The 3 Things To Do Before the End of the Year test

As we all get ready for an unusual holiday season, it is easy to forget the housekeeping items we need to take care of before the year runs out. A smart Christian plans ahead to end the year in good shape and starts the new year with the right foot. Here are three things I help my client with as a Christian financial planner to prepare for the new year.

Last call for tax planning

We love to hate taxes. Yet tax season does not have to be painful! If we plan carefully before the end of the year, filing taxes will feel like a breeze. December presents the final opportunities to optimize your tax situation. If you already work with an advisor, it is the perfect time to get in touch with them and do a quick walkthrough of any additional opportunities you can tap. We discuss with our clients the following topics to make sure we are maximizing value in this season:

• Income - Verify if we estimated your income correctly at the beginning of the year and you had the appropriate tax withholdings or estimated payments. If you did not, it’s not too late to make an additional payment to the IRS or your state revenue agency to minimize the possibility of penalties. Any unexpected bonuses or self-employment income could throw off our original estimates.
• Retirement Contributions - Confirm that your IRA contributions were deposited into retirement accounts as planned, and if not, determine additional contributions before the tax deadline. One of the advantages of IRA contributions is that you have until the tax deadline to contribute towards the prior year limits without impacting the current year’s contributions. Suppose you have additional room in your tax bracket before hitting the next marginal tax rate; it may make sense for you to convert assets into a Roth IRA. In that case, we take the necessary steps to ensure you execute a Roth conversion correctly.
• Taxable Investments - After year-end fund distributions or stock dividends, we factor in this additional income that we can’t control to make sure it aligns well with any other tax minimization strategies we are putting in place. We may also find opportunities to sell investments at a gain if you need to raise cash for the short-term or at a loss if you need to offset higher than expected gains without increasing your tax bill. Finally, we assess the value of donor-advised funds to ensure we maximize your deductions.

Don’t forget your RMD!

Required Minimum Distributions (RMDs) were created by Congress to prevent seniors from amassing sizable IRA balances without giving the government their cut. During your working years, the government gave you a break from taxes to incentivize you to save that money. In retirement, they want you to spend it so they can get their long-delayed tax revenue. Your RMD begins at age 72, and we calculate it by dividing your total accumulated IRA balance by a distribution factor provided by the IRS based on life expectancy. You can use different strategies to minimize the bite of RMDs over your lifetime, but inevitably, you will need to pay taxes on that money eventually.

You can’t mess with RMDs. The consequences of not taking your RMD could cost you 50% of the RMD amount in penalties. RMDs will also increase as you age because the IRS factor method’s objective is to make sure you empty as much of your account as possible before you pass. This RMD issue is one reason why we help our clients determine if Roth contributions or conversions are useful tools for them to mitigate this situation.

Leverage your IRAs for generosity

If you are older than 70½, you can access a unique tool inside your Traditional IRA called a Qualified Charitable Distribution (QCD). Originally designed to encourage charitable giving from seniors with large IRA balances, it is a powerful tool for your charitable aspirations if you want to manage your income in retirement and reduce RMDs in the future.

The rules are relatively simple. Starting at 70½, you can write a check of up to $100,000 to a 501(c)(3) charity directly from your IRA every year. The amount of your contribution gives you a double benefit. First, it meets your RMD dollar-for-dollar; you can also reduce your Adjusted Gross Income (AGI) by the same amount of the distribution, which essentially makes the distribution tax-free.

If you do not use the QCD tool, you will pull the amount of your donation first while incurring taxes and then donate the after-tax amount to the charity. Using the QCD tool, you can essentially bypass this issue by making a tax-free donation to your local church or charity of choice. For seniors that want to tithe out of their IRA or contribute to a charitable fundraiser, it boosts their contributions by canceling taxes and reducing the assets in an account that will create tax consequences in the future.

Don’t let the end of the year surprise you, and check out this useful tool to do your year-end check-up. If you want to learn more about taxes and retirement contributions, our Master Class How to Build a Christian Financial Plan goes into greater detail to equip you to make good financial decisions. Consider that diligent preparation can help you win tax season before it even begins. Take advantage of the tools at your disposal to clean up your finances today and be ready for the new year ahead.

Leo Marte is a Christian financial advisor and CERTIFIED FINANCIAL PLANNER™. Abundant Advisors provides financial advice for Christians with convenient virtual meetings. Let’s talk if you are ready to make the next move.