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Year End Checklist to Avoid Tax Penalties and Maximize Planning Opportunities

Eric Sajdak • December 11, 2019
As the end of the year approaches, the last thing on most of our minds is our finances. Most of our thoughts drift towards the opening weekend of hunting or preparing for the holiday season.  

To help simplify the year-end, we’ve put together a checklist of the top deadlines you need to be aware of. 

☐ Roth Conversions: Conversion Deadline Dec. 31st 

With the Tax Cuts and Jobs Act of 2017, the tax opportunity of a lifetime became available to Americans. With the looming Social Security, Medicare, and U.S. debt concerns, the current tax rates (set to expire in 2025) are likely the lowest taxes retirees will see in their lifetime.     

There are numerous reasons why a retiree or future retiree might want to explore a traditional IRA to Roth IRA conversion. Growth and future withdrawals in Roth accounts are tax-free. There are no Required Minimum Distribution (RMDs) which means the money in Roth accounts can grow unencumbered. Should you decide to pass that Roth on in your estate, tax will not be assessed on their distribution either.     

There are 39 different ways an investor can make a Roth conversion. Making the right type of conversion for your situation is critical.  

☐ Required Minimum Distributions: Dec. 31st 

RMDs are required by the IRS for every retiree over the age of 70 ½. These distributions are required from typical tax-deferred accounts. Accounts like Traditional IRAs, 401(k)s, 403(b)s, etc.     

The amount required to be distributed is determined by the IRS and is different each year based on your age. For instance, the amount required will be different at age 70 ½ than at age 75.     

If you fail to make an RMD withdrawal or fail to make the proper withdrawal, the IRS will hit you with a whopping 50% tax penalty! For retirees over 70 ½, withdrawing the proper amount it’s vital. 

☐ Max Out Employer Contributions: Dec. 31st  
 
Every employer-sponsored plan is different. Maximum contributions can vary depending on the plan type. Employer contribution matches will vary depending on the quality and generosity of the employer.     

The most basic advice any advisor or planner will give you is to make sure you are maxing out your employer’s match. You’re missing out on free money if you don’t. If your employer matches up to 6% of your salary, do everything you can to make sure you are using that match.

☐ Capital Gains Distributions and Tax Loss Harvesting: Dec. 31st

For investors with money in taxable accounts, managing capital gains distributions can be one of the simplest ways to maximize returns. A 1% savings on taxes is 1% added to your bottom line. Managing these distributions will be different for everyone.     

Various research has shown tax-loss harvesting in taxable accounts is one of the simplest ways to increase your long term returns. We won’t get too far into the concept in this article but talk to your trusted retirement planner to make sure your maximizing opportunities there.     

Another thing to note, by law mutual funds and ETFs are required to “net out” losses and gains and distribute capital gains to its investors. If these funds are held in a taxable account, you will be forced to take capital gain distributions. You will owe taxes on these gains and they could push you into a higher bracket.   

☐ Charitable Donations: Dec. 15th

The Tax Cuts and Jobs Act did change the deduction structure for charitable donations, however, if you itemize, there are still ways to reduce taxable income through donations. The reason this deadline isn’t Dec. 31st is because charitable organizations require time to process donations. Organizations vary but most have a cut-off around mid-December.   

☐ 529 Contributions: Dec. 31st  

Want to contribute to a relative’s or friend’s college education? A 529 plan can be a great way to do so. Doing so is counted as a gift and therefore limited to the gift tax exemption of $15,000 a year, per person.  

Before you go ahead and make this contribution, make sure you aren’t negatively affecting the student or future student. Your heart may be in the right place but you may end up doing more harm than good if you don’t factor in the student’s financial aid situation. A contribution made at the wrong time can cost the student financial aid. It doesn’t make a whole lot of sense to contribute $5,000 to a relative’s education if it costs them thousands in financial aid.   
Typically most investors manage these tax situations and deadlines reactively.   

At the end of the year, they take a shoebox full of statements and receipts to their accountant and ask their accountant to “find the savings!”. This is the worst time to manage your tax liability. Your accountant, although good, can not perform magic. Your savings will be extremely limited with this approach.  

Where real value can be created for retirees is with a forward-looking tax planning approach. Don’t plan for RMDs when you turn 70 ½ and have few choices left. Plan for them now. Obtain a proactive retirement plan that factors in future needs and coordinates them with every other aspect of your plan. 

File at 62 vs. Delay: At What Age Do I Break Even on Social Security?

By Eric Sajdak, ChFC® • July 7, 2020
"If I delay my Social Security benefit, at what age would I breakeven versus simply filing at 62?" We field this type of question frequently from retirees. The Social Security system allows you to file anytime between 62 and age 70. At first glance, filing at 62 seems to make the most sense. After all, there are 12 months in a year and eight years between ages 62 and 70—That's 96 months of monthly paychecks that you wouldn't be getting if you delayed. However, you get penalized for taking your benefit early. Below is a diagram showing the penalties and delayed credits for someone whose Full Retirement Age is 66:

Fair Value, Now What?

By Tony Hellenbrand • June 30, 2020
Lately I’ve been getting asked how I was able to “Call the Bottom” in late March. I want to make something clear: I didn’t. If you go back and look at the article from March 16th or read the email I sent out to subscribers on the 26th, (pure dumb luck), I ran a bad case, a best case, and a base case valuation on the S&P 500. I arrived at a base case valuation of 2,950, and at the time the S&P was hovering around 2,300, so we started recommending clients initiate buying plans. These plans did not mean “This is the bottom” or “Go all in.” Far from it. Many of our clients were buying several days before the precise bottom, and several days and weeks after. Regardless of how clearly I try to make this point (that we simply were buying something the math said was likely cheap) this morning my inbox is chock full of people asking what I think about valuations now. Are we in a bubble? Is the market ahead of the fundamentals? Are we going to double dip? Will the market crash? Will we need a second stimulus? Maybe. I have no idea. Here’s what I know, when you accumulate all of the available earnings estimates and make a conservative estimate of fair value, you end up with a fair value of about 3,060 on the S&P 500. As I type this we sit at 3,080. Regardless of whether the number is 2,950 or 3,060 or 3,080 or 3,150, any way you slice it, we’re at fair value, now. Analyst Earnings Estimates:
stealth taxes

3 "Stealth Taxes" that Increase Your Tax Bill Without You Knowing

By Eric Sajdak • May 28, 2020
It is your right as an American to (legally) pay the least amount in taxes that you owe—nothing more, nothing less. But in recent years, Congress has made a concerted effort to shift the IRS code and levy you with taxes you didn't even know you were paying. We call these "Stealth Taxes." These changes are never talked about by your congressman (or woman). They lie deep within the tax code and can potentially cost you significantly unless you learn about how to avoid them. In this article, we cover three of those "Stealth Taxes" and what you can do to minimize or avoid them altogether.
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