Year-End Planning

Sep 2018


With the weather as nice as it’s been, it seems a little early to write a column like this; however, the calendar says otherwise. What I am referring to is year-end planning. It’s hard to believe we’re talking year-end; however, as we enter the fourth quarter of 2018, we realize there’s not much time left to 2018.

This year’s year-end planning is going to be very different for many people because of our new tax laws. In prior years, one of the year-end strategies was to decide whether you should accelerate deductions such as charitable contributions into the current year; however, that all changes because of the new tax law. That is why I believe the first thing that everyone should do with regard to year-end planning is figure out whether they are itemizing their deductions or taking the standard deduction. With the standard deduction doubling in 2018, I’d imagine that the great majority of people will find that they are no longer itemizing their deductions but rather, using the standard deductions. Therefore, someone’s year-end tax strategy may be totally different than it was a year ago. It is also important to figure out where you are from a tax bracket standpoint. Brackets have changed and it’s important when doing any year-end planning to know what bracket you’re in. Therefore, the first step in regard to doing any year-end planning is to figure out where you are from a tax standpoint.

From a tax and economic standpoint, one thing everyone should consider is whether they should convert existing IRA money into a Roth IRA. As I’ve mentioned many times in the past, the benefit of this transaction is that it allows you to take tax-deferred money and convert it to tax-free money. The other benefit of doing a Roth conversion is money in a Roth IRA is not subject to minimum required distributions. Therefore, at 70½ you can continue to leave the money in a Roth IRA growing tax free.

The rules I use to determine whether someone should convert an existing IRA into a Roth IRA are relatively straightforward and simple. The first rule is you must have the money to pay the taxes on the conversion without touching any of the money that you are converting. It is important to remember that when you convert a traditional IRA into a Roth IRA you are paying taxes on that transaction. That is one of the downsides of a Roth conversion; however, it is important to remember that you are not paying more taxes; you’re just paying your taxes earlier.

My second rule is that by converting your money it won’t throw you into a higher tax bracket. That is why it’s so important, particularly this year, to look at your tax situation and understand where you stand. You could use last year’s tax return as a guide, but it is important to pull out the new tax laws and determine exactly where you are.

My third rule is that you are able to let the money grow in the Roth IRA for at least five to seven years. If you meet all three criteria, then the Roth conversion makes sense.

Remember, that a Roth conversion is time sensitive. The transaction must be completed by the end of the year. Therefore, while there is still plenty of time and you won’t feel under pressure, now is the time to make the calculations to determine whether a Roth conversion is viable or not.

For those of you over 70½ taking a required minimum distribution, it is important to remember that you cannot convert your required minimum distribution; however, you can convert anything above and beyond that.

Many of you who are still working have flexible spending accounts and now is a good time to go through those accounts to make sure that the money is spent. Not all employer plans are the same and it is important that you understand the terms of your plan. Some plans provide that if you don’t use the money by the end of the year you’ll lose it. Other plans are a little more generous. However, either way it is important that you go through your flex spending accounts to make sure that you don’t lose the money and wait until the last second and then use it on something you really don’t need.

The year-end is just around the corner and if you are going to do any year-end planning, it is important to begin the process as soon as you can. After all, before you know it the leaves will be on the ground and winter will be around the corner.

Good luck!

If you would like Rick to respond to your questions, please email Rick at