The Calendar Is About to Make Some Decisions for You
By Brian Wheeler, Director of Wealth Management & Business Brokerage
Some of the best financial decisions you’ll make this year have an expiration date. And for quite a few of them, that date is December 31.
Make Smarter Financial Decisions Before December 31
We’re not talking about completely changing your financial plan or making moves just to beat a deadline. We’re talking about looking at decisions you were probably going to make anyway and asking whether there’s a smarter way to make them before the year ends.
Maybe you’re going to give $10,000 to charity. Should you write a check, give appreciated stock, or, if you qualify, make the gift directly from an IRA? Maybe you’ve had a great income year, or a bad one. Does that change what you should contribute to retirement, whether a Roth conversion makes sense, or how you should handle gains and losses in your investment accounts? Maybe you know you’re going to need a large amount of cash next year. Should that money still be invested the same way it is today?
These aren’t necessarily complicated questions, but some of the answers change once December 31 passes. April is when we report what happened. November and December are when we may still have an opportunity to change what happens.
Start with what this year is actually going to look like. You don’t need to have your tax return completed in November, but you should probably have some idea where you’re headed. Did you earn more than expected? Sell a business or property? Realize a large capital gain? Have an unusually low-income year? Are there investment losses that might be useful? Sometimes just seeing around the corner creates opportunities.
Charitable giving is a great example. Let’s say you normally give $10,000 each year to your church, university or favorite nonprofit. The easiest thing to do is write a check. But suppose you also own $10,000 of stock that you purchased years ago for $3,000.
If You're Going to Give 10,000 Anyway, Which 10,000 Should You Give?
Giving appreciated stock directly to a qualifying charity may allow you to avoid realizing the embedded capital gain while potentially receiving a charitable deduction, subject to the applicable rules. The charity still receives $10,000. You still gave $10,000. But you may have created a much better tax result simply by changing what you gave.
The same thinking can apply to retirement accounts. If you’re at least 70½ and qualify to make a Qualified Charitable Distribution from an IRA, money can go directly from the IRA to an eligible charity. A qualifying distribution generally isn’t included in your taxable income and can count toward your required minimum distribution if you have one. Again, you were going to give the money away anyway. The question is simply: Where should it come from?
That’s really the larger point of year-end planning. It isn’t always about doing more. Sometimes it’s about doing what you were already going to do more intelligently.
The same conversation should happen around retirement contributions. Have you contributed what you intended to this year? Should those contributions be pre-tax or Roth? If you’re a business owner, are there additional employer or profit-sharing contributions worth considering?
And what about your investments? Maybe you have losses that could offset gains elsewhere. Maybe a highly appreciated investment has become too large a part of your portfolio and this is an opportunity to reduce some risk. Or perhaps you’ve accumulated more cash than you really need and haven’t stopped to consider what it’s earning or how those earnings are being taxed. Taxes matter, but they shouldn’t drive every investment decision. The goal is to get the pieces working together.
There's One More Question I Think is Especially Important: What Changed This Year?
Did you retire? Sell a business? Buy property? Inherit money? Have a particularly good or difficult year financially? Add a child or grandchild to the family? Are you planning a major purchase or expense next year? Your financial plan doesn’t automatically update itself when your life changes.
If you know you’re going to need $100,000 next year for a home, a business investment or another major expense, for example, should that money still be exposed to the same investment risk today? These are the conversations worth having now.
I like to think of November as the month for decisions and December as the month for execution. Take a look at your income and taxes. Review your investments and retirement accounts. Think about charitable giving and where that gift should come from. Look ahead at what you’ll need cash for next year. And where these decisions overlap, get your CPA and financial advisor talking to each other.
You may go through the entire exercise and decide everything is exactly where it should be, and that’s perfectly fine. There’s a big difference between deciding to do nothing after reviewing your options and realizing in January that there was something you could have done in December.
Because once the calendar makes the decision for you, it’s no longer a planning opportunity. It’s history.