Fall is here, and the holidays are right around the corner! I always get excited for this time of the year; seasonal drinks and foods at your favorite spots around town, seeing the decorations as they change over the next few months, and hopefully being able to gather with the family this year! (Mileage may vary with that last one, depending on whose family we’re talking about) However, I always think that these last few months of the year always seem to go by so quickly, and before you know it, we’re into the next year and focusing on our “to-do’s” for 2022. Which is why we wanted to put together some important financial checklist items for you – to provide valuable tips that, if needed, can help you feel confident about your financial health.
1. Check in with your Financial Team; Your CPA and Financial Advisors
Why should I meet with my Advisor? There is a reason our team is so passionate about meeting with our clients at least once per year. If you haven’t sat with your financial advisor in a while, now is a great time to have that conversation. It can be surprising how much has changed since the last conversation, and your advisor should be able to identify areas in your plan that are in good shape and areas that could be tightened up. Common items we look at for our clients include updating personal financial statements and tracking Net Worth, acknowledging adjustments to income and retirement contributions, updating future Social Security benefits and other retirement income sources, ensuring investment portfolios are properly balanced and appropriately adjusted for risk, and then reviewing retirement plans to ensure everyone is staying on target. Just to name a few.
It’s not tax season, why should I talk to my CPA? We believe that this time of the year can be a great time to check in with your CPA; by sharing some basic information, you can find out where you stand going into the end of 2021. This can help eliminate surprises at tax time, and ensure you use the remaining months of the year wisely. Are you on target to get a refund or owe? Do you have the proper withholdings? Plus, putting together some of the items needed/requested by your CPA can help you get a jumpstart on your tax prep for filing, come Spring 2022.
Bringing it all together; There are even times we work in tandem with our clients’ CPAs to piece together various tax reduction strategies, identifying and implementing tailored solutions that help to save tax dollars for our clients and their families.
2. Review your Investment Portfolio
Rebalance your portfolio; your investment portfolio mix can change throughout the year as the stock and bond markets go up and down – this can cause your portfolio’s allocation to drift off a bit from your target. We generally rebalance 2-3 time per year for our own clients, so if you are reading this and you are a Stewardship client, you don’t have to worry about this one!
Capital gain and capital loss harvesting; Reduce capital gains tax and net investment income tax, by offsetting some, or all, of your capital gains with a strategy known as tax loss harvesting. Also, depending on income, or realizing there could be a “gap year” in income, you could consider strategically selling some of your appreciated investments at the 0% Capital Gains rate.
De-risk your portfolio from concentrated positions; a concentrated stock position is generally having more than 10% of your portfolio in a single company’s stock. Many types of risks associated with concentrated positions can be eliminated by diversifying your portfolio. We work closely with our clients to put together a tax efficient selling strategy.
3. Maximizing Retirement (Qualified) Account Contributions
Maximizing your employer sponsored accounts; One of the most effective retirement saving tools, is through the use of qualified retirement accounts. This is a great time of the year to see what you have funded year-to-date, and if you are eligible to contribute any more before the end of the year. Depending on your income for the year, you may be able to contribute to an IRA or Roth IRA. Keep in mind that employer sponsored plans, such as 401K, 403b, and 457 can only be funded through payroll deferrals. Which means for some of you, these last few months may be crucial to maximize your contributions.
How does this effect my overall plan? Let’s assume you have 12 years until retirement, and you have the cash flow and are eligible to contribute an extra $2K each year. Assuming a 6.5% annual rate of return, those extra contributions could result in additional $34,741 in your retirement account! While also saving an extra $500 per year in federal and state taxes (Assuming a 22% federal and 3% State tax rate). So, for what feels like $1,500 per year, can result in a nice bump in your retirement savings.
4. Review beneficiaries and other estate planning items
Review overall estate plan; it is important to revisit your will or trust every few years, including any durable or medical powers of attorney to ensure overall estate plan is current. Have you moved? Have your assets changed? Have your relationships changed? If so, it may be a good time to connect with your estate planning lawyer to discuss and review.
Ensure your beneficiaries are updated; It is equally important to ensure that your beneficiaries on all accounts are up-to-date, I have seen too many times where an ex-spouse is still listed or the youngest child was not included as the beneficiary of an account – or even no beneficiaries at all! Review your bank accounts, taxable brokerage accounts, insurance policies, beneficiary deed on your residence, plus beneficiaries and contingent beneficiaries on your 401Ks and IRAs.
5. Other Items to consider
Mortgage paydown options: With rates still at historic lows, you might consider refinancing and lowering your interest rate. Perhaps you could make additional principal payments to accelerate your mortgage payoff, allowing you to enter retirement with no mortgage payment, while saving thousands of dollars in interest!
I want to provide a real-world example of this. Say we have a 53-year-old with a goal of retiring at 67; they have an outstanding mortgage balance of $198,000 with a 3.5% interest rate. If this person paid an extra $460/mo towards principal, they would take 10 years off their mortgage, which means no mortgage payment as they enter retirement, and they save $41,147 in interest over the life of the loan! If that same person refinanced, let’s say to a 2.5% rate; instead of $460/mo, that falls to $358/mo. (This does not factor in the cost to refinance, but hopefully you get the idea)
As an added tip, if you are taking the itemized deduction this year, you could consider making your January mortgage payment in December to save additional tax dollars.
Charitable gifts: those who are charitably inclined can be thoughtful about their giving strategy and might consider various options to maximize their giving potential or save in taxes.
Bunching: A donation strategy that lumps two years of donations into one tax year and taking the standard deduction every other year.
The use of a Donor Advised Fund (DAF) is another option – allowing the taxpayer to fund their charitable contributions strategically and allowing the actual payouts from the fund to be deferred until later.
Finally, if you are planning on making a considerable gift, you could consider gifting appreciated stock or other investments you have owned for at least one year – the charitable contribution deduction is based on the Fair Market Value at the date of the gift, not the amount paid for the asset – therefore, avoiding paying taxes on the profits.
We hope that this list provides some insight for you to help ‘fill the gaps’, and avoid leaving opportunities on the table; hopefully, this helps you to feel more confident in your financial health. We regularly meet with our clients to discuss these items and review potential strategies that may make sense for their financial plan. However, whether you are a client or not – we encourage you to reach out to John, Aryel, or myself if you have any questions or want to see how any of these strategies might benefit your situation.
