Friday, December 9, 2016

Your Year-End Financial Planning Checklist

With the holidays nearly upon us, your finances are probably not something you're spending much time thinking about. While we're certain that you all have plenty of things keeping you busy during this festive season, it is important to remember that there are powerful planning strategies that need to be utilized before the end of the year to help you get off to a strong start in 2017.


Contribute to Your Employer's Retirement Plan


If you haven't maxed out your retirement contributions, there's still time to do so. In terms of prioritizing where you save, you may want to consider contributing to your employer-sponsored plan (e.g., a 401k or 403b) before contributing to an IRA. The reason is that contributions to your employer-sponsored plan must be made by the end of the year; contributions for 2016 can be made to an IRA up until April 17, 2017. Those who are under age 50 can contribute $18,000 to an employer-sponsored plan; workers ages 50 and older can contribute up to $24,000.

Do You Have Lower Income This Year? Convert to a Roth

If you're like many of our clients, you likely have a large portion of your retirement savings in a tax-deferred retirement account, such as a traditional IRA or 401k. There's nothing bad about using tax-deferred savings options during your workings years. They provide you with an immediate tax deduction and the earnings you may achieve inside of the plan grow tax-deferred until you begin to take distributions.

There comes a time, though, when you can have too much of a good thing. Having most of your savings in a tax-deferred retirement plan means you'll be paying taxes on the bulk of your retirement income when you withdraw those funds. Plus, once you turn 70.5, that money may be subject to required minimum distribution rules. This means the government will force you to take distributions, whether you need the cash flow or not.

One solution is to convert some of your tax-deferred dollars to a Roth IRA. You'll pay income tax on the amount converted, but by proactively biting that tax bullet, you're able to boost the amount of tax-advantaged income you'll have in retirement. Additionally, if your income is abnormally low this year, you could potentially have those tax-deferred dollars taxed at a lower rate today than what you may pay in the future. Traditional IRA account owners should consider the tax ramifications, age and income restrictions before executing a Roth conversion.

Start Planning for 2017

We have a new president-elect, and there's a chance that we'll see some changes to the U.S. tax code in the coming years. Whether those changes occur in 2017 or sometime down the road, you'll want to keep an eye on the legislation emerging from Washington.

It's also a good idea to review your portfolio. If you want to have a fixed percentage of your assets invested in a number of different asset classes (e.g., 50 percent stocks and 50 percent bonds), those percentages often shift over time, with the better performing asset classes comprising an increasingly larger portion of your portfolio. Since the better performing assets tend to have more risk, this can make your overall asset allocation riskier than what you want. Depending on how dramatically your asset allocation has shifted, you may need to rebalance your portfolio so that it is more representative of your ideal asset allocation.

We understand reviewing your finances may not be on the top of your to-do list. That said, taking these proactive steps now can help you better ensure you're financially ready to tackle the new year.

The opinions and information presented is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.