Christine Benz: I'm Christine Benz for Morningstar.com.
As we count down to the end of the year, what financial tasks should be on your to-do list? Here to discuss some of the key ones is Leisa Brown Aiken. She is the financial planner at Veo Financial here in Chicago, and she is also going to be appearing at the Individual Investor Conference on January 21.
Leisa, thank you so much for being here.
Leisa Brown Aiken: Thank you, Christine.
Benz: I'd like to discuss some of the tips that you give your clients; you're a planner, and you are part of the Garrett Financial Network, so you are dealing with a lot of smaller investors. What are some of the things that you're telling them to be sure to get done now that we're counting down to the end of the year.
Aiken: Now, that we're counting down to the end of the year, I have my eye on the Dec. 31, deadline first. And we are financial planners and we give hourly advise, so we are thinking about what can all our clients do or lot of our clients do. So one of the first things is, we like flexible spending accounts for health care, and the first thing is how much is still in your account, and what expense can you use that money for before your deadline?
Benz: So clean it out.
Aiken: Clean it out. Use it or lose it. And keep in mind that there is a deadline. Some plans extend, but know what your plans rules are.
Benz: So the rules are a little bit different for 2011 in that some things you used to be able to buy with the FSA or not allowable. Can you discuss the key changes there?
Aiken: A lot of the key changes had to do with over-the-counter medicines--they aren’t allowable without prescriptions, and that was one of the key changes. Another change, some plans do allow you to do expenses all the way to Jan. 31. So know what your plans' rules are.
Benz: So would you say also people should look at what they've got left in their flex account, and if they are spending money on stuff, so they're buying glasses they don’t really need and expenses like that, are you saying, analyze that a little bit and make sure you don’t put as much in for future years?
Aiken: That’s a really good idea, and typically we want to remind people to look at that in October...
Benz: ... Before open enrollment happens.
Aiken: But if you notice that, and you notice that you're spending money, what I tell people to do is take out whatever you use, your Blackberry, your iPhone, your calendar, and write a note on the month of October to look at your flexible spending account, and that way [you can] kind of get an idea. Because I agree, some people called it the--I don’t know--the eye glasses subsidy plan or something like that. But it's better to spend it because you're not going to get it.
Benz: So 12/31 also your deadline for some other contributions: 401(k), 403(b) contributions. You've got to get those in.
Anything else people should be thinking about as that deadline looms as far as taxes and investment contributions are concerned?
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Aiken: Well, interestingly enough--I don’t if you're seeing this--I've seen a lot of people become self-employed over the last couple of years, and some of them have done really well, so that they have fairly high earnings, and if they're able to, they can contribute more if they set up a self-employed 401(k) plan than they could in a SEP-IRA or an IRA, but the 401(k) plan requires that the plan be set up by Dec. 31, not that the contributions be made, but the plan has to be set up.
The SEP could be set up when you file your tax return. But if you want to defer a big amount of money and you're self employed, talk to your tax advisor about that. You've got to do it by year-end, got to set up the plan, and have that plan document in place. It's not that hard. There are prototypes at most of the major custodians. They can help you.
Benz: How about 529 plan contributions. What does that deadline mean for people who are saving for college via those vehicles?
Aiken: Well, if you live in a state that provides a tax benefit for the contributions, Dec. 31 is the deadline for this tax year.
Benz: So Leisa, how about required minimum distributions? What should people have in mind and who do those supply to?
Aiken: So required minimum distributions generally apply to folks who are over 70 1/2, and if you are over 70 1/2, for the first time this year, you have until April next year to make your required minimum distribution for 2011. But if you wait, you'll have to make two in 2012, and you might pay higher taxes because you're making two in one year. So, the required minimum distribution amount has to be made--distributed to you with one exception by Dec. 31. So don't forget to do it.
This is the last year under the current tax law, they could change it again, where you can direct your required minimum distribution to a charity. So you can meet your required minimum distribution requirement by having that amount sent directly to a charity.
Benz: So if you are lucky enough not to need that money for any reason...
Any traps that people fall into with RMDs that they should be on alert for? If you miss it, that's a big trap?
Aiken: If you miss it, it's a big trap because the penalty is 50% of the required minimum distribution amount. So that's a big trap.
It's also a trap for people who inherit IRAs, because there are required minimum distribution amounts for inherited IRAs, and it's based on a table that the IRS has, and it's the same 50% penalty if you miss one. So don't miss required minimum distributions. I think it's often a good idea just to put them on autopilot.
Benz: So you get it paid out no matter what.
Aiken: We get it paid out no matter what.
Benz: Do you suggest that people knit their RMD process in with rebalancing. So if they're doing rebalancing and making changes anyway, should they try to sync up the RMDs with the rebalancing effort?
Aiken: It's a really good idea. I think if you look at your portfolio and maybe it's out of balance, you need to sell off something, that can be a good opportunity for the RMD. Often we find that if you have both taxable and tax-deferred accounts, the tax-deferred account may be more weighted toward fixed-income. So, you often don't find that it's increased, so that you're going to make the RMD from the asset class.
Aiken: But still, at the same time you rebalance it's a good time to make the RMD.
Benz: Leisa, you also say that people should take a look at their payroll deductions for retirement plan contributions. What are they focusing on there?
Aiken: Well, they're focusing on, what did you contribute or what are you likely to have contributed by the end of 2011, and for most of us, it would be great if we could all max out our retirement plan contributions, but some of us just can't do it.
So, what I tell people to do sometimes is just try increasing it by 1% or 2%, beginning in the first pay period of 2012 and see how it feels. And that way, you're starting out the year, you've increased it, and you can ease into the year with a higher contribution, but if you're ready to go and you make that election at the very end of the year, then you'll have it made for 2012.
Benz: So, how about people who are navigating the Roth versus traditional 401(k) contribution decision? How do you help people navigate that?
Aiken: That's a really tough one, Christine. The way I think about Roth versus traditional 401(k) is when you make a Roth 401(k) contribution instead of a tax-deferred contribution, you are forgoing the tax deferral right now. So, you're essentially making an assumption that at some point in time, when someone, you or your heirs, take the distribution, that your federal marginal income tax rate will be higher.
So, for lower income earners, maybe, maybe not. So, you really have to think carefully about the probability that your marginal income tax rate will be higher when you take the money out.
So, I think for high-income people, who are not constrained on their savings level if they forgo the tax savings it's a good hedge to do a mix, and it's really hard to calculate what the mix should be. But for a lot of people, I'd rather them have a higher level of savings, if that's what the tax deferral will give them.
Benz: So, Leisa, this is also a gift giving season, and you have some ideas for gift giving in the financial realm. What are those ideas?
Aiken: ... I really think gifts of financial education are really, really good gifts. So, it might be a subscription for teens or young adults. It could be books on financial education, there are lots of them and some are really great, and I think those are good.
Finally, if you have a child who works, a young adult or teen, and you're inclined to give them something, you may want to offer to give them a contribution for a Roth IRA, because I think that is a really great gift, and I think people often forget that.
Benz: So, it needn't be the full amount, it can just be a starter contribution?
Aiken: It could just be a starter contribution, and your website has a lot of good advice about what to do with that. For a young person, something with a long time horizon, and then can learn about investing.
And finally, just remember that spending less is not the same as saving during this time, and talk to your family, with your children, about your values around spending, saving, and gifting, and let them know why you're doing what you're doing during the season.
Benz: Okay. Well, thank you, Leisa, so much for sharing those tips. We appreciate you being here.
Aiken: Thank you, Christine. I enjoyed being here.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.