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As we rapidly approach the end of the year, we want to pass along some year-end financial planning tips and ideas.  Employing these strategies can save you significant money each year.  Don’t worry, if you’re already one of our clients we’re in the midst of checking off this list for you (and checking it twice!)

Tax-loss Harvesting:  Since 2018 has been a volatile year for the markets there are likely some tax-loss selling opportunities in after-tax investment accounts.  Here’s how it works:  let’s say earlier this year you purchased  “ABC Mutual Fund” with $25,000. The current value of the fund is $23,000. If you sell the investment this creates a “realized loss” of $2,000.  This can be used as a write-off on your taxes or it can offset other realized gains that you would have otherwise had to pay tax on.  You then take the $23,000 proceeds and reinvest in a similar mutual fund.  This is an important step, as it keeps you invested and diversified in the same way.  Long story, short, you are getting a tax benefit while keeping your investment portfolio properly diversified.  You can write-off 3,000 in losses on your taxes each year with greater amounts carrying forward to future tax years.  At an effective tax rate of 25%, a $3,000 realized loss allows you to pay $750 less in taxes for the year.

Retirement Plan Contributions:  We are getting down to the last paycheck or two in 2018, which means this is the last time you could potentially adjust your 401(k) contributions to try and get some extra dollars protected from taxes.  However for IRA and Roth IRA contributions you still have until April of 2019 to make 2018 contributions.  Also keep in mind if you or your spouse do not work, you could potential take advantage of a spousal IRA, as a way to save some extra money with tax benefits.

Required Minimum Distributions:  For those age 70.5 and older, or those who own Inherited Retirement Accounts, you must take your RMD’s by Dec. 31st.  Keep in mind that if you have multiple retirement accounts you do not necessarily have to take a distribution from each of them as long as your total distribution is sufficient to meet your total RMD.  Also if you happen to still be working you are not required to take a distribution from your 401(k) at the company where you are still employed.

Another great strategy to look into is a Qualified Charitable Distribution (QCD).  You can send money directly to charity from your retirement account, you do not pay taxes on the distribution, and the full amount still counts towards your RMD.

Roth Conversions:  Conversions from a pre-tax retirement account to a Roth IRA need to be completed prior to the end of the year to be counted on your 2018 taxes.  You pay ordinary income tax on the amount of money you transfer from a pre-tax account to your Roth, and this can be advantageous for those that find themselves in a low income (low tax year).  This is often the case for retirees in their 60’s, who no longer have earned income from working and have not yet reached the age of Required Distributions.

Gifts:  Feeling generous?  Each year the IRS allows you to gift up to 15,000 to as many individuals as you like without having to file a gift tax return.  This can be an excellent estate planning strategy as it reduces the value of your estate and potential estate taxes that could be assessed.  Contributing to a 529 education savings account is a great example of how to take advantage of gifting.  The beneficiary has funds for higher education that are tax-free.

Calculate your Savings or Distribution Rate:  The end of the year is a great time to take a few minutes to sit down and calculate one of the most important %’s in financial planning.  For Pre-Retiree’s:  your savings rate, and for Retirees: you distribution rate.  To calculate your savings rate you need to add up how much you have saved throughout the year in various areas, i,e. your retirement plan at work (including matching dollars you receive), money you contribute to an IRA, an investment account, a savings account etc.  And if you want to get technical, you should also include the principal portion of loan payments.  For example if your mortgage payment is 2,000/mo and 1200/mo is paying down principle while 800/mo goes to interest, then you would include 1200/month as “savings” as this amount increased your net worth.  Simply total up all of your savings and divide into your total income to come up with your savings rate.  If you saved 20,000 and your income is 100,000 then you have a savings rate of 20%.  Being aware of this figure is half the battle, then you can think about 2019 and some ways to improve upon your rate.

For Retirees the important calculation is your distribution rate.  Here you want to total up all distributions/income you took from your assets and savings, i.e.  voluntary or required distributions from retirement accounts, withdrawals from savings or investment accounts etc.  You then take this total distribution figure and divide it into your total amount of assets/savings.  If you distributed $40,000 and your assets (not including your home, cars, etc) are 1,000,000, then you had a 4% withdrawal rate.