even if you’ve updated your will to exclude an ex-spouse, but you left them as beneficiary on your IRA, your new spouse won’t be able to inherit those assets, but the ex will, and it can’t be challenged in probate.
Your Certified Financial Planner® professional is well suited to help you mark most of these items off your list. Review your beneficiaries, gather tax documents, maximize funding of your various retirement plans, take required distributions, and review your insurance coverage with your advisor each year, to help ensure that your financial plan is well-tuned as you prepare to turn the page on 2022.
Stephen Kyne CFP® is a Partner at Sterling Manor Financial in Saratoga Springs, and Rhinebeck.Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant & Co., Inc, SEC registered investment advisors. Sterling Manor Financial and Cadaret, Grant are separate entities.
