Year-end Planning Opportunities

Ben Waller |

    As the year comes to a close, it is an opportune time to take a moment to review how financial events have unfolded for you this year. Planning done earlier in the year, or in prior years, is based on many assumptions. With actual investment results and income figures starting to take shape, a year-end analysis can uncover opportunities not previously considered. It can also serve to reaffirm the validity of earlier decision making. The timing will be important as some decisions will need to be made before the end of the calendar year, while for others there is time prior to tax filing deadlines. 

    2020 was unique in many ways. One outcome of the CARES Act, The Coronavirus Aid, Relief, and Economic Security Act, the $2.2 trillion economic stimulus bill passed in March of 2020, was that for many individuals, taxable income in 2020 will be significantly lower than in a “normal” year. For individuals over the age of 72, or those who are current beneficiaries of inherited IRAs, the suspension of the RMD (required minimum distribution) has given some the flexibility to lower retirement account distributions and the corresponding amount of taxable income reported on 2020 income tax returns. 

    If you think that tax rates could go up in the future, now is an even more compelling time to consider taking advantage of the opportunities available today. If you have stock options that will expire in the next few years, consider exercising them during this calendar year. If you are a business owner with flexibility in the timing of recognizing income, doing so now may also be worth considering. This analysis must also include state and local tax considerations. With state budgets feeling the impact of the Virus, it could be that certain state rates will be higher in the future too. Please consult with your tax advisor to discuss how this may impact you in the future.

    Year-end planning for those whose income in 2020 was lower than originally anticipated expected to be higher in the future could include a Roth Conversion. This involves taking taxable distributions from pre-tax retirement accounts such as Traditional IRAs, 401ks, or SEP IRAs, and distributing the funds directly to a Roth IRA. Since 2020 has given many a one-year holiday on required distributions, there may be many taxpayer’s who would benefit from this strategy, given the possibility of temporarily lower effective tax rates. 

    Once a distribution goes into a Roth IRA, the funds grow tax free and any future Roth distributions are not subject to income tax. A Roth Conversion needs to be completed prior to 12/31 to qualify for that tax year. By paying the taxes on distributions now, a tax payer could accomplish the following:

1.    Pay taxes at a potentially lower tax rate now than would apply in the future on the distribution.
2.    Reduce taxable income in future years by reducing the value of retirement accounts subject to RMD rules. 
3.    Create a tax-free account and the flexibility to use it for cash flow needs in the future.
4.    Provide a better asset for heirs to inherit while reducing the size of your taxable estate. 


    If your income for 2020 was higher than originally anticipated, there are several options available to reduce your taxable income, depending on your specific circumstances. Please be sure to consult with your tax advisor about how this may benefit you.

1. HSA Contribution (Health Savings Account) If you are currently enrolled in a “High Deductible” health insurance plan, you may be eligible to contribute to a Health Savings Account (HSA). Contributions are tax deductible and account balances grow tax free with no tax due upon withdrawal if funds are used toward qualified medical expenses. HSA contribution for 2020 is due April 15, 2021.

2. Donor Advised Fund (Charitable Donation Account) Contributions to a donor advised fund qualify as a charitable donation and can be used as an itemized deduction on your federal income tax return. A donation can be made to the donor advised funds, and that account can fund many future years of giving. Gift must be given prior to 12/31 to qualify for a donation for the relevant tax year.

3. 529 Account (College Savings Plan) In many states, contributions qualify for a state tax deduction. Account balances grow tax free and withdrawals are tax free if used for qualified education expenses. Contribution must be made by 12/31 to qualify for the relevant tax year.