6 Year-End Retirement and Tax Planning Ideas + a Story

Since 2022 will soon be in the history books, this week I offer retirement and tax planning ideas to consider before the year ends.

I would like to extend Happy Thanksgiving to everyone reading this week’s blog. I hope you have a wonderful holiday and get to spend some quality time with family and or friends who matter to you.

But before I get to the retirement and tax planning ideas this week, I wanted to share a story about this past weekend.

When it comes to financial planning and saving for retirement, it’s not about growing the largest portfolio or beating the market. Sure, having more money is nice, but trying to beat the market also implies taking on more risk. That could result in having less than you had hoped or planned. That could keep you from living your desired lifestyle both now and in retirement.

LIFE PLANNING

At Apprise, Life Planning is an integral part of the financial planning process. Life Planning helps us – and you better understand what matters most to you and identify your priorities. (See here for more information about Life Planning.)

A few months ago, I wrote Experiences Matter. In that blog, I discussed a trip I took with our second son Daniel. My wife and I want to give our kids experiences that they can remember. We value sharing experiences with our kids rather than providing them with things. We hope they’ll remember our shared experiences long after we are gone.

As a financial “advicer,” I believe in transparency and focusing on the human side of life. These are things I encourage clients to do as well. While it’s not always the case, we try to spend our money with purpose, too. Again, Apprise’s clients are encouraged to take this approach as well.

LACROSSE TRIP

This past weekend I had an opportunity to take our daughter Sarah to a lacrosse tournament in Dallas. Her prior tournaments have been in Maryland and other nearby states. This was easily the farthest we’ve traveled for her to play. I don’t often get to spend much one-on-one time with Sarah. It was a wonderful opportunity to be with her and share in seeing her play a game that she enjoys.

While lacrosse is quite popular in Maryland – especially where we live – Sarah is the first one in our family to play lacrosse. All three of her older brothers played baseball as their spring sport. Sarah tried playing t-ball one year but didn’t enjoy it. She did play basketball and soccer, like her brothers, but eventually decided to focus on lacrosse.

Her experience got off to a slow start. She played at the rec level and struggled at times. She tried out for some club teams as she got a little older but didn’t make it. While I have never played lacrosse, one year I coached her rec team. My assistants knew the game, but I was asked to share my experience as a coach with those who had not coached in the past. Needless to say I’m glad that Sarah has much more knowledgeable and experienced coaches now.

CLUB LACROSSE

Finally, as she entered her high school years, Sarah earned a spot on a club team. It was touch and go as to whether or not she’d make it, but, in the end, she was awarded a spot.

It was still a struggle at times, and she didn’t get a lot of playing time. But she has improved significantly. In fact, this weekend several of the other parents who made the trip told me how much Sarah has improved and what a good player she has become. As a dad, it’s hard to put into words how nice it is to hear that from others.

Our trip got off to a bit of a rough start in terms of getting to the airport, but we ultimately arrived at our destination. The team went 2-2, which was a good outcome. The highlight for me was the second game. Sarah plays defense. The team’s best defender got two yellow cards early in the game. That meant she had to sit out the rest of that match. Sarah really stepped up her level of play. Her team pulled out a 6-5 win by scoring the last two goals of the game.

Friday night we went with most of Sarah’s teammates and the other parents to see a live rodeo. Like many of the girls, Sarah rooted for the animals in several events. What the cowboys were trying to do to the animals seemed a bit cruel. I admit I agreed. It was one of those experiences where we can say we did it, but we don’t need to do it again.

After Sarah’s second game on Saturday, we grabbed a quick dinner and then went to see “Wakanda Forever.” It made for a late night, but both of us enjoyed the movie and the night.

Sunday morning, we finally ventured to downtown Dallas’ historic district where we had a nice breakfast. We had just enough time to go to the area where JFK was shot. Sarah’s team lost her last game, and it was time to begin the trek back home.

CLOSING THOUGHTS ON OUR TRIP

I also appreciated some of the little things that can so easily go unnoticed. For example, there was the bookmark Sarah used to mark her progress in the book she was reading on the plane. I told my wife about this. She said, “That’s what girls do.” I don’t doubt it. I just hadn’t noticed it before. We both enjoyed the audiobook we listened to as we drove around Dallas and to and from the airport. It’s a Harlan Coben book. As some of you may know, Harlan was one of my high school classmates. We didn’t quite make it to the end yet, but I’m sure we will soon.

I appreciated the considerable care Sarah took to get ready to go to the rodeo. She wanted to wear something “rodeo-appropriate” while also looking her best. She succeeded.

As for the trip itself, unlike the rodeo experience, I can say that I look forward to the next time. It can be hard to get one-on-one time with your kids, especially when you have four. You must be intentional and make sure it happens. I’m lucky to have shared the experiences I did with Sarah this past weekend.

Thanks for reading my story. I appreciated the opportunity to share it.

On to this week’s main topic.

RETIREMENT AND TAX PLANNING IDEAS

2022 will soon end. The new year is less than six weeks away. For investors, 2023 has not provided much in the way of smooth sailing. Hopefully, 2023 will deliver calmer seas and a less contentious political environment. Unfortunately, we can’t say for sure what will happen. When it comes to forecasting, our crystal ball is permanently cloudy.

I’d like to share some retirement and tax planning ideas to consider before year-end as you think about what you can do to improve your finances and tax position.

1. Retirement Planning

a. Required Minimum Distributions

Those who are at least 72 or older by year-end should take their required minimum distribution (RMD). Note that if you turned 72 this year, you could delay your RMD until April 1, 2023. But that’s not typically recommended for most. Why? It means you must take two RMDs in 2023, which can increase the associated tax rate. If you have a pre- 2020 inherited IRA, you also must take an RMD this year. If you inherited an IRA in 2020 or later, you may be subject to a 10-year distribution rule, but you don’t have to take an RMD in 2022.

b. Qualified Charitable Distributions

Those who are at least 70 ½ years old can make a qualified charitable distribution (QCD) from their IRA to satisfy part or all of their RMD. You can donate up to $100,000 annually directly from your IRA to a 501(c)(3) charity. The amount donated gets excluded from your income. The deadline for QCDs is December 31^st, but you should start the process earlier than that. Otherwise, you might not complete it on time.

c. Contributions to Employer Retirement Plans

The maximum contribution for 2022 is $20,500. If you’re 50 or over, you can also make an additional $6,500 catch-up contribution.

d. Consider a Roth conversion

Yes, I mention this one frequently (e.g., see here). A down market can make Roth conversions even more valuable. They can also add value for you, your surviving spouse, and your heirs. While you must pay current income taxes on Roth conversions, they help diversify the tax treatment of future distributions. That can make it easier to manage the overall tax rate associated with withdrawing money in retirement and lower the overall tax cost associated with your retirement assets.

2. Charitable Giving

a. What assets should you donate?

If you have appreciated assets in your taxable accounts, consider donating them rather than cash. Why? You won’t owe any capital gains taxes. For example, say you purchased shares of XYZ stock for $50 and those shares are now worth $150 (it’s unlikely these were purchased this year). If you want to donate $3,000 to your favorite charity. You can donate 10 shares and claim a potential $3,000 tax deduction. You won’t owe capital gains taxes (up to 20%) on the $1,500 gain. Using a 20% tax rate, if you sold the shares to raise the cash for the donation, you would have to sell 11 shares instead of 10 to have $3,000 in after-tax funds.

b. Consider bunching deductions

Since the passage of the Tax Cuts and Jobs Act of 2017, it’s become much harder to itemize your deductions. The primary deductions most of us can take are for real estate and income taxes, mortgage interest, and charitable contributions. You can only deduct $10,000 from your taxable income. Depending on your interest rate, your mortgage interest deduction could be relatively small, too. The standard deduction is $25,900 ($28,700 for a married couple if both are 65 or older). Say you donate $5,000 annually and pay another $12,000 in mortgage interest. That means you’ll claim a $1,100 tax benefit ($27,000 – $25,900) for your charitable contributions. You’ll get only a small additional benefit for your contributions.

What if you could do this instead? Make a $15,000 contribution this year. You could use a donor-advised fund, so that you can still give the money out over time, too. You’ll have $37,000 in itemized deductions this year ($11,100 excess). Then you’ll get $25,700 each of the next two years. That gives you total itemized deductions of $88,800. If you don’t bunch your deductions, you’ll only get to deduct $81,000 over the three-year period. The actual benefit could be even larger if you consider that the standard deduction typically increases some each year.

3. GIFTING

a. How much?

2022, individuals can give up to $16,000 tax-free annually to another individual. This figure increases to $32,000 for a couple. In other words, a married couple can transfer up to $32,000 a year to each of their children, grandchildren, or anyone else without impacting their estate or needing to file a gift tax return.

b. Other Considerations

Gifting securities during a down market can provide additional value. It shifts the appreciation to the recipient. This can be advantageous if that person has a lower tax rate. Depending on your age and health, this could be less advantageous if there is a chance the asset could be transferred at death and get a basis step up to fair market value.

4. HEALTHCARE SAVINGS

a. Flexible Savings Accounts

Remember that amounts contributed to a Flexible Savings Account (FSA) for healthcare generally do not roll over to 2023. Some employer plans will give you until March to spend the money.

b. Health Savings Accounts

If eligible for a Health Savings Account (HSA), you can contribute up to $3,650 (individual) or $7,300 (family). Those who are 55 or older can contribute an additional $1,000. For a married couple, the one covered by a spouse’s plan will need to open their own HSA to make this additional contribution. See this blog for more information on HSAs.

5. REVIEW REALIZED GAINS AND LOSSES

a. Consider tax-loss harvesting

Given the market’s performance this year, you may have opportunities to claim capital losses. You net gains against losses first. If losses exceed gains, remember that you can claim a tax loss of up to $3,000 a year. Any additional losses can be carried forward to future years.

6. BUMP UP WITHHOLDING TO COVER A TAX SHORTFALL

a. Increase Payroll Withholding Amounts

If it looks like you could owe taxes this year, consider increasing your withholding on Form W-4 for the balance of the year. Importantly, the IRS considers withholding amounts as having been paid throughout the year rather than at the time the taxes are withheld.

b. Withholdings From RMDs

If you haven’t taken all your RMDs for 2022, you can withhold as much as 99% of any distributions and use them to pay estimated federal and/or state income taxes. As with payroll withholdings, such amounts are considered as paid ratably throughout the year rather than at the time of payment.

Increasing your withholdings when you have underpaid your taxes can reduce or eliminate any underpayment penalties the IRS may charge.

Year-End Retirement and Tax Planning Ideas – Final Thoughts

At Apprise, we tell clients and prospects that we believe taxes and investing are joined at the hip. Good tax planning can reduce what we pay in taxes both now and in the future. That can leave us more money to spend today or save for tomorrow. It can also increase our chances to have the types of experiences discussed at the beginning of this week’s blog.

I hope you find these retirement and tax planning ideas helpful. If you have questions about any of these suggestions or would like some help implementing them, please schedule a free call. I’ll gladly answer any questions and assist in whatever way I can.

I’ll be back next week with “Apprise’s Five Favorite Reads of the Week.”

Our practice continues to benefit from referrals from our clients and friends. Thank you for your trust and confidence.

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