Holiday Movies and Year-End Planning Tips ft. Kyle Cipperley and Don Rahn

Updating your balance sheets, what to do with your annual raise, and "Christmas Vacation": First National Wealth Management's Adam Cox, Kyle Cipperley, and Don Rahn have a conversation about all things year-end to close out Season 6.

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Transcript

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- Planning tips to finish your year off right. Welcome to Common Cents on the Prairie, a podcast dedicated to helping you demystify the sometimes complex topic of money. I'm Adam Cox, head of Wealth Management for The First National Bank in Sioux Falls. We're a community bank based out of South Dakota. In this podcast, we share expert insights from around the country and stories from our local community to arm you with the tools you need to make better financial decisions. Because the truth is, the more we talk about this stuff, the better off we're all going to be. Today, we're talking favorite holiday movies and year end planning tips, so if you're someone who's looking to take your personal finances to the next level, this episode is for you. And to help me walk through these tips, I've asked a couple of my colleagues, Kyle Cipperley and Don Rahn, to join me for another episode. No strangers to the show, Kyle leads our Investments team and Don leads our Wealth Advisory team. We hope you enjoy this episode. All right guys, welcome back to the show, thanks for joinin' me.- Yeah, good to be here. Good to be here, Adam.- All right, so what we're going to do today, we're going to do a little round robin. This is year end, and we're going to talk some year end planning tips, but before we do, I thought we'd do a little icebreaker. It's been a while since we've done an icebreaker in an episode, so I thought we'd break it out. This episode, this is late November, and this episode will come out between Thanksgiving and Christmas, so let's go with the theme, what's your favorite holiday movie? Don, why don't you go first?- I think I'll go with "Polar Express."- Okay.- It's somethin' that takes me back to, my daughters, when that came out, they were six and nine years old. And the animation was great, and anything Tom Hanks touches is usually just pretty good.- Sure.- I'll go with "Polar Express."- Oh that's a sweet memory.- We watch that about every year when we get together.- Nice, very cool, very cool. Kyle, how about you?- Well, my parents had me watching "Christmas Vacation" when I was about six years old.- Heck yeah.- So that's my, that's my favorite. I was watchin' it, and my parents didn't know it.- Yeah, exactly.[all laugh] So, I think that's probably my favorite Christmas movie, but I'll give you a couple bonus ones. One you haven't probably seen, is called "The Holdovers."- Okay.- It just came out last year. It's got Paul Giamatti in it. I really like that one. It's a little bit darker, but it's still a really good movie.- [Adam] 'kay.- And then the second one, it's not really a holiday movie, but it's got family coming together. So it kind of reminds me of a holiday movie, and it's "Meet the Parents."- Wow, nice.- The gold standard for me is "Christmas Vacation." Every time I watch it, I hear a new line like I've never heard it before in my life. I've seen the movie like 300 times. Even this morning before we recorded, the line of him talkin' about his son going to the circus and hoping to bark for the Yak Woman. I just, this morning, I just was dying thinking about it, so that's my favorite. All right, well what we're going to do, as I mentioned, we're going to just do a little quick fire round robin. As we get close to the year end 2024, thinking about how do we finish the year strong financially and then launch ourselves into a successful 2025, so I will start. One of the things that I do this time every year is I update my balance sheet. Probably going to come a surprise to people to hear that I only look at my financial accounts once a year and it's the end of the year. It might be a little surprising given what I do for a living. My feeling is I am more concerned with behavior than I am with necessarily the outcome. And as I get closer to retirement, that will probably change. I'll probably keep a closer eye on things, but I'm a little ways from retirement at this point, at least to my knowledge. And so once a year I update assets, I update liabilities, and most importantly, I'm really looking at the behaviors for the year. And for me, that savings rate, so did we hit the savings rate that we want to hit to meet the goals, our long-term goals. So updating your balance sheet is not perfect because the reality is is it's a point in time, and you could look at it at the exact wrong time in the year, the market maybe had just gone in the tank. And you look at it point year over year and you think, oh great, we went backwards this year, but really, it's what can I control? And that's the behaviors, and that's really what I'm looking at when I update my balance sheet. Oh Kyle, how about you?- With our clients, what we're doing at the end of the year, we're looking at rebalancing quite a bit. So especially in a year like this, where the stock market's gone up dramatically, our clients' portfolios have gone up a lot. And so what we're seeing is a lot of our client accounts have a lot more in stocks than they did at the beginning of the year, and so one thing we do is we look at where their stocks are as percentage of their assets compared to where we want it to be. And so like this year, we're selling down stocks quite a bit to get back to the targets, getting risk back under control to where we want it to be, using that money to invest in bonds or leave it in cash. So that's something we're busy doing with our client portfolios, and that's always the case, but especially in a year like this with the markets up a lot.- Yeah, well I know for people who invest on their own, that's something that can drift over time too.- Correct.- You set your investment objective, and then you look up five years later, and maybe it's drifted considerably based on the performance of the market. Or if you are working with advisors, not all advisors are on that as regularly as they need to be, so yeah, really important to stay on top of that, so you're not taking too much risk or too little risk.- Right.- Love that. Don, what's your first tip?- Yeah, I think it's a lot of my clients at this time of year, it's the holiday season, and they're looking at annual gifting to their family members. And with the gift tax exclusion amount, the annual amount is 18,000 for 2024, and that's going up to 19,000 for 2025. So usually, my clients are doing that at the beginning of the year or the end of the year. It's kind of around this time of year, and a lot of times they're doing that just to be generous to help their family members out, and each spouse can give 18,000 per person. So if you take a husband and wife for example, they could each give $18,000 to their child or their child's spouse or their grandchildren. If you take a family of two children that are married, that maybe and four grandchildren, a couple could give up to $288,000 in 2024 without anybody incurring any tax. The couple giving the money incurs no tax, and the people receiving the money incur no tax. So it's a pretty effective wealth transfer strategy, especially, for high net worth clients, that are maybe trying to reduce their estate for estate planning purposes.- Yeah, well what's interesting about that strategy too is a lot of high net worth couples are also using those gifts as a test to see how the recipients handle the gift too, because a lot of times they're talking with us going,"I'm not sure if our kids are in a spot"where they could handle a large amount of money." So sometimes, they'll use these annual exclusion gifts as a test, so.- Yeah.- If you happen to be getting one of these gifts, pay attention to it.- So they're looking for behaviors.- Yes, exactly.- Focusing on their behaviors.- Yep, it might be more than just a gift, so. Okay, well next one for me is all about cash planning, so I'm right in the middle of this myself. So one of the things I think is helpful to do this time of year, is you start planning out what the next year spending looks like and if you think there are any big expenses coming down the pipe for you to manage. So again, I always like to reflect back personally. For me, I'm about to embark on a godawful expensive remodel that could kill me, and I've got a teenage driver now. And so, I know at some point she's going to want a car, and so I start thinking about all right, how much do those things cost and make sure that that money is not exposed to any market risk, because the last thing I want to do is know in my mind how much something's going to cost. I know when I'm going to have to spend the money, and then that money is exposed to a downturn in the market, and all of a sudden, I have less to pull from. So I am maybe a little bit more conservative this way, but I am 12 months out even to those big expenses, sometimes even further out, if they're really big expenses. I'm taking that off the table, taking the risk off the table and have that money available because I know I'm going to spend it anyways.- [Don] Right.- Kyle, how about you?- Yeah, the last thing that I have is something called tax loss harvesting. It's a term the investment industry came up with because we're jealous of farmers.[all laugh] What you do is you look at your client's portfolios, and you see are there any securities that we've purchased that are in a loss? Fortunately, we don't have many of those, but in the instance where you do have something that's down, you can sell it, and then you can realize a loss. That's something that doesn't sound like it's a great deal, but what you can do then is you can use that on your tax return next year to offset any other gains that you might have incurred, or you can offset up to$3,000 of your income from selling losses. So that's something that we're constantly looking at the end of the year, and throughout the year actually, to see if there is an opportunity to sell an asset at a loss. You can immediately repurchase something similar to it. It can't be identical.- Okay.- You've got to wait 31 days to repurchase the asset that you sold at a loss, but you can find something that's similar to what you sold, so that you're not out of the market or what have you.- Yep.- And so, we're doing that quite a bit this time of year.- Okay, awesome.- [Kyle] Yep.- Don, what's your next one?- Yeah, I would say it would be RMDs, required minimum distributions, and qualified charitable distributions. As we're approaching the end of the year here, there's a deadline for the required minimum distribution, that's the required amount that a client needs to take from their traditional IRA or 401k pre-tax retirement accounts.- Yep.- And for a person that's 73 years old and say has a $1 million 401k, 3.65% of that portfolio needs to come out.- Okay.- And that would be $36,500, and if they don't meet the 12/31 deadline, there's a penalty by the IRS of 25% on that amount.- Oof.- So in that case, it would be over $9,000 penalty, so you want to make sure that you're taking that required minimum distribution. And that's why a lot of our clients, when they retire and are working with us, they consolidate their 401Ks and IRAs, so that there's one account to keep track of.- Yeah, so you don't miss one.- Because if you have several accounts that has to be accounted for, you can take it out of one account, but that's a lot to keep track of. So just kind of having it in a consolidated place, and that fits with your rebalancing too. You have one account to rebalance to your investment objective. And then the other thing related to that is the qualified charitable distribution, a QCD, and there's a deadline, 12/31, to do that. And a lot of people are giving to charitable organizations. We're entering the Thanksgiving holiday, the holiday season, that's when a lot of charitable giving happens. And so you can do up to$105,000, if you're over 70.5, and that's different, that's nuanced from the old law. 70.5, 105,000 can be given to a charity each year.- Wow.- And that counts towards your RMD also.- Okay.- So, some people, they may not give the whole 105,000, but let's say that example I said, 36,500, they might give 10,000 to the charity and take 26,500 for themselves.- Sure.- Less withholding.- Yep.- And, you don't get a tax deduction on that, but you do not pay the taxes on, for instance, that $10,000 distribution.- Oh, okay.- So if you're in the 24% tax bracket, that would mean, to give 10,000, it's really only costing you $7,400.- Yep, yep, oh that's great. So my next tip is to think about how to handle raises, so one thing I think about with raises, it's again coming back to behavior. I like to say, "Maybe don't spend all of your raise,"to the extent possible." So for instance, if you get a 4% raise, can you take 1%, maybe even 2%, and put that into your retirement savings, so just cut it out. The nice thing about doing that right away is you can't miss something you never had. And so if you get a 4% raise and you just say,"I'm going to take half of it and put in retirement savings," well, you're still up 2%, which is great, that's awesome. And you're not spending that other 2%. Now the flip side is just the reality of the last few years and how expensive life has gotten that advice was easier to follow maybe a handful of years ago than it has been with inflation recently and the cost of goods going up so much. But as hopefully that starts to normalize, getting back to a place where it's two to 3% a year, and you're getting raises four or 5%, maybe you're getting a promotion, can you take part of that pay increase, automatically add it to your retirement savings. You're not missing the money, and you're still having more money to spend. It's a pretty nice balance. And the other thing is, if you're workin' with an employer with a retirement account, sometimes they may have that feature where you can automatically do that, where you can set every year, I'm going to increase my savings by 1% or 2% a year, and it automatically does it for you. And that's really, really convenient, that's easy. It's kind of a set it and forget it situation. If your retirement plan doesn't offer that or you don't have a retirement plan available to you, you may have to go in and do that manually, but just somethin' to stay on top of this time of year. Don, I think we're going to go back to you.- Roth conversions is a really common thing to do this time of year, and what that is is you're taking money from a traditional IRA, which is in a pre-tax situation, and you're converting those dollars to a Roth IRA. And a Roth IRA is a growth, the money grows tax free for the rest of your life.- Yep.- Many people that are doing this, they typically are looking at their tax situation. I have a lot of clients that have retired that have a lot of money maybe built up in money markets, and they earn a lower tax bracket for a year or two right after retirement. That's a prime time to do these Roth conversions.- Mm, because their income isn't as high?- Their income isn't as high, and if they're in say the 12% tax bracket, it's almost like a no brainer to do some Roth conversion with that.- Yep.- To take you maybe up to the 22. Once you get to the 22 and above, you maybe think about it.- Yep.- But if you don't need that money in that traditional IRA right away and you can convert it, you're getting it into a tax free growth bucket, and so that pans out really well for when you might need those dollars several years down the line and also to pass on to your family members, because Roth IRAs go to family members income tax free.- Yep.- As beneficiaries.- Yep, love those. One thing we just went through here at the bank is we had to review our benefits. Don, I know you talk to a lot of clients this time of year about reviewing their benefits. Is there anything that sticks out, as you're havin' those conversations?- Yeah, I would say what sticks out is usually you're renewing your health insurance coverage.- Yep.- You may be converting from a traditional plan to a high deductible plan. If you are, you want to look at the health savings account to make sure that you get maybe your company's match, and maybe looking at what, if you know a surgery's coming up, maybe you can be putting away some extra dollars into that health savings account.- Yep.- A lot of people that have maybe a traditional health plan have a flexible savings account, so you want to check that balance and know different companies have different rules. There's some use it or lose it, where you might leave dollars in there, so you might want to, if you need new prescription glasses, it might be a time to go do that, to spend those flexible spending dollars.- Yep, well the other thing too is, if you know your family's maybe expanding this year is you're going to take a look at different plan types as well. And I know it's not a very exciting thing to talk about all the time is look at,"Honey, we have to look at our benefit plan," but that's part of the deal, so.- And you also want to review your 401k beneficiaries to make sure they're correct.- Yep.- Usually there isn't, but if there's a life change event, people go through divorces, things like that, that you want to make sure that your beneficiaries are aligned correctly.- Yeah, so true, we've seen that many, many times. All right, as we look out into 2025, sometimes things stay the same, sometimes we know that there could be big changes. As we look out, I know one of the things that we're paying a lot of attention to is any potential tax law changes that could be coming. I know some things are going to potentially sunset, and we've had maybe change in administration, so we're a little curious how those things are goin'. Don, can you fill us in a little bit about what may be changing there.- Yeah, so the Tax Cuts and Jobs Act was enacted into legislation in 2017 and put into law January 1 of 2018, so we've been on this law for going on almost seven years, and it's set to sunset at the end of next year, at the end of 2025. So it's going to be an eight year law, and that Tax Cuts and Jobs Act, it affects corporate income taxes, it affects personal income taxes, and also it affects the Lifetime Gift and Estate Tax exemption.- Yep.- And currently, that is at 13.61 million, which is quite high. It's due to go to 13.99 million.- That's per individual.- Per individual.- Yep.- And with portability, so a couple with that, with portability, it's essentially 28 million, and if it sunsets, the information that I've read looks like that could go back to 7 million per individual.- Per person, yep.- So that's somethin' we're definitely keeping our eye on. It impacts our high net worth clients. Estate planning attorneys are definitely, that's on their radar and so forth.- Yep, I know their queues are pretty long already.- Yes.- We're planning for that. So, definitely something to keep our eye on.- Yes.- All right guys, think that's it. We gave 'em nine or 10 tips, as we go into year end. So hopefully, this episode will come out in early December. Hopefully, people have enough time to scramble, get a few of these things done that they haven't got done quite yet this year, and then launch into a successful 2025. It's hard to say that, imagine we're already in 2025, but thank you so much for joining me and looking forward to the next year.- All right, thank you.- [Adam] I hope you found this helpful. If you did, please subscribe and share with your family or friends. If you have a topic you want us to cover in future episodes, send us a note through our website, and if you're at the point where you want an expert opinion on your finances, reach out and we'd be happy to start a conversation. And remember, any comments, insights, or strategies discussed on this podcast are intended to be general in nature, and therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything we discuss, please consult with your attorney, CPA, and/or your financial advisor.