We're approaching the end of 2016, and the time is now to review the previous 11 months and plan the last few weeks to get the most bang for your buck. There are many issues that affect both business owners and employees. Your finances require your attention to several matters at this time of the year: contributions, distributions, charitable giving, beneficiaries, Roth conversions, and taxable gains.
Here are some of the most important and most common questions you need to ask and answer now:
Have you maxed out your contributions?
Look at your retirement accounts. Have you contributed as much as possible to these accounts? Also, make sure you're taking advantage of any employer matching offered to you. "That's free money you can earn from your employer with the matching they offer on that plan," says Bud Heintz, CFP® of Heinz Wealth Management.
Have you taken your Required Minimum Distributions, if applicable?
If you're 6 months or more past your 70th birthday, you're required to withdraw a minimum amount from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account annually. Check with your accountant about what distributions you're required to take. Your Required Minimum Distributions can be donated, which brings us to the next question on our checklist.
Have you donated to charity?
As youʼre probably aware, philanthropy isnʼt just good for qualified charities, it can also significantly reduce your tax liability. The amount of your taxable income is reduced by the amount you donate to qualifying organizations including: qualifying religious organizations; tax exempt educational organizations; tax exempt hospitals; a government unit, such as a state or a political subdivision of a state; publicly supported organizations; certain private foundations that distribute all contributions they receive to public charities within two-and-a-half months after the end of the foundation's fiscal year; a private operating foundation which pools all of its donations in a common fund; and, certain membership organizations that rely on the general public for more than a third of their contributions.
Are your beneficiaries current?
Unlike other types of assets, which donʼt specify who will receive them on your death, such as cars, some real estate, and other personal property, retirement accounts that are governed by The Employee Retirement Income Security Act, such as IRAs and 401(K) accounts, which allow you to specify who will receive the asset or account, automatically without the need for probate or other court involvement. Make sure these beneficiaries are correct, though, because if theyʼre not then thereʼs a good chance that the assets will pay out to your probate estate, which can expose those assets to creditors' claims and all sorts of other issues.
Would it benefit you to make a Roth conversion?
A Roth conversion of even a portion of your IRA or retirement accounts allows you to grow your money tax-free versus tax-deferred. You will pay taxes on the money at the time of the conversion, and it is most beneficial to you to pay the taxes with money separate from the amount you are converting. You should consult a Certified Public Accountant to make this strategy work best for you.
"How much to convert to a Roth IRA each year will vary based on your other sources of income: other dividends or distributions, other investment income you might have," says Heintz. "It takes a little bit of work over time but you can really shift money from tax-deferred to tax-free with a Roth conversion."
"The key is you've got to use money that's not in that IRA to pay the taxes to get the full benefits," says Darin Shebesta, CFP®, Vice President/Wealth Advisor with Jackson/Roskelley Wealth Advisors, Inc. He explains further with this example: If you wanted to convert $10,000 and let's say you're in the 15% marginal bracket, you'll have to pay $1500 in federal taxes to convert that money. If you use $1500 from the money in that account to pay for the conversion then you only have $8,500 working for you in the tax-free account. Whereas if you pay for it from funds outside of that account, you have $10,000 working for you in the tax-free account.
Do you need to temper any gains made in the last year?
If you have taxable accounts or taxable investments outside of your retirement plan, it's typically this time of year that you want to look at your year-to-date tax situation, considering any gains that you've realized or losses you've realized so far.
"We are in a market the last year or so that's been relatively flat and there are some opportunities where you can avoid a tax hit from a distribution right now," says Heintz.
"People may not realize that they have a stock with a big gain," says Shebesta. "You could gift your entire stock to [a qualifying charitable] organization and you're not having to pay capital gains taxes on it and you're getting the full benefit to write off."
Are there any big purchases you should make now or put off until the new year?
As Shebesta says, "If you're trying to keep income down for 2016, maybe there's some year-end things you can put into this year to give you bigger write-offs," you may want to make big purchases now. Or perhaps you are going to try to keep income down for next year by choosing to delay big purchases until January or later.
What actions must you take before December 31?
Pay attention to these issues now. If you must act, including by making donations, you need to act on or before December 31 to get the benefits of these actions.
Steve Cook is an attorney in the Phoenix, Arizona. He helps clients plan get peace of mind through planning.