Last-Minute Financial Planning To-Do's

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The clock is ticking on 2018. Joining me to share some last-minute financial planning to-do's is Tim Steffen. He is director of advanced planning for Baird.

Tim, thank you so much for being here.

Tim Steffen: Good to be here.

Benz: Tim, let's talk about some things that people should have on their to-do list if they are thinking about tightening up some financial odds and ends before the end of the year. You say that taking a look at your portfolio, assessing your asset allocation should be something to keep in mind if you are doing some sort of financial review.

Steffen: It's not the kind of thing you wait till the end of the year to do. You can do it at any time obviously. But as you are thinking about these things, and especially, given the volatility we've seen recently, taking a look at your asset allocation, making sure it's still within the ranges for asset classes and the weightings that you wanted, you are not over or underweight or anything like that, rebalancing--this is the right time of the year to kind of think about those things.

Benz: The advantage of doing that potentially at year-end is that you may identify some tax opportunities, especially in your taxable account. Let's talk about tax loss selling, because it strikes me that 2018 is a year when some investors will have some losses among their holdings. Let's talk about how to approach that. You obviously want to focus on your taxable accounts. Do you have any tips to share?

Steffen: As you are accumulating your data here at year end, take a look at what your realized positions, the realized gains have been so far this year. You may have sold some things earlier in the year that you forgot about. Go back and take a look at how you've done this. Your advisor can typically give you a year-end summary of where you are at from a gain/loss standpoint.

Benz: So, compare to your cost basis?

Steffen: Exactly. Yes. Look at what you've sold things for. Make sure your cost basis is accurate. Because if was a position you held a long time ago, your basis on the records may not be appropriate anymore, may not be correct. If it was something you inherited, make sure you adjusted the basis for date of death valuations, up or down. Or any other thing where the basis might have changed, maybe like a stock option exercise or something unusual like that. Get your basis done right. Determine your gains or losses. And if you are in that gain position, then look to see if you have maybe some ways to reduce some of that, offset it with some losses you might have in the portfolio.

Benz: One thing that we expect to see is some mutual funds making these capital gains distributions. They usually come right about this time of year. Potentially if you are someone who is getting one of these distributions, any thoughts on what you should do?

Steffen: Those distributions that come from a mutual fund, they are capital gains. It's no different than if you've sold something yourself. It's a gain that you can offset with losses that you might have. Keep that in mind, as you are getting a word from these funds, as they start trickling out, what the gain distributions are going to be. You may want to offset some of those with some losses, too.

The big thing in all of this is, don't get too hung up on the tax side. Remember, these are investment decisions first. Whatever you are buying or selling, make sure it's a right investment decision, especially if you are selling for a loss.

Benz: Another topic I want to hit on is what's called tax gain harvesting. Let's talk about what that is. It doesn't seem at first blush like something you'd want to do, but actually there may be that tax benefit for certain taxpayers.

Steffen: There maybe reasons to accelerate gains or to realize some gains. The common scenario we see is somebody who has got a loss will say, well, I have a loss maybe I should realize a gain. That's not always the best reason to realize a gain. That loss isn't going anywhere. That's got some value to you. You can save that and use it in a future year if you want. But if you've got something that from an investment standpoint makes sense to sell, you've got that loss that can help minimize or even eliminate the tax cost on it.

The other reason to sell is maybe looking at your tax bracket. You might be in that zero percent capital gain bracket where you can realize a gain at no tax cost. People get surprised at how much income you can actually have before you are out of that 0%. That may be another consideration in terms of realizing gains.

Benz: What's the advantage of pre-emptively realizing a gain in that case? Say, you are someone who is in that 0% capital gains tax bracket.

Steffen: So, let's say, you can sell something, it's got to be long-term, you should hold it more than a year, you can sell and realize a gain. If you are in that 0% bracket, you can realize the gain, it's part of your income, part of your AGI, but the tax rate on it might be zero. Then you can turn around and buy right back again if you want. Unlike the wash sales where you sell something at a loss, you have to wait a period before you buy back with gains; that's not the case.

If it's something you really want to own, and you own it for a while, you may be able to sell it, reset your basis essentially at no tax cost. You've got to be careful with that. There's a lot of other things that can be impacted by realizing the gain. Even though the gain may be taxed at 0%, it could have another effect in your return elsewhere. So, you got to be careful there. But it can be something to consider.

Benz: It sounds like with all of these things, get some tax advice unless you are super-duper comfy with tax matters. Let's talk about last-minute retirement plan contributions. You actually have until April 15, right, for IRAs, but the company retirement plan contributions have to go in before year end.

Steffen: 401(k)s, you got to have those maxed out if you are going to do that before the end of December. So, that's a salary deferral thing. You've got to make sure you work with your employer to get that money in before the end of the year. IRAs, yeah, you do have until April 15. If you extend your return, you don't get to extend the time to make a contribution. So, make sure you get it in before that April 15 deadline. That's traditional or Roth IRAs, same thing. If you are 70 1/2 now, you can still contribute to your 401(k), but you can't contribute to an IRA. So, you got to keep that in mind as well. Remember, you turned 70 1/2, you are taking money out of IRAs, you should not put money into it anymore. So, be careful there. But otherwise, yeah, April 15 is the date on IRAs.

Benz: And then, maximum allowable contributions are going up a little bit, right, for both 401(k)s and IRAs?

Steffen: Yeah, they are going up about $500 a piece or so. Youll be able to put some extra money away, but that's not until 2019. So, even if you make your IRA contribution in April of 2019, if it's for 2018, you are still subject to the old contribution levels. That's only if you do it for the calendar year 2019.

Benz: But if I'm setting my 401(k) contributions, I should look to those 2019 figures?

Steffen: Absolutely. Usually, that's done as just a percentage of your income. The employer will keep making that contribution until you hit the max. You may just be contributing for a little bit longer next year because of the higher contribution limits.

Benz: Let's talk about charitable giving, because this is one piece of financial planning due to the changes in the tax code that is pretty different in 2019.

Steffen: It's different, but it isn't different. I mean, the rules about charitable giving specifically haven't really changed all that much. In fact, if anything, they have loosened the rules and made it easier to deduct more of your gifts this year. The problem is, all the other changes they made on the deduction side will make it harder to itemize. With the increase in the standard deduction the limits on other types of deductions that you can claim--the state tax deduction, the home equity interest, the miscellaneous deductions, all of those being capped or eliminated--it will be harder to itemize, and if you don't itemize, your charitable gifts don't provide a tax benefit. So, it is a little trickier this year to determine what's the real tax benefit of your charitable gifts.

Benz: Which is not to say you shouldn't be charitable, but you may not get as much of a tax benefit. But let's talk about people who are subject to required minimum distributions. I know a lot of our viewers are taking their money out of their IRAs. They actually can get a tax benefit.

Steffen: Absolutely. So, if you are over 70 1/2, you can take money directly from your IRA, go right to a charity and it's not reported as taxable income to you. You also don't get to deduct contribution, you don't get to double dip there. But if you are subject to some of these new rules where it's going to be harder for you to get a tax deduction for your charitable gifts, this is a way to still get a tax benefit for that. It's got to go directly from the IRA to the charity. It's only IRAs. You can't do it from a 401(k) or something like that. And you have to be 70 1/2 at the time of the gift, not just the year of the gift but at the time of it. So, if you don't turn 70 1/2 until April, you got to wait till April to do the gift.

Benz: Say I have a little extra time and I want to check off a few other things, what are some good sort of financial planning maintenance things to do at this time?

Steffen: They talk about changing the batteries in your smoke detector when you change your clocks, year end is a good time to think about some of these kinds of things, like reviewing your estate documents, for example. If you've got married or divorced, there was a birth or a death in the family, if you relocated to a new state, your estate plan may need a review. It's a good time to take a look at that.

Related to that would be beneficiary designations, retirement plans, life insurance policies, trusts that you have. Make sure those designations are still correct. Related to that would be executor or guardianship designations you made, are those still appropriate. Review the whole financial plan and everything. Even take a look at things like your online passwords and that. Maybe this is the time of year to reset those.

Benz: Or use one of those password minders which are …

Steffen: Absolutely. Automatic generators or something like that to update all that information.

Benz: Lots of helpful tips there. Tim, thank you so much for taking the time to be here.

Steffen: You bet, Christine.

Benz: Thanks for watching. I'm Christian Benz for Morningstar.com.