Plan a Year-End Financial Review

Plan a Year-End Financial Review
Plan a Year-End Financial Review
John O’Rourke.

When it comes to year-end tax planning, there is always a lot to think about. Working with a qualified tax professional can be key in assessing tax-saving opportunities before the year-end. Here are just a few to consider.

Tax-Loss Harvesting
Tax-loss harvesting, selling securities at a loss to offset capital gains tax liability, can be one of the most critical tools for reducing taxes. The strategy is typically employed at year-end and tends to focus more on limiting short-term capital gains, which are taxed at a higher income tax rate than long-term. With tax-loss harvesting, an investment with an unrealized loss is sold and in turn provides a credit against any realized gains within the investment portfolio. This lessens the impact of the overall loss, reduces the capital gains tax liability and maintains the portfolio’s overall investment objectives by replacing the sold asset with a similar one.

IRAs and Retirement Plans
It is important to take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans, such as 401(k) plans, allow one to contribute funds on a deductible (if qualified) or pre-tax basis, reducing taxable income. Contributions to a Roth IRA (assuming income requirements are met) or a Roth 401(k) are not deductible, so there is no current year tax benefit. However, qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2018, individuals can contribute up to $18,500 to a 401(k) plan ($24,500 if age 50 or older) and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if age 50 or older). The window to make 2018 contributions to an employer plan typically closes at the end of the year, with the deadline for IRA contributions typically the tax filing deadline, which will be April 15, 2019.

Roth conversions
Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. Whether a Roth conversion is appropriate depends on current and projected future income tax rates. For example, if one’s current tax bracket is lower than what it is expected to be at retirement, converting may make sense.

Consulting a tax advisor is highly recommended, particularly since recent legislation has eliminated the option to re-characterize or “undo” a conversion. Once it’s done, it’s done.

Health Savings Accounts
A Health Savings Account (HSA) is tax-advantaged and can be a powerful savings tool for those with a high-deductible health plan. Withdrawals and investment gains within the account are never taxed so long as they are used for qualified medical expenses. Tax-deferred contributions for 2018 are limited to $3,450 for individuals and $6,850 for families. This limit applies to all contributions, whether they are made individually, by the employer, or family members. For those qualified, an additional $1,000 “catch-up contribution” is available at age 55 or older, for either individual or family plans. The opportunity to make contributions is eliminated at age 65 when enrolling in Medicare and 2018 contributions can be made up to April 15, 2019.

John O’Rourke is First American Bank’s Private Banker and Wealth Advisor for South Florida. As a relationship manager for high net-worth individuals and their companies, he assists clients and family members with a variety of banking and wealth advisory needs. If you have any questions or comments, contact John at Jorourke@firstambank.com. First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.


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