As we enter the final months of 2019, it’s time to start giving serious thought to year-end planning. Exploring the following seven ideas with your clients now will give you ample time take appropriate steps for their goals and circumstances.
Plus, when you have the conversations today, you and your clients will both have more time to relax and enjoy the upcoming holiday season knowing that you’ve already addressed this important annual topic.
1) Add to an IRA
Remind your clients to fully fund their IRAs. As you know, they actually have until April 15, 2020 to contribute to their IRAs for the 2019 tax year, but you might point out to them that the sooner the money is in their accounts, the faster it will start working for them. The 2019 IRA contribution limit is $6,000 with an additional $1,000 catch up amount for individuals age 50 and older.
2) Boost 401(k) contributions
Many companies allow employees to increase their 401(k) contributions outside the open enrollment period. Let your clients know that if they do bump up their contributions for the rest of the year, they’ll lower their taxable income and add to their retirement savings. At the very least, encourage them to put away enough to earn the employer’s matching contribution in the future. The 2019 401(k) contribution limit is $19,000 with an additional $6,000 catch up amount for individuals age 50 and older.
3) Contribute to a 529 plan
Remind those of your clients with young children, or grandchildren, about the benefits of a 529 college savings plan (i.e. tax-free withdrawals for qualified education expenses, possible state tax deductions, total control of assets until used by beneficiary, etc.). If your high net worth clients haven’t yet reached the 529 gift tax exclusion of $15,000 per recipient ($30,000 for married couples filing jointly), they’ve got until December 31, 2019 to do so.
4) Delay purchasing mutual fund shares
Some of your clients may not be aware that many mutual funds pay capital gains distributions in December. You might want to inform them that if they were to buy new shares of a fund just before the distribution date, they may get a larger distribution, but they’ll owe capital gains taxes on the money they just invested without really having received much benefit from their investment. To avoid this potential problem, clients may want to delay making additional investments until after the distribution date.
5) Consider selling “losers”
Clients might want to consider selling investments that have lost value and are no longer needed for portfolio balance. You could remind these clients that their losses can offset any capital gains they might have achieved; if they don’t have any gains, the losses can offset up to $3,000 of their regular income. Plus, any losses that they don’t use in a given year can be carried forward indefinitely for use against future capital gains. Of course, if clients still liked the investment that they sold at a loss, and they wanted to keep it in their portfolio, they could repurchase it, but they’ll have to wait 31 days to avoid violating “wash sale” tax rules.
6) Take RMDs
Clients who are 70½ or older must start taking their required minimum distributions (RMDs) from their traditional IRA and 401(k) or similar plan by December 31, 2019. However, if you have clients who turned 70½ in 2019, remind them that they can wait until April 1, 2020 until they must take their first RMD. They will then have to take a second RMD (the one for age 71) by December 31, 2020.
Taking two RMDs in one year could give them an unexpectedly large taxable income for the year, possibly bumping them into a higher tax bracket and affecting the amount of their Social Security benefits subject to taxes. When you explain this trade-off for delaying their first RMD, encourage clients to consult with their tax advisors before making a final decision.
7) Consider strategies for charitable gifts
The relatively high standard deduction available to taxpayers under the current tax code may result in fewer of your clients itemizing their deductions. If this is the case, they may have less incentive, at least for tax reasons, to make charitable gifts.
Nonetheless, receiving a tax deduction is not the only tax benefit of making a charitable gift, particularly for those of your clients subject to RMDs. If, instead of withdrawing the money, the retirement account owner decides to transfer the funds directly to a qualified charity, the distributed amount can be excluded from the account owner's income.
This qualified charitable distribution may allow your clients to enjoy a sizable tax benefit from their generosity. In fact, clients 70½ or older can transfer up to $100,000, tax-free, from their retirement account to charities each year -- even if the amount is more than their RMDs.
Those of your clients who aren’t yet 70½ can still gain some tax benefits from certain types of charitable donations, such as gifts of appreciated securities. Even if they won’t itemize this year, they can still avoid the capital gains taxes they’d have to pay if they were to eventually sell those securities.
Demonstrate your value as a financial advisor to your clients
These are a small sample of topics you may want to explore with your clients. RBC Correspondent and Advisor Services provides a more comprehensive checklist to help facilitate productive year-end advisor-client planning conversations. Our goal is to help the advisors we support—as well as their clients—finish out the year on a positive financial note.
RBC Correspondent and Advisor Services does not provide tax or legal advice. All decisions regarding the tax or legal implications of investments should be made with a tax or legal advisor.