Top Year-End Financial Planning Strategies

Top Year-End Financial Planning Strategies

With the end of the year upon us, this is a great time for financial advisors to meet with their clients and to make some year-end moves to save on taxes and/or better position their clients for the coming year and beyond. Here are some great year-end financial planning strategies for financial advisors and their clients as well as do-it-yourselfers.

Review Taxable Gains and Losses

This is a key tactic in any year, but the current year has seen much market volatility and many mutual funds have accumulated large capital gains even though their returns may be mediocre for the year. This is the time of year when many mutual fund firms are making distributions and this many will be larger than normal. Reviewing potential capital gains distributions along with capital gains and losses elsewhere across your taxable accounts is a good year-end practice. (For more, see: Pros and Cons Of Annual Tax-Loss Harvesting.)

Financial advisors can help clients review their portfolio and look for good candidates for tax-loss harvesting to offset gains. As always tax-loss harvesting should be done in conjunction with the overall management of your portfolio and not simply as a tax savings measure.

Review Your Financial Plan

This is a good idea at any point during the year but it can be a great meeting topic at year-end with clients. This is a good time to see where the client is in terms of their financial goals such as saving for college and retirement. Are their investments properly allocated? Are there factors in their lives that have changed and that might impact their financial or investing strategy? (For more, see: When to Dump Portfolio Losers.)

Review Your 401(k)

Fall open enrollment is the time when many organizations roll out any changes to their 401(k) plans in terms of the investments offered, the company match or other aspects of the plan. Check to see how much you are contributing to your plan. If you are not tracking toward the maximum salary deferrals of $18,000 or $24,000 (for those who will be 50 or over at any point in 2015), look at upping your deferral rate if you are in line to receive any sort of bonus payment prior to year-end. Going forward make sure that you are in the best investment options for your situation and if you can increase your contributions for the new year make sure to do so.

Charitable Contributions

Year-end is often a time when clients make charitable contributions and financial advisors can help clients fulfill their charitable inclinations in a fashion that works best with their tax and financial planning objectives. A common tactic is to use shares of appreciated stock, mutual funds or exchange-traded funds (ETFs) to make the donation. Not only will the client receive credit and a tax deduction for the value of the security donated but they will avoid having to pay any taxes on the capital gains. Be sure the security has been held for at least a year and a day to get the maximum benefits. (For more, see: How Donor-Advised Funds Can Help Cut Taxes.)

For clients who are in a position to make a sizable charitable donation financial advisors might suggest a donor advised fund. Fidelity Investments, Vanguard and others offer them. A donor advised fund will manage the assets donated and the donor can direct money to the qualifying charitable organizations of their choosing. This is a great vehicle for clients who want to make the contribution this year and then distribute the funds over a period of time. Perhaps the client had a big bump in income, this is a great way to offset some the tax impact.

Start a Solo 401(k)

If you are self-employed and have no employees a solo 401(k) might be a good retirement plan solution for you. In order to contribute and take a deduction for the current year the account needs to be opened by December 31. The plan allows salary deferral contributions at the same limits as a regular company plan ($18,000 or $24,000 for those 50 or over). Additionally, profit sharing contributions can be made to the plan and are due by the time the business files its tax return including extensions. Deadlines for your salary deferrals will vary based upon the business structure. The self-employed work hard to build their business, they should use some of the proceeds of the business to fund their retirement. (For more, see: Retirement Plan Options for Small-Business Owners.)

Take Any Required Minimum Distributions

For those to whom this is applicable, all required minimum distributions from retirement plans must be taken by December 31 for the current calendar year. This pertains to those 70½ or older with individual retirement accounts (IRAs) as well as retirement plans such as a 401(k) or 403(b). There is an exception in some cases for those working after age 70½ regarding their current employer’s plan. Additionally, younger beneficiaries with an inherited IRA account may also be subject to RMDs. It is a great service for financial advisors to remind clients to take their RMDs and to help them facilitate doing so.

Rebalance Your Portfolio

With the volatility in the stock market so far this year, your portfolio might be out of balance if you haven’t rebalanced lately. This might have put you in the position of taking too much or too little risk compared to what you need in order to meet your financial goals. Rebalance with a total portfolio view. Use tax-deferred accounts such as IRAs and 401(k)s to your best advantage. As discussed above, donating appreciated investments to charity can be used as part of the process. Likewise, with tax-loss harvesting. You can also use new money to shore up under allocated portions of your portfolio to reduce the need to sell winners. This is an area that I’d assume most financial advisors have as a standard item on their client meeting agendas. (For more, see: Explaining Portfolio Rebalancing to Clients.)

The Bottom Line

The end of one year and the start of a new one seem to be significant milestones for many of us. This time of year marks a good time to review your finances, to make any last-minute adjustments to put yourself in the best position for this year and to position your finances for the future. Financial advisors should ensure they have reached out to all clients to ensure that all end of year adjustments are made. It is also a great time of year to meet with clients to ensure they are properly positioned for the new year and beyond. (For more, see: Tax Planning Strategies for the End of the Year.)