Taking Your Year-End Checklist To The Next Level

Big surprise: 2020 is turning out not to be the financial disaster some feared a few months ago!

Don’t become complacent with the recent recovery of the U.S. stock markets. There is still time before year-end to complete important financial planning projects.

The punch list below has many of our favorite financial planning ideas. Pick two or three that make the most sense for your family and get them over the finish line during the next month.

Maximize your retirement savings through an IRA, 401(k) or Roth.

The federal government provides a tax incentive to encourage these tools and establishes a limit on how much wealthy families can capitalize on it. The 2020 401(k) limit for individuals under 50 is $19,400.

Here’s a strategy that few wealthy families take advantage of: Create Roth IRAs for your working teens and young adults. Roth IRAs are less common among wealthy families because the federal government limits contributions from high-income earners. While you may exceed this limit, you may be eligible to contribute to a retirement account for your children or grandchildren. Consider this:

  • The younger generations in your family have the longest amount of time to benefit from capital gains and income tax exemptions.
  • A Roth IRA is a financial literacy opportunity for your heirs.
  • Contributions are limited to W-2 income ($6,000 maximum). No doubt your heirs will be spending their income on gas, clothing, and food. If you match their W-2 earnings with a Roth IRA contribution, it may encourage them to find a job and earn a few thousand dollars.
  • For children under 18, a Roth UTMA IRA is another option.

Make annual exclusion gifts of $15,000.

No federal gift tax. (Plus these gifts currently are not captured in state estate tax calculations in locations like Illinois.)

Don’t just make the gift. Make the gift to encourage financial literacy and to support college savings. What your heirs do with their annual exclusion gift will give you a good idea of what they will do with their eventual inheritance.

Refinance your Mortgage.

Again? Probably. Interest rates are back down to nearly zero and many homeowners are trying to capture the interest savings. Mortgage bankers are working overtime to process all the requests, so don’t count on a quick turn-around.

Be sure to consider the closing costs. Calculate how many months of interest savings will be required to recoup the fixed costs of refinancing. In some cases, refinancing a smaller mortgage may not be worth the effort.

Jump-Start College Savings.

Higher education costs money. The earlier you start a 529 plan, the more years it will grow. Some states (like Illinois) offer partial income tax deductions to the individual making the contribution.

Check your credit report.

We are constantly surprised by how many people we know who have had their identity stolen. It is a lengthy and time-consuming process to unravel the problems caused by identity theft. The sooner you identify the fraud, the better. If you have not seen your credit report this year, order one. It’s free.

Be Charitable.

Today more than ever, people are in need. Charities addressing homelessness to food insecurity, environmental causes to healthcare, all depend on financial support from individuals like you and me. It’s not too late to create a Donor Advised Fund or make gifts with appreciated stock. But don’t wait too long. Year-end is a busy time and due to COVID it may be more difficult to get gifts completed in late December. Do it now!

Review your investments.

Following the stock market recovery, you may want to rebalance your portfolio before year-end. Many investors rebalanced in March after the market declined. Those investors now will be shifting from stocks to bonds, or from growth stocks to value stocks. With uncertainty around COVID and the November elections, don’t assume your portfolio will be stable. Determine if your asset allocation has drifted and get it back on target. Do you ever check for capital gain distributions from mutual funds? We do. This is important if you hold a fund at a loss. Perhaps you owe capital gains tax on investments in your portfolio. Side-stepping these tax obligations isn’t hard, if you plan ahead.

Review Your Estate Plan.

Oops. Many estate attorneys are busy with other families, so it’s probably too late to work on this during 2020. However, if there has been a change in your family or if your old plan is out-of-date, get your ducks in a row. You should review your estate plan every 3-5 years.

Final Thought

This year has reminded us of two important lessons: Investment performance is often determined by factors beyond anyone’s control and luck can play a big role in the outcome.

You have more control of your financial plan. A disciplined process can help establish a strong foundation on which to grow your family’s wealth.

Remember, this newsletter is educational and not intended to be legal, tax or investment advice for you, the reader. Consult your own advisor, tax accountant or attorney before making decisions.

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