If you do not change direction, you may end up where you are heading.
The year is drawing to a close - and the Christmas/New Year’s holiday is a time we frequently review our life and what we have accomplished. If you find yourself assessing your financial progress (or lack thereof) I would suggest the following five moves you should consider at the end of this year if you want to improve your financial performance in 2020.
#1 Take your RMD (and give it to a charity)
If you are older than 70.5 you are required to take distributions from your retirement accounts. These are called Required Minimum Distributions (RMD’s). The exception to this is Roth accounts which do not have RMD’s. These distributions will need to be made before the end of the year for 2019. If you do not know the amount you need to distribute, you should contact your advisor or the financial institution which holds the money to help you determine what to distribute.
If you regularly give money to a charity you should give the money directly from your retirement account to the charity of your choice. This is called a Qualified Charitable Distribution (QCD). The money contributed will not count as taxable income. By doing this you accomplish two goals at once – a gift to charity along with reducing the taxes you would otherwise pay.
#2 Bunch Deductions
Recent tax law changes nearly doubled the standard deduction amount to $24,400, which means fewer people now benefit from itemizing tax deductions. If your itemized deductions — including mortgage interest, state and local taxes (known as SALT, now capped at $10,000), and charitable contributions are just shy of topping the standard amount, you might think about bunching certain deductions into alternating years.
For example, if your itemized deductions are around 20k each year consider doubling your gifts to charity in one year. By combining that contribution with other itemized deductions like real estate taxes and medical/dental expenses, you will come out well above the standard deduction in one year and just take the standard deduction the next – resulting in less taxes paid over the two years than if you just took the standard deduction.
#3 Save More
Most people under save and overspend. If you have a retirement plan available to you at work – maximize the benefit of that account by contributing a minimum of the amount your employer will match. If able, contribute the maximum amount ($19,500 in your 401k in 2020 or $26,000 if you are 50 or older). Doing so will improve your retirement security and lifestyle. If you have high interest debt or no emergency fund consider building that first…
#4 Tax Savvy Retirement Distributions
In my experience people don’t give a lot of thought about the tax consequences of different sources of retirement income. For example: pulling funds from a taxable account produce significantly less tax consequences than pulling funds from tax-deferred accounts (like IRA’s). Tax deferred account distributions can generate SIGNIFICANT tax liability (up to 30%+).
In retirement, pull funds from taxable sources first, followed by deferred sources like IRA’s and lastly Roth accounts in order to maximize your income tax deferral and minimize the payment of taxes.
#5 Get More Yield on Cash
A quick review of your banking relationships will reveal that the yield on your cash in savings accounts is next to nothing (national average of .09%). In addition, the vast majority of brokerage accounts pay less than .25% on cash balances. Even if you don’t carry large cash balances the cumulative effect of low yields on your cash over decades can be significant.
Do yourself a favor and pay attention to the details. Online firms Credit Karma, Wealthfront and Betterment have cash accounts which yield close to 2% by contrast. Open an account to hold any cash you do not need to keep in checking such as emergency fund or excess savings.
