[Especially with year-end tax planning season now under way, many advisors and financial planners recommend that it is vital to go beyond just “tax planning” to consider the entire wealth balance sheet to capture all the benefits and opportunities available. Many wide-ranging variables should be considered before implementing any planning strategy.
To better understand the issues involved, we reached out to Institute member Alyssa Yocom, CPWA, CFP, and wealth manager at Schultz Financial Group (SFG) – an independent RIA firm with a decades-long commitment to deepening client relationships and offering a unique integrated package of services to create a working partnership with their clients. SFG has implemented a more holistic and carefully integrated family and business wealth planning approach by bringing “the Four Capitals of Wealth” to their service offering. We asked Alyssa to offer an article we can publish to share with us their thoughts and approach to tax and wealth planning.]
Year-End Wealth Management Planning by Alyssa Yocom, Schultz Financial Group
The fourth calendar quarter offers a time for reflection and planning. As we look back on what has occurred this year and into what next year may hold, we are offering this article to highlight some of the planning strategies that Schultz Financial Group considers for each client as a part of our year-end wealth management planning process.
Planning For Investments
We perform an ongoing review of client portfolios throughout the year. In the fourth quarter, we are able to analyze what has occurred within the client’s portfolio this year and what we may expect from the portfolio for the remainder of the year. We consider capital gains or losses that have been realized and whether tax-loss or gain harvesting is appropriate. Harvesting losses may help offset realized gains and potentially reduce ordinary income. Harvesting gains ensures the use of the 0% long-term capital gains bracket.
Retirement Plan Considerations
As an extension of reviewing a client’s investment portfolio, Schultz Financial Group analyzes the makeup of the accounts within the portfolio. Cash flow permitting, an individual may want to increase their retirement plan contributions up to the annual limit. We review each client’s income and retirement accounts available to determine the proposed contribution strategy across accounts.
One strategy available to high income-earners with sufficient cash flow is the mega backdoor Roth conversion. If an individual can maximize their retirement plan deferrals and still has a desire and ability for further savings, they can make non-deductible contributions to their retirement plan. Keep in mind that the retirement plan must specifically allow for non-deductible contributions to the plan.
Health savings accounts (HSAs) are often overlooked as their contribution limits are lower than that of defined contribution plans, such as 401(k)s. However, HSAs offer three tax advantages:
1. Contributions to an HSA are tax-deductible. Furthermore, contributions made through payroll are not subject to FICA and FUTA taxes.
2. Interest and investment earnings grow tax-free.
3. Distributions from the HSA are tax-free when used for qualified medical expenses.
A common pitfall is forgetting to invest the funds that are saved in a health savings account. When a client has an HSA, we discuss maximizing their contributions and investing the account. Since the investment growth is tax-free, the compounding of investment returns within an HSA can be very meaningful over time.
It is often an optimal strategy to cover medical expenses from cash flow to allow the health savings account to remain invested until retirement.
Tax Planning
Required Minimum Distributions (RMDs) are a significant factor in year-end wealth management planning for many of our clients as these distributions are taxable and impact figures like a taxpayer’s modified adjusted gross income – which is used in several calculations such as determining the taxable portion of Social Security and Medicare premium adjustments. Individuals with inherited retirement plans or individuals above age 72 may be required to take minimum distributions from their retirement accounts. It is critical that the RMD is calculated accurately and distributed on-time to avoid a 50% penalty by the IRS. We offer to calculate and help facilitate RMDs for our clients. There are several strategies to consider when distributing an RMD:
1. Qualified charitable distributions (QCDs) can be considered for all individuals above age 70½ with an individual retirement account. QCDs are cash donations from IRAs to qualified charities. A QCD will satisfy an individual’s RMD and is a non-taxable distribution. QCDs are limited to $100,000 and must be made from an IRA as they are not allowed from qualified retirement plans or ongoing SEP or SIMPLE IRAs. Furthermore, IRA distributions follow the first-dollar-out rule. This means that if you take a distribution from your IRA in excess of the RMD amount for the year, only the first dollars up to the RMD are considered as satisfying the RMD. Because of this rule, it is a good practice to make a qualified charitable distribution prior to taking the remainder of your RMD if you intend on taking any excess distribution.
2. If the client does not need cash or taxes to be withheld from their RMD, an in-kind distribution may be the optimal strategy. Distributing shares in-kind to satisfy the RMD can be a particularly advantageous strategy in years where investment assets are down. The amount of the investments distributed in-kind will be subject to ordinary income tax, as with any form of RMD. However, the investor will effectively be converting any future appreciation of that asset to preferential capital gains treatment. The future appreciation would be subject to ordinary income tax if it were left in the IRA for a future distribution.