Now that we have entered the fourth quarter, it is a good time to contemplate some year-end wealth management actions. We welcome your questions and calls to review your situation, and to work closely with you, your legal and tax advisors to create the best plan for you.
- Maximize your retirement contributions. IRA and 401k plans provide extraordinarily tax-friendly vehicles for growing wealth. Take a moment to review your 401k plan, including any employer match, to ensure you are maximizing the benefits to you. This must be done before year-end. Also review your IRAs, or open one. You have until April 16, 2018 to open and fund an IRA for 2017.
- Review your retirement plans. If you are 70.5 years of age or older and have not yet taken your Required Minimum Distribution, please call us to help avoid significant penalties.In some cases, it may be advisable to convert your traditional IRA to a Roth IRA. A “Roth conversion” allows your portfolio to grow tax-free, with no required minimum distributions during the owner’s lifetime. Considerations favoring a conversion include age, income level, future estate plans, or an expected move to a significantly higher tax bracket.
- Notify us of outside capital gains and losses. We review investment losses in the fourth quarter to see if any sales to increase tax efficiencies make sense in your portfolio. A tax-loss harvesting strategy can provide tax savings, but requires coordination prior to year-end. While we do not recommend letting the proverbial tax tail wag the dog, there are often ways to recognize losses without compromising investment performance. In New Jersey and other states where capital gains losses cannot be carried forward to future years, such a discussion is especially time-sensitive.
- Incorporate investment strategies into your charitable giving. The donation of appreciated investable securities is a wonderful way to advance your philanthropic goals, while securing a tax deduction at fair market value and avoiding capital gains taxes. Arranging such donations often proves significantly more desirable than writing a check to your favorite charity. In other cases, establishing either a Donor Advised Fund or an independent foundation may make strategic sense. And for individuals or families that own land, charitable conservation easements may provide an attractive tax deduction while preserving habitat and the environment. It is important to consult with your accountant about the specifics of each gifting strategy, as some might leave you vulnerable to the alternative minimum tax (AMT).
- Options for employers. Employers who intend to make a 2017 contribution to a pension or profit-sharing plan must have such plans in place before year-end. This contrasts with contributions to Roth and traditional IRAs, which can be made through April 16, 2018, and those to SEP IRAs, which can be as late as October 15, 2018 for taxpayers who file for an extension. If you are looking to set up a new plan, please contact your Clear Harbor advisor.
- Annual Exclusion Gifts and College planning. Individuals may give up to $14,000 tax free to their children and grandchildren. Those funds can go into personal accounts or, for minors, UTMAs, 529 plans or trusts. The particular benefit of a 529 Plan is that investment gains, interest, and dividends all grow and are distributed on a tax-free basis. 529 plans allow you to give up to $70,000 in one lump sum and spread the gift evenly over 5 years without incurring a federal gift tax (there are some restrictions on the lump sum option).
- Estate planning. It is natural to place more emphasis on creating a legacy than on protecting it. However, careful planning is the only way to ensure that your wealth survives you in the manner that you desire. If you have not established an estate plan, or have neglected to revisit it lately, it may be wise to contact your estate attorney for an update on tax changes adopted in recent years. We would welcome the opportunity to coordinate with you and your attorney to structure or update an estate plan appropriate to your objectives and the current tax environment.
- Prospective Legislation--late last month the White House and Congressional Republicans announced a plan that would reduce and simplify marginal income tax rates, reduce the corporate tax rate to 20%, limit itemized deductions solely to home mortgage interest and charitable contributions, and allow for some types of pass-through entities (such as sole proprietorships, limited liability, and S- Corporations) to benefit from a lower 25% rate. We are becoming increasingly more optimistic that some level of tax reform will be enacted, you can expect a deeper analysis of this policy framework when and if actual legislation is passed by Congress.
- Portfolio review. Finally: as we have reiterated in other Clear Harbor Flashes, this remains a complex and challenging investment environment characterized by very different risks from just a few years ago. Year-end is a great time to review your financial allocations to ensure alignment with your evolving investment objectives in light of changing market conditions, expenses, and tolerance for portfolio volatility.
The Clear Harbor team views itself as well equipped not only to execute specific investment strategies on your behalf, but to help you consider your overall financial goals, methodically evaluate your risk, and advise holistically on your comprehensive wealth picture. It is our mission to partner with you, your accountants and attorneys to shape a wealth strategy that takes into consideration all of your assets, including those not managed by Clear Harbor, to address your financial needs both today and well into the future.