It’s hard to believe the end of the year is upon us. There is only a month and a half left in 2019…and the decade! Here are some ideas to make sure you’re maximizing your planning and minimizing your taxes for the current calendar year.
#1: Maximize Your 401(k) Plan
The IRS recently released their Contributions and Benefit Limits for 2020. Notably, both 401(k) salary deferrals and the catch-up contribution for those age 50 or older increased by $500. An individual 50 years or older in 2020 will be able to contribute $26,000 in salary deferrals in 2020.
Important: If are 50 years or older or will turn 50 years old anytime during 2019, you are eligible for the catch up! Ensure you have contributed both the $19,000 deferral and the $6,000 catch-up maximum for this year. Then make sure you’ll be on schedule to max out both next year.
Download the 2020 Contributions and Benefits Limits
#2: Maximize Your Health Savings Account (HSA)
An HSA is the only investment vehicle that delivers triple tax benefits. Contributions are tax deductible on the way in, earning are tax-deferred, and withdrawals used for qualified medical expenses are tax-free.
You must be covered under a high deductible health plan in order to contribute. A high deductible health plan is defined by the IRS “as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,900 for self-only coverage or $13,800 for family coverage.”
#3: Maximize your Charitable Contributions
In 2019, the standard deduction has increased to $12,200 for single filers or $24,400 for married, filing jointly. To take advantage of itemized deductions such as mortgage interest, state and local taxes (SALT), and charitable contributions, the total of these deductions must exceed the standard deduction.
If you’ve had an unusually high income this year (bonus, sale of a business, etc), you can use charitable bunching by making a larger than usual tax-deductible contribution to a Donor Advised Fund. Bunching is advancing your next few years’ charitable gifts into the current tax year. The aim is for this deduction to exceed the standard deduction in order to minimize your taxes today. In future years, you then direct your Donor Advised Fund to make gifts to charities on your behalf.
See examples and read more about making the most of your charitable contributions here.
#4: Take Your Required Minimum Distributions (RMDs)
For those 70 ½ years of age or older, you must take annual withdrawals from your IRAs and retirement accounts. Roth IRAs, however, are not subject to this rule.
The amount of your distribution is calculated using the IRS’s “Uniform Lifetime Table”. Fortunately, most custodians such as Schwab or Fidelity have already calculated this for you.
When must you begin taking distributions?
From the IRS website:
Beginning date for your first required minimum distribution
- IRAs (including SEP and SIMPLE IRAs)
- April 1 of the year following the calendar year in which you reach age 70½.
- 401(k), profit-sharing, 403(b), or other defined contribution plan
- Generally, April 1 following the later of the calendar year in which you: reach age 70½, or
- retire.
It’s important to note that business owners with 5% or greater ownership must still take RMDs from their 401(k)s even if they are still working in their company and making ongoing contributions.
Failure to take your required distribution may be result in a 50% excise tax on the amount that should have been taken.
#5: Make a Qualified Charitable Distribution (QCD)
One of the most exciting things included in the Pension Protection Act of 2006 was the QCD. A QCD allows you to make a charitable donation (up to a maximum of $100,000 per person/per year) directly to a charity with the amount donated directly offsetting the Required Minimum Distribution.
For high net worth individuals in the RMD stage, we find they typically receive more in required distributions than they actually want or need. By donating to your favorite charity directly from the IRA, your required distribution and taxes are reduced under the QCD method. This is especially important for those unable to itemize their deductions, as now their charitable donations can be taken in full. If you are currently taking RMDs and making charitable donations, QCD’s can be a fantastic strategy.
#6: Update Your Beneficiary Designations
The end of the year is a great time to make sure your beneficiaries are current. Log into your 401(k) plan, speak with your HR administrator, call your financial advisor, email your life insurance agent. Request a review of your designations to verify that they match your current wishes.
Life transitions, such as divorce or the death of a spouse, are incredibly difficult. It’s understandable that during these challenging times beneficiary designations get left unchanged. This is your reminder to review them.
As always, reach out to us and/or your tax advisor to talk through any of these planning opportunities.
Happy Planning,
Brian