RHP Market Talk

A Year End Financial Checklist

December 09, 2020 Royal Harbor Partners Episode 4
RHP Market Talk
A Year End Financial Checklist
Show Notes Transcript Chapter Markers

Listen to Partners Natalie Picha and Michele Jones as they discuss time sensitive tax, social security and retirement account updates as we near the end of 2020 in Episode 4 of RHP Market Talk.  

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Natalie Picha:

I'm Natalie Picha and welcome to the latest Royal Harbor Partners Market Talk. Today, I have our partner, Michele Jones here with me to have a conversation about your year end financial checklist. These are items that are time sensitive, and we think you should be considering near the end of this year, 2020.

Michele Jones:

Thanks, Natalie. I'm really excited to be here and talk about this topic. There's many things that we have to do at the end of the year, financially or personally, but if we can bring something to someone's attention that they weren't aware of, that would be great today.

Natalie Picha:

Absolutely. So, first on our list is reviewing any tax losses. If you've sold investments this year for a gain, you may want to sell investments that you have experienced losses on in order to offset those gains for tax purposes. Now, here at Royal Harbor Partners, if you're in one of our managed accounts, you know that we do this for you all year long. Now, we also remind our clients that our first priority is to the efficiencies and the ultimate goal within that particular portfolio and taxes are always our secondary concern, but it is something that we review. However, if you yourself are managing some accounts on your own, you have some self-directed accounts. Then those accounts are ones that you'll want to do this review for yourself.

Michele Jones:

And something also that our clients may or may not be aware of, but we were able to take advantage of some of these tax loss situations when we experienced the large declines in March of this year. So we went through and reallocated, the portfolio, took advantage of many tax losses and repositioned ourselves. So, it's important for everyone to take a look at what potential gains or losses they may have at the end of the year and how that may affect them going forward.

Natalie Picha:

Absolutely. Yes. And then secondly, usually about November, you would be getting a phone call from our team to review your required minimum distributions. We call those RMDs. And so usually end of October, early November, you might be getting a call from Sarah or an email to say, hey, let's look at what your RMDs look like for this year. But 2020, is a very different year. And this year per The Cares Act, the RMD requirement was eliminated. That was to help investors avoid paying taxes on those distributions. So, that first of all was a big change because of The Cares Act. But, in the future, if you fail to take your RMD, there is a massive 50% penalty that you could be charged when you don't take those. Additionally, The Cares Act in addition to The Cares Act, the secure change the age at which you must start taking your RMDs. So that's been changed from 70 and a half to age 72.

Michele Jones:

Yeah. That does make it very different this year. So, if you don't take your required minimum distribution, you are able to eliminate that this year. And then also just knowing that those that hadn't taken them in the past at 70 and a half, have a few more years where they are before they are have to take their required minimum distribution. That kind of goes into what another thing that The Secure Act ended, which was The Stretch IRA for non-spousal beneficiary. So, for example, if you have an IRA and you have a non-spousal beneficiary, before The Secure Act, your beneficiary would be able to take those required minimum distributions based on life expectancy. Now, for non-spousal beneficiaries, they are forced to take those the entire IRA account over a 10 year period. So that means they have to actually distribute that entire amount, which for some non-spousal beneficiaries who are high-earners, this could be very dramatic for their own personal tax situation. So , we've done a lot of things to try to minimize some of that and what we work with a lot of our clients on as how to possibly spend down some of those IRA assets starting very early now in taking the income from the IRA versus other sources to help lower that IRA amount. Some of the other strategies that we've looked at is you could potentially take a portion of that income from your IRA. If you don't need it for your living expenses and you can convert it to a Roth IRA. The Roth IRA has different rules where they're not subject to spending down those assets in 10 years. So, that's a great way to pass that legacy asset on to future generations. And also , just reviewing that estate plan and looking for different estate planning strategies, how to get those assets out.

Natalie Picha:

Exactly. And I would even say, you know, jumping around here a little bit, that you might, you might even look at qualified charitable distributions. When you're talking about you have a large IRA, maybe all of your assets have been placed in an IRA. You need to be thinking about what that means to your future generations, but you may also be considering some charitable contributions and you could, could go through the process of doing a qualified charitable distribution directly from that IRA, which is a great way to bring down that balance of the IRA as well.

Michele Jones:

Right. Now, in that scenario, you have to make sure that you are of age 72 , where you can take your required minimum distribution, but you also, that charitable contribution can be up to a hundred thousand dollars a year. And that's a huge amount. So, for someone who's not going to spend that asset, and like you said, wants to contribute to a charity, this is a great way to do it.

Natalie Picha:

All right. Another idea for those of our clients that are very, you know , charity minded, is a Donor Advised Fund. So, if you have highly appreciated assets in a portfolio and you would like to make a contribution to a charity an option that you have is to move those funds over or move that asset over into a Donor Advised Fund where it can be liquidated within that DAF as we call Donor Advised Funds or call those DAF sometimes , it can be moved over there and liquidated within that Donor Advised Fund. And you don't have to pay the additional tax penalty on the capital gains or the tax liability on those capital gains. So moving over into a DAF allows you to, you know, potentially also tax liability, but also maximize your giving and your, the charity of choice actually is getting more of asset than if you try to liquidate that beforehand, pay the taxes on it and then give them the cash. So, that's a strategy that I think a lot of times clients are not aware of. It does take a little bit more time, right? You've got to actually set up a Donor Advised Fund and move funds over, but I think it's worth it. And this year is a great year to be thinking about, you know, our giving strategies, considering the need that we've seen in a lot of our communities this year. There's a lot of other more complex strategies that we could go into, but really those are things you probably should give us a call and talk to us about one-on-one, how we can help you really maximize your giving.

Michele Jones:

Yeah, that's a really great point , Natalie. One thing that's has the deadline for the end of the year for sure, is maximizing your retirement account contributions. Specifically through your employer retirement plans. So, this is really important. So if you're contributing to a 401k or a 403b, you have until December 31st to make your full contribution. Another thing you want to absolutely make sure you're taking advantage of is if your employer offers a match, that's absolutely free money on the table for you. So you want to make sure that you're a least minimally contributing the amount to take advantage of that full match.

Natalie Picha:

Absolutely. And don't forget that if your company offers you an FSA, a flexible spending account, and you have, you still have some funds in that FSA, a lot of times that's a use it or lose it situation. And you want to make sure that you go ahead and use those funds, those unspent funds before the end of the year and not all FSAs it's a year , year in use it or lose it situation, but most of them, so something you want to ask about, for sure.

Michele Jones:

Absolutely. On the topic of contributions , so contributions to your IRAs, your Roth IRAs and your health savings account, you actually have until April 15th of 2021 to make your 2020 contribution. But that's very important too. Sometimes people forget how important it is to contribute annually to those types of accounts and how those assets accumulate so quickly. So, please review your IRAs and Roths and Health Savings Account to see if you haven't already made those contributions and how you can maximize that before the April 15th deadline.

Natalie Picha:

Yes. And speaking of contributions, if you're over age 50, you're now eligible for catch-up contributions. And so that's something to think about if you haven't changed your 401k contribution or 403b contribution in quite a while , and you're now over age 50, you might want to look that amounts probably changed,

Michele Jones:

Right? And this is also true for the IRAs and HSA as well.

Natalie Picha:

Well, right, right. That's right. If you're over age 55, you're now eligible to take certain types of distributions from your 401k without penalty, including in-service distributions, which that really leads to a lot of potential flexibility because you could actually roll out that 401k plan into an IRA. And, you may have an option of actually using us for active management on that if you would like. You know, there's a lot of more flexibility there. And something to be considered if you're over age 55.

Michele Jones:

Right. And then at 59 and a half, you're now eligible to take money from your retirement plan without incurring that 10% penalty. So, that is if you're in one of those IRA strategies where you're trying to spend down your assets, that may be a good time where you start taking money from those plans.

Natalie Picha:

Right. At age 62, you're going to be eligible for Social Security. And if you're age 65, you're going to be eligible for Medicare. And if you sign up late for Medicare, you could be facing a 10% penalty for that. So you need to stay ahead of that and be thinking if in this next year 2021, one of those milestones is on the forefront for you. You need to get ahead of it by about six months.

Michele Jones:

Right. And back to that Social Security, it's so important to do a Social Security analysis just because you're eligible at 62, you typically have a reduced benefit at 62. You want to take a look at when you're eligible for your full retirement benefit. And then also look at possibly maximizing the growth of that Social Security and waiting to age 70 . So, Social Security analysis is very important. Looking at your situation where your income is, what age you're retiring, and also the considerations of taking your Social Security while you're working also could create some penalties to you.

Natalie Picha:

Exactly. We also look at, always think about longevity, which can sometimes be a really sensitive topic, but that is something to think about when you're looking at your Social Security, if you have longevity in your family and your health is very good, then , you know, a lot of times we'll, we'll look at maximizing that Social Security benefit by waiting until age 70, but that might not be the case for you. So that's, that's the kind of detailed planning that we like to do for our clients.

Michele Jones:

Very individualized.

Natalie Picha:

Absolutely. And then lastly, some other items to consider , and these are not so time sensitive, but they're just something that you should always have in the forefront of your mind. And that's always keeping your beneficiaries up to date on your, any of your retirement plans, your life insurance. All of those should always be updated. Things that we often see , in the cases of a divorce or death, sometimes people forget to go back and update those beneficiaries. So that's a big one. I'm always looking at life insurance. And I know Michele you've experienced this just recently with one of our situations , reviewing that life insurance to understand , if you still need that life insurance. Right. So sometimes we have life insurance, we see a deficit and we know that, okay, someone needs some additional coverage. We can do those reviews for them. But sometimes we see life insurance that's been paid on for many, many years that really needed to be reviewed and it could be updated.

Michele Jones:

Right. And one , a lot that we see is people that own those very old life insurance policies, especially ones that accumulate cash value. And they don't understand that the life insurance has changed so much in the years and possibly for that same premium amount, they may be able to significantly increase their death benefit or add a long-term care feature or do something where they be able to benefit their family more with those assets. So it's so important to review it on an annual basis, make sure it's still appropriate for you and to understand why you own it .

Natalie Picha:

Absolutely, absolutely. At Royal Harbor Partners, we know that you want to feel confident about your family's financial future. You need a plan that offers a clear path forward. The problem is financial planning is complex and you may be afraid that you'll make a wrong decision that could really impact future generations. We understand how you feel, and we believe that you deserve to have confidence that you have secured your family's financial future. That's why we've devoted ourselves to our relationships with 135 multi-generational families, helping them create successful legacies. Here's how we do it. First, you meet with our team. Second, we will customize a personal financial plan. And third, we will execute with ongoing support to help make sure that the plan comes to fruition. Call us today, or visit our website to start the conversation at www.royalharborpartners.com.

Disclosure:

Royal Harbor Partners is a registered investment advisor. And the opinions expressed by Royal Harbor Partners on this show are their own. All statements and opinions expressed are based upon information considered reliable. Although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented is for educational purposes only, and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk, and unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax legal or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Introduction
Reviewing Investment Gains and Losses
Required Minimum Distributions
The Secure Act and IRA Changes
Qualified Charitable Contributions
Maximize IRA Contributions
Age Milestones
Updating Beneficiaries
Closing
Disclosure Statement