Of the many ways that financial advisors try to provide demonstrable value-added services for their clients, one of the most effective is making the most efficient use possible of tax-advantaged savings accounts, for the hard-dollar tax savings it can create. And while it often takes consistent planning through the year to make the most of those accounts, the end of the year provides the opportunity to make a number of last-minute changes, not only in order optimize contributions and distributions, but potentially to avoid any unnecessary and preventable costs as well.
For those with the means to do so, the first, most obvious first step is to make sure that they’ve contributed as much as they can to any available qualified retirement plans through their employer(s), and even consider establishing (or changing) a separate employer retirement plan for any side businesses that the individual may own in order to take advantage of the (non-coordinated) employer limits for defined contribution plans, which in 2018, stands at up to $55,000 per non-related business (plus catch-up contributions!).
Meanwhile, those 70 1/2 or over have the opportunity to manage their tax exposure by making (up to) $100,000 in Qualified Charitable Contributions (QCDs) from pre-tax funds in their IRA, which counts towards their Required Minimum Distribution obligations as well (thus allowing them to minimize both their taxable income and their Adjusted Gross Income). Especially since QCDs have become even more valuable following the passage of the Tax Cuts and Jobs Act… as with the steep increase in the standard deduction, most taxpayers won’t itemize deductions in the future, and therefore taking RMDs and then donating to charities won’t provide any offsetting deduction on their tax return in the future (but donating from an IRA via a QCD is still a perfect pre-tax donation!).
Continuing in that same post-Tax-Cuts-and-Jobs-Act-landscape vein, year-end Roth conversions are now even more valuable from a planning perspective. Because, even though the overwhelming majority of taxpayers will have lower tax bills in 2018 than in 2017, the most impactful cuts for individuals are scheduled to expire in 2025, which means that they have a relatively limited window in which they can make Roth conversions at a lower rate than would otherwise be possible in the future. Yet going forward, taxpayers may increasingly need to wait until the end of the year to decide exactly how much to convert, as TCJA also eliminated Roth recharacterizations (making the Roth conversion itself a one-time irrevocable decision).
And, although much of the focus at the end of the year is on optimizing savings, advisors should also pay attention to any tax-favored funds individuals may have in a healthcare flexible savings account (FSA) that should be spent before the end of the year, given their inherent “use-it-or-lose-it” provision. And while some employers may give employees the option to carry over up to $500 on a year-to-year basis, or utilize a 2 1/2 month grace period the following year, the fact is that money inside an FSA needs to be spent… preferably in a way that doesn’t involve negative outcomes for the individual’s well-being.
Other planning options advisors have at their disposal for end-of-year tax planning include rolling over employer retirement plans to an IRA in anticipation of purchasing Qualified Longevity Annuity Contracts in 2019, and (when appropriate) utilizing Achieving a Better Life Experience (“ABLE” or 529A) accounts, which are accounts that allow for tax-deferred growth and distribution of funds used for ongoing disability expenses for those who were disabled prior to age 26.
But, ultimately, the key point is to recognize that year-end planning around tax-advantaged accounts is just another way that advisors can provide great service for their clients… with real tangible hard-dollar savings. And while some of these planning issues may be relatively straightforward, the fact is that optimizing the use of tax-advantaged accounts often requires a nuanced look and properly navigating what are sometimes complex rules and provisions.
source https://www.kitces.com/blog/end-of-year-contribution-distribution-deadline-requirements-ira-401k-fsa-qcd-529a-able/
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