B. Riley Wealth Management End-of-the-Year Financial “To Do” List
The Holiday Season Has Officially Arrived.
Before you begin your holiday shopping, however, follow this year-end financial planning “to-do” list from B. Riley Wealth Management to make sure you start 2020 off right.
The deadline for implementing investment and tax-related changes to financial plans for the upcoming year is December 31, 2019, and open enrollment for W-2 employees finishes by mid-November. While that may seem a little far off now, Halloween has passed which means the holiday season is here!
Before starting your gift list for friends and family, consider taking a proactive approach to your 2020 financial planning. It takes time to gather a holistic financial picture and anticipate what’s next. We offer some helpful tips and valuable insights below. Read on.
Review your planned contributions for open enrollment, and max out your current 401(k) retirement contribution
If you are a W-2 employee with a 401(k) plan, you should be contributing the maximum amount allowed annually. That maximum contribution amount in 2019 is $19,000. If you’ve met that amount; great. If not, find out if you can add your year-end bonus check to your 401(k) to help meet that maximum. You won’t have to pay taxes on that bonus – until you withdraw the money in retirement. If you are over 50 and looking to close a gap to “catch-up” from earlier times, you’re allowed to put in an additional $6,000. Talk to your financial advisor about how you can do so.
The max 401 (k) contribution amount allowed for 2020 is expected to be the same, plus-or-minus $500. If you’re contemplating an increase in the percent of your pre-tax income contribution, the ideal amount is said to be around 6-10% pre-tax salary per paycheck, and many companies offer a full match at 6%. Obviously, the more you can contribute to your retirement plan, the better.
Remember to use the money in your flexible spending or health savings account
Employer-provided tax-advantaged benefits like FSAs (flexible spending accounts) and HSAs (health savings accounts) require annual re-enrollment during your employee benefits open enrollment period. If you haven’t used up the funds in your existing accounts, now is the time. Most employers do not offer grace or carryover periods from one year to the next, so if there are permitted medical expenses you can take on prior to the end of the year, do it. Carefully review your 2019 out-of-pocket expenses and adjust for 2020 as necessary.
Review your insurance plans including health, life, AD&D (accidental death & dismemberment) and short-term disability
This applies especially to W-2 employees during employee open enrollment. For example, based on last year’s medical expenses, should you switch to a more comprehensive health plan? This can have a measured impact on your financial well-being should something unexpected arise. If you’ve had a major life change (i.e. a marriage or the birth of a new child), go over your health plan, FSA and HSA options carefully. It only takes one unexpected hospital stay to derail you financially.
You may already have life insurance and a long-term care coverage plan in place, but is it the best one available given your circumstances? Rules and regulations change over time, and plans are often updated, so set aside time to review what’s out there with your financial advisor and make changes by year-end if necessary. Figure out whether additional insurance coverage above what your employer provides is needed, plus, find out what’s actually covered in employer-offered long-term, disability, AD&D, and short-term disability plans.
Review your portfolio
Start by looking at your portfolio for tax efficiency purposes. Obtain a copy of your year-to-date (YTD) capital gains and losses report from your financial advisor. In assessing how your investments are performing or underperforming, it’s likely you’ll find that some of your holdings have incurred a loss this year while others have done well. Check your asset allocation, figure out what’s working and what isn’t, have your financial advisor evaluate how much risk you’re carrying, and if necessary, have them rebalance your portfolio based on that information.
In the event of a loss, investors are able to write off a maximum of $3,000 such that selling off a losing position in an account can offset any realized gains, thereby reducing taxable income for the year. It cannot be overstated, however, that there are stringent rules governing the sale of investments, and this should not be done without the assistance of your financial advisor.
Revisit a Roth IRA
Based on your filing status and adjusted gross income, it’s possible you are no longer eligible for a Roth IRA (an individual retirement account in which you pay taxes going in to the account, but then all future withdrawals are tax-free). You can’t contribute to a Roth IRA if you make too much money, which in 2019 means $137,000 if you’re single and $203,000 if you’re married. That said, in 2018, Congress lifted income restrictions for Roth IRA conversions. What that means is that if you open a nondeductible IRA, you can convert it to a Roth IRA using what is called the “backdoor method.” Depending on your assets, this conversion may be worth it for you.
Review your tax withholdings
The IRS now has an online Tax Withholding Estimator that can help almost anyone try and predict what their tax bill may be. Are you an employee who might need to make an adjustment to the amount of money withheld from your paycheck based on contribution modifications? If you are a business owner or self-employed, this is also a good way to try and estimate quarterly tax payments and plan ahead.
Prepare charitable donations
“Giving Tuesday,” or the Tuesday that follows Thanksgiving, is a now widely publicized annual kick-off to the holiday gift-giving and charitable season. While being inundated with emails and phone calls from non-profits can be an annoyance, it’s a good reminder to plan for some charitable giving before the end of the year, as it can increase your tax savings.
Just make sure the amount of money you’re donating actually affects your tax bill. Review your itemized deductions (e.g., deductions for mortgage interest, property taxes, medical expenses, and of course, charitable contributions). If those deductions are more than the standard deductions, then charitable contributions may reduce your tax bill.
Review your education savings plans
Given the cost of education, you should have opened a 529 savings plan for your child when they were born. If you haven’t already, it’s not too late. The 529 savings plan is one of the best ways to save for your child’s schooling, and there are many types available, including 529 plans that will fund K-12 education, college and graduate school. As a parent, you have ownership of the account and can name your child as the beneficiary. There are no contribution limits, but if you put more than $15,000 in the account in any given year, you’ll have to report it as a gift on your income taxes. If you’re looking to fund your child’s future education and can afford it, there is always an option to superfund a 529 plan.
Review estate plans
Your estate plan is something that should be reviewed on an ongoing basis, as should your living trust, will, and power of attorney. Have you undergone any major life changes over the past year that require changes in beneficiary designations? There are some adjustments you can make on your own during employee open enrollment in November, but for others, your financial advisor should be able to connect you with attorneys and estate planning experts who can assist you. Check trust funding, review trustee and agent appointments, and go over any health care directives you may have along with powers of attorney in the rare case that you become incapacitated. Make sure you fully understand what each of the documents mean.
Take your RMD, or required minimum distribution
If you have inherited money or are by now 70 ½ years old and using a retirement account, the IRS requires that every year, you take a certain amount, or required minimum distribution, from that account. As an example, let’s say you inherited money in an IRA (individual retirement account) from a deceased spouse or parent. You must take out some minimum amount per annum and pay taxes on it. To avoid penalty and calculate what that amount is, use this calculator.
Set up an emergency fund if you do not have one already
Do you have a liquid cash reserve aside from your investment portfolio, retirement accounts, and other assets in case of an unexpected emergency? Insurance will cover certain things like temporary disability, but job loss, natural disasters, illness, the sudden death of a family member, and a whole host of other issues can happen outside of what may or may not be covered by insurance. An emergency fund should cover at least six months of living expenses. There are several considerations when it comes to planning for an emergency fund, among them age, income, current investments, liquidity, and more.
Reach out to your financial advisor
Given all of the above, if it’s been a while since you’ve had a touch-base with your financial advisor, today is a great day to pick up the phone and give them a call. Ask them: in addition to this list, what do they see as the most pressing financial tasks to knock out as the year draws to a close? Meet with them and get moving on your financial planning for the end of 2019 and beyond.
Looking for a financial advisor? We can help with that, too. Click here to contact us and we’ll put you in touch with a financial advisor that’s closest to you.
B. Riley Wealth Management is not engaged in rendering legal, accounting or tax-preparation services. Specific questions as they relate to your situation should be directed to your legal and tax advisors.