Financial Planning for the Year Ahead
Frank Herbert’s classic 1964 sci-fi novel, Dune, starts with the pre-chapter quote, “a beginning is the time for taking the most delicate care that the balances are correct.” While Maine’s mountainous and snow-covered landscape contrasts sharply with Dune’s desert planet, this statement applies to universes both fictional and real as a new year begins, especially with regard to your financial plan.
One of the first steps to take in order to ensure that your financial life is in balance is to check that you are taking the fullest advantage of retirement accounts. If your company has a retirement plan, such as a 401(k) or 403(b), we strongly encourage you to contribute to it. Employers will often match any contributions you make to such a plan at a set rate up to a certain percentage of your salary. We recommend contributing at least the percentage of your salary that an employer will match. It’s free money and a 100% return on your investment. While contributions will reduce your take-home pay, the alternative is that you are leaving money on the table, reducing your overall compensation today – and the value of your future retirement assets. The 2020 maximum contribution to a 401(k) or 403(b) is $19,500. There is also a catch-up provision that allows those age 50 or older to contribute an additional $6,500. Also, some employers offer both traditional 401(k)s and Roth 401(k)s. The question of which to choose is related to a number of assumptions that are worth considering before making a decision.
We also recommend that you consider opening a Roth IRA or a traditional IRA if you do not have one. These allow you to contribute a maximum of $6,000 annually with an additional $1,000 catch-up provision for those age 50 or older as of 2020 and can be opened regardless of whether or not you have a company retirement plan, although certain limits can apply. A tax professional can help you determine your eligibility to make a contribution in a given year. Your ability to contribute directly to a Roth IRA is reduced or eliminated if you earn above a certain amount in a given year. However, this restriction can be circumnavigated by using a “backdoor” Roth IRA. This involves contributing money to a traditional IRA and converting the account to a Roth IRA. We would be glad to discuss your options in this regard.
If you already have an IRA, it is worth noting that you will not have to take an annual Required Minimum Distribution until you are age 72 due to the recent passage of the SECURE Act, unless you turned 70½ in 2019 or earlier. Those planning to take distributions this year still can do so, but it is not required by law and may or may not be your best option.
For those with a taxable investment portfolio, it may also be worth discussing a budget for capital gains with your tax professional and financial advisor to help ensure you are not paying more taxes than necessary. Additionally, quarterly estimated tax payments may be required if you receive non-W2 income, such as interest and gains from your portfolio or income from self-employment.
Throughout the year, we ask our clients to let us know as soon as possible of any cash needs from their portfolio. This allows us to plan ahead and make sure we have this cash in reserve. This is important, because markets can swing up and down. We do not want to sell securities at a low point unless it is absolutely necessary. We generally recommend holding 18-20 months of living expenses in cash reserves in a savings account, which can also help you avoid having to dip into your investment accounts at the wrong time.
It is also important to let your financial advisor know about any significant changes to your life situation as they happen, so we can help you consider any impact on your finances.
Most people consider gifting to various charities toward the end of the year. There are a number of ways to do this. These include gifting shares of appreciated securities from a taxable investment account, contributing securities to a donor-advised fund, and gifting some or all of your Required Minimum IRA Distribution (RMD). If possible, we recommend having a list of charities and amounts ready by the end of September. This will give you one less thing to worry about during the holiday season, and it will help to avoid a last-minute scramble as the various deadlines for making these gifts approach.
As always, we are here to help you address these and any other financial planning concerns you may have.