I realize the holiday season can be overwhelming; there are gifts to buy and family logistics to arrange. And I know the last thing you want to do is add something to your to-do list.
But you’ll thank me for this later.
Tax season might not be on your radar right now, but you should know that there are some tax-related items that should be taken care of before December 31st. Although most tax returns aren’t due until April 15th, you should ask yourself the following questions before 2019 comes to a close:
- Can you contribute more into your qualified accounts, like your 401(k)?
- Were you planning on making any tax-related gifts for 2019?
- Do you have some income that you need to defer until 2020 to help with your taxable income for 2019?
And then there’s the big question: Is a Roth conversion an option for you?
What is a Roth IRA conversion?
In a nutshell, a Roth IRA is another type of account that can be used for retirement planning. You can open a Roth account or convert funds from an already established Traditional IRA. The difference between a Roth IRA and a Traditional IRA are:
- With a Roth IRA, the contributions are made after taxes.
- It allows for tax-free growth and tax-free withdrawals if you have owned it for at least five years and are 59 ½ or older.
- There are no required minimum distributions (RMDs).
- There are no taxes on withdrawals made by a beneficiary.
The reason all of this is important is because when a conversion takes place, taxes will be due in the year of the conversion – you can convert all the funds or a portion of your account value.
Additionally, if you’ve had a low income-producing year, this might be a good option for you because it may put you in a lower tax bracket. It might also be helpful when there is a favorable tax environment.
What else do you need to know?
It’s important to keep in mind that tax laws are forever changing and can be difficult to keep up with. When it comes to being prepared and meeting your deadlines in 2019 and 2020, here are a few changes you should be aware of:
- Elimination of the Alimony Deduction began in 2019. This is for divorce or separation agreements made or modified this year, or after.
- The contribution limit for 401(k), IRA and other retirement plans rose this year! 401(k) contributions rose from $18,500 to $19,000, and IRA contributions rose from $5,500 to $6,000 (first increase since 2013). Limits for catch-up contributions for those 50 and older were left unchanged. Check your contributions to see if you can contribute more before end of the year.
- There are also higher HSA limits and standard deductions.
Here’s what to do next
When it comes to all of these details, it’s important to make sure both your CPA and your financial advisor are on the same page you are. If you work with a financial advisor and a CPA who are willing to work together on your behalf as a mutual client, you can give each of these professionals permission to work on possible tax-saving scenarios together to present to you for your consideration.
Be prepared with the following information:
- Recent paycheck(s)
- Deductions (unless using the standard deduction)
- Business income and expenses (if you are a business owner)
You might also want to review your employer’s benefits page, with special attention to things like 401(k) contributions and Health Savings Accounts (HSAs).
Again, I know that while you’re in holiday-mode, figuring out your taxes is the last thing you want to do. But by taking a look at a few things now, you just might affect your bottom line in the future.
And it could help you stay on the “nice” list.
Melissa Thompson is an Investment Advisor Representative holding a ChFC® designation in the Castle Rock, CO and Denver, CO areas who focuses on educating individuals and small businesses about the importance of protecting and growing their financial assets. “My preliminary meeting process is a chance for us to talk about where you are and where you’d like to go. You’ll have the opportunity to make sure that my services fit your unique needs before you commit to moving forward. I look forward to creating life-long relationships with my clients and taking the fear out of financial planning.” To schedule a consultation with Melissa, CLICK HERE. (11/21/19)
These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided. Prior to rolling over any plan assets to an IRA, an individual should carefully consider various factors such as, investment options, fees and expenses, services, penalty-fee withdrawals, protection from creditors and legal judgments, required minimum distributions, and employer stocks depending on individual needs and circumstances.