Four vital tax, planning, and financial housekeeping things to do by December 31Part II in a two-part series. New research from Fidelity Viewpoints. Visit fidelity.com
Surely, your clients want to feel on top of things and in control of their money. So, they should take the time to give those finances a year-end checkup.
Doing this before year-end gives them enough time to take steps to save on 2017 taxes and set up investments for success in 2018—without putting a damper on holiday cheer.
Sure, there are important financial housekeeping tasks that clients can tackle at any time of the year (see Year-round financial to-dos), like checking their credit reports or repricing their car insurance. But December 31 only comes once a year, and there are many key financial deadlines to meet before then.
Whether they’re currently working and saving for retirement, approaching retirement, or embarking on new post-retirement adventures, here are some core tax, planning, and financial housekeeping things to do by year-end.
1. Make sure to take your required minimum distributions (RMDs)
Stay on top of RMD deadlines—or you may face potential penalties and higher tax brackets.
Once you reach age 70½, you’re generally required to begin taking required minimum distributions (RMDs) from your tax-deferred retirement accounts by December 31 each year. You can choose to delay your first RMD until April 1 of the following year, but if you delay your first distribution, you’ll be required to take two RMDs in one year, which could bump you into a higher tax bracket.
Regardless of what you decide, don’t miss the deadline, as this can be a costly mistake. The IRS imposes a significant tax penalty up to 50% of the amount not taken. If you don’t need the cash to cover immediate expenses, you can always reinvest the money in a nonretirement account to generate potential growth or income.
Many people wait until December to take their RMD as one distribution, but why risk missing the deadline? You can have your RMDs calculated automatically each year and taken out of your account on a schedule that works for you—monthly, annually, or on a customized basis.
Tip: See how required minimum distributions work, and how to manage them. Think twice about delaying your first RMD. It could boost the taxes you’ll pay on the money you take out, affect the rates you pay for Medicare insurance, and potentially put you in a higher tax bracket the following year.
2. Manage withdrawals from taxable, tax-deferred, and tax-exempt accounts
Wait until the time is right for withdrawals from tax-exempt accounts like Roth IRAs, Roth 401(k)s, and HSAs.
How and when you withdraw money from your retirement accounts can affect how long your savings will last, as well as your current-year tax bill. In general, if you are age 70½ or older, it makes sense to take your RMDs first, then take withdrawals from taxable accounts (beginning with investments taxed at low capital-gains rates), followed by tax-deferred accounts like traditional 401(k)s and IRAs, which are taxed at higher ordinary income rates. Tax-exempt accounts—Roth IRAs, HSAs, and Roth 401(k)s—come last.
Tip: Depending on your tax situation, you may want to reduce your withdrawals from a tax-deferred account and instead withdraw from your tax-exempt Roth accounts. Why? Your withdrawals from tax-deferred accounts are treated as ordinary income and may bump you into a higher tax bracket. This strategy can be complex, however, so be sure to consult your tax advisor. Read Viewpoints: Manage your tax brackets in retirement on Fidelity.com.
3. Review your retirement income plan and investment strategy
If your lifestyle or goals change significantly—or, after big moves in the market—that’s the time to review your investments and, if necessary, rebalance.
It’s essential that you have a retirement income plan in place that generally seeks a balance of growth and wealth preservation over time—especially when there’s a risk of market downturn. As investments gain or lose value, you should review and adjust your mix of stocks, bonds, and cash to ensure that it remains aligned with your goals and risk tolerance. Life events may also dictate changes. You may also find that managing your portfolio is easier if you bring all your accounts under one roof.
When rebalancing your portfolio, you’ll want to take taxes into consideration. So make sure to work with a tax professional and financial advisor.
Tip: One way to keep on track is to set up a year-end review with an investment advisor. Read Viewpoints: How to work with a financial professional on Fidelity.com.
4. Maximize charitable giving
Consider QCDs as a giving strategy to fulfill RMD requirements if you’re 70½ or older.
In addition to donor-advised funds, another giving option that you may want to consider is a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity, and this becomes an option once you’ve reached age 70½. A QCD counts toward your RMD for the year, up to $100,000, and isn’t included in your taxable income.
Tip: QCDs can offer significant advantages, but the rules are complex—so be sure to consult with your tax advisor. A caveat: Donor-advised funds cannot be recipients of QCDs. Visit the Fidelity Learning Center and read QCDs – The Basics on Fidelity.com.
It’s worth it
Wherever you are along life’s journey, these to-dos are important parts of a year-end financial checkup. Most of them can be accomplished quickly, and the benefits can last a lifetime. So get started now, and use the year-end to make tax-smart moves that can help set you up for a prosperous new year.
Read Part I: Essential Money-Moves for Pre-Retirees here.
1. Assumptions based on: Single filer for 2017 tax year; taxable income $37,950 to $91,900; 25% marginal tax bracket; maximum contributions of $18,000 can yield a potential $4,500 tax savings; if over age 50, catch-up contributions of $6,000 bring total contributions to $24,000 and can yield a potential $6,000 tax savings.
2. A distribution from a Roth 401(k) is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death.
3. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses as described in IRS Publication 969. Tax advantages are with respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. See a tax professional for more information about the state tax implications.
4. A distribution from a Roth IRA is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.