Alan Haft

Ten Year End Planning Tips You Don’t Want To Miss

November 15, 2010
by Alan Haft

Is it November already?

I don’t know about you, but for me, this year seems to have flown by quite fast and in a short two weeks or so, I’ll be doing a lot of thinking about turkey and family around a big table. Shortly after that, it’ll be on to thoughts about egg nog, a ski slope with kids and if I’m lucky, maybe a new iPod. 

With the year flying by and quickly coming to an end, I may as well join the retailers out there and get a bit head start to holiday season. Far too often, December comes rolling around and things like financial issues take a back seat. With that, I figure I’ll get an early start to holiday season by sharing a few ideas to review with clients before this year comes to an end.

  1. Take required minimum distributions (RMDs).
    For clients over 70½, last year there was no required minimum distributions needed to be taken out of IRAs and other qualified accounts. This year, however, one needs to do it and in my world, a few clients had to be reminded of such. So, with that in mind, remember: IRS regulations require that clients take initial withdrawals from traditional, Simplified Employee Pension Plan (SEP) and Savings Incentive Matching Plan for Employees (SIMPLE) IRAs by April 1 in the calendar year following the year they reach age 70½ and each year thereafter. Then, on an ongoing basis, clients must withdraw the total RMD amount for each year by the end of that calendar year. For example, if a client reached age 70½ in 2010, their first withdrawal must be made by April 1, 2011, and they then must take the rest of their total 2011 RMD for the year by December 31, 2011.
  2. Spend the balance of Flexible Spending Accounts (FSA).
    If clients participate in an FSA for either health or dependent care, you may want to remind them to see if the plan has implemented the 2½ month extension provision, which allows 2010 FSA money to be used for expenditures through March 15, 2011. If the plan doesn’t have the extension, be sure to use up any balances before the end of the calendar year or these balances will be forfeited. One way to do so: stock up on over-the-counter medicines for next year.
  3. Make last-minute charitable contributions.
    Maximize client itemized deductions by making donations in the form of cash, property, or appreciated stock. The latter could help them avoid some capital gains taxes.
  4. Make an extra mortgage payment.
    Besides increasing the amount of their mortgage interest deductions for the current year, making that one extra payment could, over time, cut the amount of interest clients are paying on their mortgage and actually reduce the number of years it will take to make payments before the house is owned free and clear (which, depending on how you view tax deductions, may not be in the client’s best interest).
  5. Consider making deductible business purchases by the end of the year.
    If clients are self-employed and know they’ll need to buy deductible business-related items in the following year, clients may want to buy certain items now to maximize their deductions in the current year (and take advantage of holiday sales).
  6. Think about gifting.
    This year, clients can gift up to a total of $13,000 (per person) to as many people as they want. Giving away these gives could serve a number of purposes such as reducing the value of a taxable estate over time.
  7. Review and balance capital gains and losses.
    Make note of capital gains clients realized this year from the sale of stocks or mutual funds. Also find out if their mutual funds will be distributing capital gains by year end. When you’ve added up client gains, check to see if there are any losses they can carry forward from previous years to offset these gains. If there aren’t, advise them to consider selling underperforming securities. Taxes should never be the sole reason a client buys or sells investments, but it may be possible to improve their tax and investment situation at the same time. Think of it as being a good time to “clean out the closet.” Especially with the possibility tax rates are going up next year, this could be my list’s most important idea to pay attention to.
  8. Consider increasing final 401(k) contribution.
    If a client hasn’t already contributed the maximum of $16,500 (an additional $5,500 for those 50 and older) to their 401(k), consider recommending an increase of the contribution amount from the final paycheck. They have until December 31st to make a final contribution for the year.
  9. Open and fund a 529 plan college savings account.
    Clients have kids and no idea how they’re going to get them through college? A 529 can help. For those that aren’t aware of it, a 529 plan offers high maximum contribution limits and significant tax benefits. Money in the account can grow tax-deferred for years and withdrawals are tax-free if used for any number of expenses related to higher education. But some people are using them for estate planning as well, since the money a client puts into a 529 plan account is considered “a gift.” Clients are allowed to contribute up to $65,000 this year — which is considered five years worth of gifting — at one time. The rule is based on a calendar year, so if they make a contribution in December, one of the five years (or $13,000) is applied to the current year. The balance of their gift will carry over and be credited in subsequent years.
  10. Make Those IRA contributions.
    Clients can make IRA contributions through April 15, 2011, but why not consider doing it now so they don’t forget? For 2010 (year of this writing), the IRA contribution limit is $5,000, or and extra $1,000 if the client reaches age 50 before the end of the year.

One last very important point: I have known many people — especially business owners (sole proprietor, C Corporation, S Corporation, and others) — who have not set up qualified retirement plans such as a 401k. The ability to “take income off the top” and place it into a qualified plan could be a missed opportunity. With enough time until the end of the year, it is still possible to set up a qualified plan and given it takes a little time to set up a plan, this is the single most important reason I tend to write these year end planning thoughts early.

In conclusion, implementing or reviewing any of the above ideas with clients can prove to be a very valuable service and another reason to stay in touch with your clients.

Have any ideas I missed? Please be sure to email me before the year comes to a close.

Additional Resource      Managing Your Tax Season (Publication)

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Alan Haft is an investment advisor representative with an insurance license, author of three books including the national bestseller, You Can Never Be Too Rich and makes frequent appearances in national print, television and radio media such as The Wall Street Journal, Money Magazine, CNBC, BusinessWeek and many others. The amounts represented in this article should all be considered hypothetical and for example only.

* For full disclosure, Haft is a part of a firm that utilizes all industries which typically includes us receiving percentage based fees for brokerage services as well as commissions when implementing insurance based plans. Haft does not work for any particular financial company or industry nor should this column be construed as an endorsement or condemnation for any particular product. Readers should note that all views and vendor recommendations as expressed in this article are solely the author’s and do not necessarily reflect the views of the AICPA CPA Insider™ or the AICPA.