First Friday Live – End of Year Planning


Welcome to our First Friday series that we’re doing on the First Friday of the month at 12:30 pm CST. We’re going to be LIVE on Facebook and talking about a different topic each time and this month the topic is “First Friday Live – End of Year Planning” 


I know that this is a conversation that is on a lot of people’s minds right now, so I thought this topic would be timely in December and look forward to 2021. Many people right now are asking what they should be doing with regards to end of year planning, so we’re going to cover a couple of things today.


First Friday Live - End of Year Planning

First, we’re going to talk about taxes, followed by some things that we want to make sure that we’re aware of and paying attention to regarding the market.


But before I get into anything, I want to make sure I say this. It’s always good to plan. We’ll talk about the end of year planning, but here’s the deal: don’t ever wait until the end of the year to start planning.


Planning should be an ongoing conversation that we’re always looking ahead to so that it’s never crunch time and you have to get things done right away.


IRAs, ROTHs, and Retirement 

With that said, let’s, let’s jump right in and start talking about retirement accounts like IRAs, Roths, or a 401k. 

A couple of things to note, people are often asking what can I contribute or can I contribute? If you’re working, you can contribute to an IRA or Roth. Now, whether that makes sense or not is really part of your overall plan, but what you can contribute is $6,000 per year for an IRA or Roth if you’re under 50 years old and $7,000 per year if you’re over 50 years old.

With it being December, you can still make those contributions. 

Now if you have an IRA or an IRA account and you’re already retired and you’re 70, the rule used to be that you would have to take out your distributions at 70 and a half. It would be the minimum distributions from an IRA or your IRA accounts.

But this last year the Secure Act changed that and changed the age to 72. 

So unless you were 70 and a half before December 31st of 2019, you don’t have to take your distributions until you’re 72.

Side note; another thing that happened this year is COVID, right? Along with COVID came the Cares Act, which waived RMDs. So you do not have to take RMDs this year. 

I would say that if you have set up your RMDs to come automatically to continue doing it, but let’s just say you’re brand new. You just are turning 72 this year and you’re trying to make sure you get it done. Well, the good news is you don’t have to do it this year. In 2020, they waived all required minimum distribution. You don’t have to do that so it’s important to know that.

But again, if you’re looking to contribute, you want to make sure that you’re doing so inside of a plan. You know, business owners or those that are self-employed can do some SEP plans or some other plans where you can contribute more to retirement. So if you’re looking at ways to try to save taxes as a business owner or as a self-employed individual, that is an option, but again, we want to make sure it’s part of the plan, not just a one-off, right? 

One thing we’ve talked about a lot recently is the four areas of your financial life. You have tax planning, cash flow management, and investment positioning in the state preservation, and all four of those areas should be coordinated and working together. We don’t want to just do one thing, for example, tax planning, and not think about how it’s going to affect the cash flow, investments, or anything else. 

So it should be all part of an overall plan. 

A couple of other things I do want to mention that have stood out in 2020, is something to think about with the Cares Act. There were a few other provisions for retirement accounts. One of them is that if you have money in your IRA or Roth or even a 401k, there is more of an opportunity to get access to it this year. 

Normally if you’re under 59 and a half and you take money out of a retirement account, you’re going to pay a 10% penalty. Well, because of what has happened this year with COVID, they have waived that. So even if you’re younger than 59 and a half, you can take money out of your account and not pay a penalty. 

You also then have the ability to pay that tax back over three years. So the maximum amount you can do for that is $100,000, but I have had a couple of clients we’ve talked to this year where we’ve done that. They’ve had a few different situations being farmers or people whose jobs changed because of COVID. Since we’re not really sure what 2021 looks like we decided to take advantage of taking that out now, knowing if we don’t need it, we can put it back into the IRA if we want to and pay the tax and not have to pay the tax. But if we do need it, if we decide to do other planning, we can pay that tax back over three years. So there’s that possibility, and it’s something really to think about.

Another area that could help is if you’re just starting to retire or you lost your job, and now you have to try to find health insurance. If we go to the marketplace, you’re only eligible for that health insurance if you’re under a certain income.

So there could be an opportunity to take more income in 2020 and then less so that our income in 2021 is less so that you can pay less for health insurance. 

I had another client who was thinking about a couple of years from now on taking some income now and next year so that when they have to get private insurance for a couple of years before Medicare kicks in, they can actually reduce their income and be taking a lot less income, which will make their health insurance a lot less.

So those are some of the ways that you can plan. It’s always good to be looking at it from a big picture perspective and not just the present and what the most is that you can save right now.

Using some of that money that we can take out and taking some of the income now where we know taxes are low and creating it so that we get it now and we can pay less and health insurance later. That’s one way to think about the big picture and plan ahead. 

ROTH Conversions

Another big topic of conversation this year is with Roth and Roth conversions. Taking money from your traditional IRA and moving it to a Roth can be a good idea, but it really comes down to your situation.

Does it make sense? How long is it going to be in that? And what’s kind of the big picture plan. 

I was talking to someone else this week and they were asking, when does it make sense? 

With the amount that they have in IRAs, $20 or $30,000, converted to a Roth doesn’t really change their perspective a whole lot. Doesn’t really make that big of a difference. 

But if we do it as part of a plan and as part of a big picture, it can make a great difference. For a few of them we just ran some software and what we saw a lot of is that they’ve done a great job of saving in their accounts, so now at retirement, we have these accounts that we’ve saved in and we’ve built up these values and we don’t need it.

If we don’t need it all for the income you end up just taking your distributions and letting the account grow. 

We have plenty of clients that have done that or are doing that. The problem is that the tax burden continues to grow. 

So, if we take a look and maybe we take a slice of it, we’re never going to convert all of it, but maybe we take a slice and convert a slice of that IRA and the money that’s in IRAs to Roth over three to five years, it can make a great impact. 

I did this with one of our clients and we looked at $200,000,  just a portion of their IRA accounts, and if they did what the traditional kind of plan is, where they just let it sit and grow and take their minimum distributions out, then they take their distributions and they ended up putting their distributions back in a savings account because they don’t really need it. 

If somebody has $200,000 and they’re doing that, and there are a few years before they’re 72, when they have to start taking distributions, they end up paying about $140,000 in lifetime taxes on that IRA. This just goes until age 90. So it could end up being more or less, depending on that, but $140,000 in tax on a $200,000 IRA, not the greatest use in my opinion of tax efficiency, right?

Taking that same $200,000, if we convert it to a Roth over or a Roth alternative, and we’re going to do it over five years.

Just to note, people have asked a lot about the tax law and what’s going to happen. Are things going to change with, you know, after the election, there’s always, everyone’s always talking taxes and how is that going to be affected? The last tax reform was set to stay the way it was until 2025, at which point it would start reverting back. 


Even with some uncertainty the one thing that we do know is right now is there is a divided government, meaning there’s not either party that has the majority. I don’t see taxes changing greatly, at least over the next couple of years, because there’s some balance there. 


I can’t tell you what’s going to happen in the future. They can change taxes all the time, but it looks to be that there should be some stability, at least for the next few years in taxes, which allows us to do some tax planning ahead. 


Going back to that $200,000, instead of converting it all, let’s convert it over the next five years and we’ll end up paying around $40,000 in taxes by doing that. 


Now we have an account that’s growing tax-free. When we did the Roth alternative, which is an IUL life plan, we also have a death benefit that instantaneously was over $600,000 that’s tax-free. That client can use that as well for any type of long-term care needs of their future. 


I say all that because yes, converting to a Roth or Roth alternative can make sense, but we want to do it inside of a bigger plan. When planning, think about if you’re going to need that income? Do we want to pass it? You know, what are some of the things we’re looking for? Can we leverage it to cover long-term care in the future? What’s the tax outlook?


All of those things need to be considered as part of a bigger plan versus just taking a small amount and converting it each year, if that makes sense.


So we want to look at things in the big picture right now, if you’re watching and you’re like, I’m just still saving for retirement. What do I do? How do I do it? 


Or, you might be watching saying we’re past that, but I have kids and grandkids that need to be saving for retirement. We definitely want to make sure they know about the IRA and Roth limits, but also look at some of the alternatives for them. 


Because again, it shouldn’t just be at the end of December or the end of the year, trying to attack time, throw money in a retirement account. 


Yes, you can save that way and you might have a good result, but you’re going to get better results when you’re being very proactive with your planning and you’re looking at the different options. Looking at what the best place is for you to save and do it efficiently from a tax standpoint, from a risk standpoint and what that’s going to look like for your future.


If you haven’t ever had that conversation, just let us know. We’ll help give you some resources and help you with that. 


There are a few other things I really want to make sure we point out and one is on other investments accounts, so not IRAs or ROTH, but just money you put in an investment. And they’re in stocks, bonds, mutual funds, things like that. What happens with those accounts? And you have probably, aren’t quite aware that at the end of the year, you’re going to get a 1099 and you end up paying taxes on some of that money, even if you never took it out. 

Brokerage (non-retirement) Accounts

What that is, is flow through a capital gains tax. Let’s say you have this S&P 500 type fund mutual fund, in March it was going crazy, right? The market was going down and people were getting out. So if they are going to get out, it leaves the fund company no choice, but to sell and liquidate some of those shares. Now, when they do that, if they have had held something in there for a long time, they get a capital gains tax, but they then pass it through at the end of the year to all the fundholders at the end of the year. 


This is a really inefficient way to save/invest. So we want to always look at that, and this is the time that we really need to be doing it again. We should be doing it all throughout the year, I know with our portfolio manager, this is something they continue to do for our clients. As they’re always looking at what has a gain, what has a loss, can we sell something sometimes at a loss to offset gains, do some tax swapping or tax harvesting. And yes, we’re keeping in mind, we want to get growth. We want to have risk-adjusted returns, but we want to keep the taxes low too, because if we can reduce the taxes that only helps with the gains.


So if you have accounts that are brokerage accounts and mutual funds and stocks, whatever that are not IRAs, it’s extremely important right now that we look at them. Is there anything in there we can take a loss and offset some of the gains? We also should be looking at your risk, how the returns are, and how you’re set up going forward. 


Looking Ahead – Low Interest Rates


Which kind of brings me to another thought when it comes to interest rates. Interest rates are low. We were just doing a call this morning and talking about interest rates in the form of white people, buying houses or refinancing or things like that. If those rates stay as low as they’re projected to stay well, it’s great for people buying houses and financing, but it hurts saver. 


Bonds are going to see some volatility. They’re might see some negatives. What we see a lot is, especially in retirement, people will go more towards bonds right now. They might have maybe 60% in stocks and 40% in bonds or target-date funds that move more towards bonds at retirement age. But bonds, especially forward-looking, are going to be very inefficient, especially the bond funds. Now there are some opportunities, some different options within some of these bonds to still see some gains and some returns. But unfortunately, most of the big bond funds that people are in, they’re really too big to be able to take advantage of some of the opportunities that will be out there, or they’re not nimble enough to be able to do it.


We actually just recorded a call with Guy our money or portfolio manager on that. So if you missed it, make sure you check that on our blog.


The bonds themselves are going to be hurt coming ahead. So we want to look at one of those accounts, where are you positioned as far as taxes? Is there anything that needs to be done this year to reduce some of the taxes or offset some of the taxes, you know, well, high pay taxes, if you can start offsetting some of that, especially when it comes down to, is it better for your risk-adjusted returns? 


Capital Gains Tax

There’s a way that you can separate gains from your basis, defer and reduce some of those capital gains taxes. So if you have sold something with high capital gains tax, you might want to make sure to just message me. I’ll make sure you get this information. 

Income Tax 

And then lastly a  few other things I just want to mention on the income. If you have received some additional stimulus money this year, so if you’re a business owner and you’ve got the PPP loan or some of the stimulus that came to farmers, a lot of that is going to be taxable and not everyone realizes that. So it is really important, you know if you haven’t thought about it and looked at where your income is, you know, sit down with your, your CPA or tax preparer talk about this so you’re not surprised. And if you don’t have somebody that helps you with that, let me know. What you don’t want to do is end up at tax time owing a whole lot more than you thought you did, because you didn’t quite understand how the taxes on these other government programs. 


If 2020 has been a great year for you and you’ve had really high income, this is time to do income tax planning, right after December 31st, when we flip over into 2021, there’s nothing we can go back and fix, or I should say nothing very is limited on what we can do.


Whether you’re a business owner or an individual, you want to make sure that you have an idea of what your income is and if it’s going to be more than you thought. Also, consider things like the stimulus that you got that you didn’t realize was going to be taxable. 


First Friday Live - End of Year PlanningIt’s important to at least look at it and see if there’s anything that we can do now to offset some of those income gains. 


If you have any questions on anything that I’ve talked about or anything else that maybe I didn’t cover, please feel free to reach out and let me know.



The last thing I want to leave you with is: always plan!

First Friday Live - End of Year Planning


It’s really important to be proactive, thinking ahead about how all the pieces will be working, including how your income may affect taxes, how your investment may affect your income, etc.


Also, mark your calendars no for and don’t miss our next First Friday, which will be January 8th next month due to New Year’s Day.


We’re bringing on a very special guest and talking about planning ahead and for your future 2021 and beyond. You won’t want to miss that one, so make sure you RSVP on our Facebook Event on the Bertram Financial page.


So enjoy Christmas and I’ll talk to you soon.

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