It’s the holidays, a time for celebrating with friends and family. Every year at
this time we wrap up the past year and plan for the year to come—this annual process
should also include financial and estate planning. Here’s some tips to help you with
the process.
Meet with your advisors. Now is a great time to meet with as many of your advisors as you can—your attorney, banker, accountant, tax advisor, financial planner, investment advisor, and even representatives from charitable organizations such as the UW Foundation.
Assess your current financial situation. Tally up your net worth much like you would when applying for a loan. There are a number of online tools to help. This should give you an overview of your financial situation.
Catch up on your filing and shred unnecessary paperwork. It’ll help with your taxes and peace of mind. Enough said.
Review your income strategy. Retirees especially should evaluate their income strategy every year and take into account changes that occurred throughout the year. Consider these important milestones:
Take required minimum distributions from IRAs. If you turn 70 1/2 this year, you need to take your required minimum distributions
from IRAs and other tax-deferred accounts such as a 401(k), although not from Roth
IRAs.
Review your asset allocation and rebalance your investment portfolio. With the economic turmoil of the last couple of years, some have sought safety by moving everything to cash or bonds, rather than having a balanced diversified portfolio. Meet with your advisor to ensure that the investments you hold are appropriate based on your risk tolerance, goals, and time frame. And once you set those proportions, rebalance at least yearly—or use autorebalancing—to maximize your strategy.
Review your tax plan and take advantage of tax provisions that expire December 31. Review and maximize your deductions. Meet with your advisor to offset capital gains and losses. Excess losses can offset up to $3,000 in ordinary income taxes, and losses beyond that can be carried forward indefinitely. For 2013, expiring tax provisions include remodeling your home for energy efficiency, electric vehicles, state and local sales tax, mortgage insurance premiums, teacher’s classroom expenses, and IRA distributions to charity.
Adjust your withholding. It’s nice getting a tax refund, but that’s money you could otherwise invest—you want to pay the IRS its due but no more. Make sure you’re not having too much or too little taken out of each paycheck or through quarterly estimated tax payments.
Use the remaining balance in your flex spending accounts for medical and childcare. Use it or lose it.
Take full advantage of your employee retirement plan. If your employer matches your contributions, that’s “free money.” Make sure to contribute enough to take full advantage of that.
Maximize your retirement contributions. For 2013, you can contribute a maximum of $5,500 to your IRA and $17,500 to your 401(k). If you are over 50, you can contribute an additional $1,000 to your IRA and $5,500 to your 401(k) per year. By maximizing your contributions each year, you greatly increase your chances of being able to adequately fund your retirement.
Review your estate plan—or begin one. With the help of your attorney, review or write a will or revocable living trust, which avoids probate. Review or create a durable power of attorney, a release of information form, and advanced directives (a durable power of attorney for health care and a living will). Make sure to take into account recent major life changes when updating, and consider dispersing your tangible personal property through a separate signed list of bequests to avoid potential family conflict.
Review your beneficiaries. IRAs, 401(k)s, annuities, and insurance policies allow you to name a person to receive those assets when you pass away. Many people don’t realize that these designations take precedence over their will, so make sure that they reflect your most current wishes.
Consider buying life insurance. If you have loved ones who depend on you, life insurance is a good way to take care of them, if you were to pass away unexpectedly. It can be surprisingly affordable.
Set up a college savings plan such as a 529 Plan. There are two basic types of 529 plans, prepaid tuition and savings/investment plans, and contributions to a plan are not deductible but the contributions and their earnings can be withdrawn tax-free when used for qualified education expenses.
Consider making gifts to your loved ones. Individuals can gift up to $14,000 each to an unlimited number of people without the giver incurring a gift tax. The recipients aren’t taxed either. Remember that giving a gift now removes that amount from the estate and hence is not subject to estate taxes. Note that payments of someone’s tuition and medical care directly to an institution or medical care provider do not count as gifts for tax purposes.
Consider making a charitable donation. Donations are as important as ever for tax savings. Also consider using appreciated stock or other property rather than cash—not only will you benefit from the charitable deduction but you may also avoid paying built-in capital gains tax on the stock. Some families consider supporting a charity of their choice as part of the holiday season—and sometimes even in lieu of gifts.
Take advantage of the IRA charitable rollover. A charitable rollover allows those who are 70½ or older to make tax-free gifts from an IRA of up to $100,000 to qualified charitable organizations such as the UW Foundation. The benefits include meeting your charitable giving goals by transferring your required minimum distribution, and potentially additional amounts, to UW while eliminating the income tax associated with the distribution.
Consider gifting appreciated securities to charities. Appreciated securities you’ve held for more than a year can be donated to a charity for a full fair market value deduction without incurring tax on the capital gains. Or, if you’re holding securities at a loss, sell them first and then donate the cash, and you can claim the capital loss on your tax return.
Act before year-end. Time’s almost up.
If you have questions or if you are considering UW in your estate plans, please contact
Tracy Richardson, Senior Associate Vice President for Planned Giving, at (307) 766-3934
or trichar6@uwyo.edu.