Before the joy and craziness of the holidays kick in, we wanted to highlight a few time-sensitive tax items to take care of by December 31 this year.
Required Minimum Distributions (RMDs)
For those of you over 70 ½ you will need to take your RMD from your retirement accounts before December 31, 2019. If you have one or more retirement accounts managed here at Better Money Decisions, you have probably already heard from us about the amount and the options available to you for satisfying that requirement. We have already been able to complete many of these transfers on your behalf.
For those who have not yet satisfied the RMD requirement on your retirement accounts, you have multiple choices for how you take that RMD.
Take it in cash from each retirement account. This is certainly the best choice if you are going to need that money within the next year.
Transfer it to your taxable investment account to keep it invested. This is a great option for those who don’t need the RMD to fund living expenses and would prefer to keep that money growing for the longer term.
Give it to charity. If you make charitable contributions, consider using all or part of your RMD to fund those. If done directly from the retirement account, you will avoid paying income taxes on that portion of your RMD that went to charity.
Also remember that if you have multiple IRAs or multiple 401ks/403bs, you can take your entire calculated RMD for all like-accounts out of just one of those IRAs or 401k403bs. This can be useful when you have an IRA with illiquid assets or a 401k/403b provider with higher expense ratios. But be careful – you can only do this with like minded accounts. You can’t combine your IRA RMD with your 403b RMD or your Inherited IRA RMD.
Year End Gifting to Family or Charities
If you typically give cash to family members or charities at the holidays, consider giving the gift of stock instead. For those of you with taxable accounts that contain low basis stock or mutual fund positions (with large embedded gains), it may make sense to give some of that stock or mutual fund position to a family member, especially if they are in a low tax bracket. They can keep the stock or sell it at their tax rate, not yours. It’s a great way to pass on part of your estate over time and avoid capital gains. Giving stock to charities is even more beneficial, as they pay no capital gains tax on the sale of that stock.
To do this type of gifting, you’ll want to make these arrangements as soon as possible. TD Ameritrade and other custodians often have an early cutoff in December to make sure everything is processed by the end of the year.
Due to the tax law changes in 2018, many clients lost their ability to itemize, qualifying for the standard deduction instead. If you were close to the threshold for itemizing, consider bunching your deductions in one year to take advantage of itemizing. For example, if you do a certain amount of charitable giving each year, consider accelerating three to five years of that funding into a Donor Advised Fund (DAF) to get the full deduction this year and then dole out the contributions from the DAF over the next few years.
If you are contemplating converting a portion or all of a Traditional IRA to a Roth IRA, you’ll want to get that done by December 31. These conversions are usually beneficial to those in lower tax brackets or those who anticipate being in a higher income tax bracket in retirement. We can help determine if this is beneficial to you. Conversions must be completed early in December as TD Ameritrade has an early cutoff date.
2019 Mutual Fund Capital Gains
As you know, we’ve had a pretty good year so far in the stock markets. Such a year usually means that many mutual funds will have larger than normal realized capital gains that get passed to your tax return. While most of our B$D portfolios use passive mutual funds and ETFs, some of you do own actively managed mutual funds. These funds typically have the highest realized capital gains each year.
Here at B$D we will be watching the December notifications from the mutual fund providers we use in our portfolios so that we can notify you of any significant capital gain income that will need to be recognized on your 2019 tax return. If you have funds (and especially actively managed funds) in taxable accounts we do not manage, you’ll want to keep an eye out for these December notifications. The gains can be significant.
As always, here at Better Money Decisions, we are here to help you with these and other year end concerns.