It’s hard to believe that the end of the year is just around the corner. Soon trick-or-treaters will be knocking on your door, turkeys will be basted, and New Year’s Eve plans will be made. To hopefully make the holidays more enjoyable, we’ve put together a short list of things you should consider doing before year end. Getting to these sooner rather than later will give you time to deal with any issues that may come up.
Goals and Investment Strategy
1. Review Your 2011 Goals
With three months to go, you’ve still got time to accomplish what you set out to do at the beginning of the year. Whether it’s finishing that household project or consolidating your retirement accounts, be sure to let us know if we can help. It may also be a good time to start thinking of your goals for 2012.
2. Update and Review Your Envision Plan
An Envision plan acts as a roadmap that combines your goals, finances, and investment strategy. Making sure that it’s up to date will provide you with a more accurate picture of your financial situation and help determine if your investment strategy is still appropriate. Establishing and reviewing the plan is a quick and eye-opening process.
3. Understand and Know Your Risk Tolerance
It’s important to be comfortable with your investment strategy and money managers. If you feel that your risk tolerance has changed, we can work with you to adjust your investment allocation.
Here at WrapManager, we strive to speak with clients on a quarterly basis to make sure their goals and investment strategies are aligned. We do this using our Envision process which takes a snapshot of where you are now, plans for your goals, and calculates the probability of achieving them given a certain investment allocation. Get started with your Envision by answering a few questions here.
Retirement Account Maintenance
4. Required Minimum Distributions
Individuals over age 70½ must take Required Minimum Distributions from traditional IRAs and 401(k)s by December 31, 2012. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.
If you have turned or will turn 70½ in 2011, you can postpone your first IRA RMD until April 1, 2012. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2011 tax year withdrawal by April 1, 2012 and your 2012 tax year withdrawal by December 31, 2012.
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits must be included as income for tax purposes. For tax year 2011, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.
5. Roth IRA Conversions and Re-characterizations
While you can no longer divide the income from a Roth IRA conversion across two years of federal tax returns, converting a traditional IRA into a Roth before 2013 may make sense for another reason: federal taxes might be higher in 2013. Congress extended the Bush-era tax cuts through the end of 2012; their sunset may not be delayed any further.
You may want to consider a re-characterization if your Roth IRA is now worth less than the amount you initially converted. The Roth balance would then go back into a traditional IRA and you would not owe the tax on the amount you re-characterized. However, if you’ve already filed for 2010, you would need to file an amended return.
You are able to re-characterize a 2010 Roth conversion up until October 17th, 2011 (usually October 15th unless that date falls on a weekend). After doing so, you can reconvert a 2010 conversion after waiting more than 30 days. The rules for reconverting are different for a conversion done in 2011. You must wait more than 30 days or until the following year (whichever is greater) to reconvert. So if you re-characterize a 2011 conversion on October 30th, you must wait until 2012 to reconvert back into a Roth.
Be sure to consult with your tax professional before you make any IRA moves.
6. Review Estate Planning Documents and Beneficiaries
It’s a good idea to review your will, trust, and other estate planning documents on a yearly basis. If you don’t have estate documents set up currently, now may be an excellent time to do so. Review the beneficiaries listed on your IRA and other retirement accounts. Your loved ones could spend a lot of time and incur additional costs distributing your assets if there is not a clear plan in place.
Retirement Account Contributions
7. 401(k) or 403(b) Contributions
The IRS hasn’t announced the contribution limit for 2012 yet. Given the moderate inflation of late, we might see the annual limit rise to $17,000 from the present $16,500, or not. In 2011, you can contribute up to $16,500 per year to these accounts with a $5,500 catch-up contribution also allowed if you are age 50 or older.
Some MAGI phase-out limits affect Roth IRA contributions. If the phase-out limits aren’t adjusted north for 2012, phase-outs will kick in at $169,000 for joint filers and $107,000 for single filers. Should your MAGI exceed those limits, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.
8. IRA Contributions
If you haven’t made your 2011 IRA contribution yet, you can still do so through April 17, 2012. The IRS has not indicated what the 2012 contribution limits on traditional and Roth IRAs will be. If the IRS leaves limits where they are now, you will be able to contribute up to $5,000 to your IRA next year if you are age 49 or younger, and up to $6,000 if you are age 50 and older.
Some MAGI phase-out limits affect Roth IRA contributions. If the phase-out limits aren’t adjusted north for 2012, phase-outs will kick in at $169,000 for joint filers and $107,000 for single filers. Should your MAGI exceed those limits, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.
Taxes
9. Capital Gains and Losses
Recognizing your long-term capital gains at 2011 rates may provide an advantage if capital gains rates rise in future years. If they do increase, it may be advantageous to defer recognizing losses in future tax years. This will help to more effectively reduce your capital gain exposures or to offset income. Investors typically realize the losses before year-end, but it may be beneficial to wait. We are happy to provide our clients with their gain and loss report upon request.
10. Think About Adjusting or Timing Your Income and Tax Deductions.
Postponing a portion of your 2011 taxable income until 2012 could bring you some tax savings. If you are close to the line on itemized deduction, you might also consider speaking with your CPA about accelerating payment of deductible expenses. We’ll also provide statements and any other useful information to your CPA. Just let us know.
Charitable Gifting
11. Special Consideration For Your 2011 RMD
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act allows you to send all or a portion of your RMD directly to a qualified charity (for 2011 only). Those eligible are investors over 701/2 who are taking their RMD. The amount is limited to $100,000, is not counted as taxable income, and no charitable deduction would apply. Unlike previous years, you must send the funds directly to the charity. Ask your CPA or estate planner if this option would make sense for you.
Give Us A Call Today
We help investors like you make sure they know where they are financially. Perhaps more importantly, we help investors develop their investment strategies and match them to their goals and risk tolerance, all using what we believe are some of the best money managers around. The Envision process is free, insightful and comes with no obligation. Get started today by answering a few questions about your financial situation. Or give one of our Wealth Strategists a call today at (800) 541-7774 (or email ) to have us take a look at your financial situation and investments, discuss these tax strategies, or research money managers.
Sources: IRS, Marketing Library
The attached report and information have been prepared or produced by WrapManager, Inc. from sources and data believed to be reliable. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice, as an offer to sell, or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed. Returns and experiences will vary for each client. Each client’s risk tolerance and investment objectives are unique to them. Past performance may not be indicative of future results. No assumption that future performance of any specific investment or product made reference to directly by WrapManager, Inc., on its Web site and in marketing materials, will be profitable or equal the corresponding indicated performance level(s). If performance numbers are generated gross of fees, a client’s return will be reduced by investment advisory fees and any other expenses. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC. Prospera Financial Services - Member FINRA/SIPC.