As year-end approaches, there are many planning strategies that require action by December 31. Retirement accounts, in particular, have specific deadlines for tax-advantaged opportunities.
Here are five year-end planning ideas that investors may consider for 2015:
1. Review required minimum distributions (RMDs). Many investors take distributions from retirement accounts annually in December to meet the minimum distribution requirements. Contact clients early to make sure they are on track. The Internal Revenue Service has specific rules, and the penalty for not taking an RMD is 50% of the required amount.
Discussing RMDs may also lead to identifying other retirement accounts that could be consolidated. There are also some options for investors who do not rely on the RMD for income. For grandparents, the income from the RMD could be used to set up a 529 college savings account. There may also be an opportunity to avoid taxes on the RMD if the distribution is sent directly to a qualified charity. This particular provision expired at the end of 2014, but Congress may vote to extend it before the end of 2015.
2. Discuss a Roth IRA conversion. For some individuals, such as sales professionals or executives who receive bonuses, income can vary substantially from year to year. They may benefit from completing a “tactical” Roth IRA conversion when income is lower. With the possibility of higher tax rates in the future, investors may choose a Roth to better manage their tax bill in retirement. It’s also important to remind investors that all or part of the conversion can be undone before the next tax-filing deadline, without incurring any taxes or penalty, if they change their mind.
3. Conduct an annual beneficiary review. This process will help clients avoid problem situations if they have not updated all of their accounts. It may also uncover other retirement accounts for consolidation. When reviewing IRAs, investors may want to consider a “Stretch IRA” strategy to ensure that the tax-deferred income benefits extend to future generations.
4. Identify opportunities to harvest tax losses. With tax rates and other health-care reform-related taxes under scrutiny by lawmakers, planning for tax efficiency is more important than ever. As the end of the year approaches, investors may want to review their portfolio to identify opportunities to strategically generate losses to offset gains. Here is an opportunity to discuss ideas such as a tax swap strategy for mutual fund holdings.
5. Talk to small-business owners about net operating losses. Small-business owners set to record a net operating loss (NOL) this year may be able to transform that loss into tax-free income. NOLs may be carried forward to offset ordinary income on future tax returns without any limit on the amount. The NOL has the potential to offset additional income from a Roth IRA conversion, eliminating the tax liability. The rules are complicated, and it is critical for investors to meet with a qualified tax professional.
Forming strategic relationships with local tax professionals who can assist business owners and other investors with advanced tax strategies can provide additional value. These relationships may also lead to referrals for retirement and other planning opportunities.
To learn more about these and other ideas, financial advisors may explore “Year-end planning ideas: 10 ways to help you build your business in 2016.”