The holiday season is a special time of year when we get a chance to celebrate all that we have to be grateful for with family and friends. It is also an opportunity to reflect on the year as it comes to a close. Before we move into 2020, take time to review your finances and take action if necessary. Here is a financial planning year end checklist with some suggested items to look at to help optimize your overall financial well-being.
Review your Financial Plan and Make Updates
Did you achieve any short-term goals that you can cross off the list? Do you have adequate cash reserves to cover unexpected costs? If you received a bonus from your employer, consider using the money to increase your emergency savings or, if possible, have the bonus deferred into your 401(k) account. Are you still on track to meet your long-term goals, like funding your retirement or saving for college expenses? It is important to ensure that your investments are appropriately aligned with your goals. If you are in your 20s or 30s, you can afford to be more aggressive in the stock market to meet your goals. As you get older and closer to retirement age you should consider moving to a more moderate to conservative investment allocation of stocks and bonds. The right asset blend for you will depend on your goals, age, and risk tolerance. Confirm that your investments still make sense for your goals. Please contact us if you would like a second opinion.
Rebalance your Portfolio
The stock market performs differently from year to year. If the market is up for the year, it may be a good opportunity to sell some of your equity holdings to lock in gains (while paying attention to capital gain recognition). Alternatively, if the market is down for the year, consider selling some of your bond holdings to get your portfolio back in balance. Also, mutual funds distribute income throughout the year, especially in December. Make sure you don’t have excess cash sitting in one of your accounts that could be invested and working for you.
Look for Opportunities to Reduce Taxable Income for the Year
My colleague, Vanessa McElwrath provided helpful year-end tax planning suggestions in our November Newsletter. Vanessa discussed the importance of maxing out retirement account contributions, as well as looking for potential opportunities to do charitable gifting, Roth IRA conversions and/or tax loss harvesting.
Make Sure your Investment Portfolio is Tax Efficient
To the extent possible, hold your bonds and REITs in tax-deferred retirement accounts. These two asset classes generate a lot of income, and you do not pay taxes on income generated in tax-deferred accounts until withdrawal. Also, if you need cash from your investments, review the amount of taxable income you expect to receive this year. If you expect to receive less income next year, consider delaying the sale of investments and deferring recognition of capital gains until early 2020.
Review Required Minimum Distributions (RMDs)
If you have a retirement account that requires you to distribute a minimum annual amount (IRA and you are 70 ½ or older or Inherited IRA, for example), make sure you have these completed by December 31st. The penalties for late RMDs can be severe. You can read more about RMD Rules on this IRS page.
Review your Estate Plan
It is vital to have wills and medical directives in place. Make revisions to them if your life circumstances have changed this year. Also, look at your IRAs, 401(k)s and insurance policies and make sure your designated beneficiaries are up to date. Does your life insurance coverage still make sense? Maybe you are self-insured with adequate personal investment assets and no longer need to pay expensive insurance policy premiums.
Here are a few more items to think about:
- Consider refinancing your loans. Interest rates have steadily declined in 2019. If you have outstanding mortgage, car or school loans, it might make sense to refinance at current rates.
- If you have a 529 account, make sure you are paying expenses in the same year of the expense. For example, you may have received a Spring 2020 tuition bill before the end of 2019. It is best to wait until January 2020 to pay this from your 529 account, to ensure that you are following the IRS rules on 529 withdrawals.
- Check your credit report. With the ongoing threat of identity theft, it is critical to review your credit at least every 12 months to make sure nobody has stolen your personal information and used it open a credit card or take out a loan.
Now that you have reviewed your finances for 2019, start thinking about next year! Now is not only a good time to review the above topics, but also to set your goals for 2020. While circumstances can always change, it is much better to be proactive now and revise an existing plan if necessary, than to come up with a plan at the last minute. We are always here to help you with your financial planning year end checklist or any other financial questions you that and your family may have.
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