private wealth

10 Tips for Your Year-End Planning
(And 2 PSAs!)

Our financial environment has taken some hits over the last year, between increased market volatility, higher interest rates and rising inflation. These shifts do not necessarily mean that you need to sit on the sidelines and wait for the next change before taking action. There are opportunities and steps you can take now to move your planning forward before year-end.   

To that end, we recommend that you turn your attention to your personal financial game plan as soon as possible. Take the time to revisit your long-term priorities, identify any concerns you may have, and then schedule a conversation with your trusted advisors to review your current playbook.

As a warm-up to a meaningful conversation with your Private Wealth advisory team, we’ve compiled a list of potential strategies for you to consider. 

Square Up Your Income Tax Liability

1. Look for opportunities to accelerate or defer. The IRS just released the 2023 inflation-adjusted income tax brackets and there are meaningful adjustments occurring next year. It may be worth reviewing your 2022 tax situation and looking ahead to 2023:  

  • If you expect your income to fall into a lower bracket next year, it might be beneficial to defer income into next year and accelerate deductions into 2022.
  • If you anticipate landing in a higher income tax bracket next year, are there opportunities to accelerate income before calendar year-end 2022 and defer deductions into 2023?

Consult with your tax and financial advisors to ensure you understand how this may impact your overall tax and financial situation.

2. Leverage tax-loss harvesting. Few cheer at watching their investment account balances decline because of market volatility. On the other hand, it may create opportunities to strategically harvest losses to offset capital gains elsewhere in your portfolio. If you don’t have any realized capital gains this year, those capital losses can be carried forward into future tax years. Now is a great time to talk with your investment professional about your budget for capital gains and to identify any losses that may be harvested before year-end. 

Investment and Retirement Planning

3. Gut check your risk tolerance and your long-term goals. After several years of above-average returns, the recent market fluctuation has made prior theoretical conversations about your risk tolerance much more real. Now is a good time to have a conversation with your advisor about how you’re actually feeling about your current asset allocation and the embedded risk therein.  

4. Maximize your retirement contributions. If you are able to contribute to a retirement account, confirm you are maximizing those contributions to take advantage of any employer-provided match, as well as the IRS limits. The maximum amounts you can contribute under IRS rules before December 31, 2022 are:

  • 401(k)/403(b): $20,500; if you are age 50 or older; the max is $27,000.
  • IRA: $6,000; if you are age 50 or older; the max is $7,000.
  • SEP-IRA: the lesser of 25% of the employee’s compensation or $61,000 (timelines for SEP contributions may vary, check with your tax advisor to ensure you understand your options).

5. Consider converting a traditional IRA to a Roth IRA. Roth conversions have been a popular topic for the last several years. The favorable tax rates and brackets enacted by the Tax Cuts and Jobs Act (TCJA) in 2018, combined with this year’s market dip, may make the strategy more impactful. In general, a Roth conversion may be beneficial if you:

  • Can afford to pay the additional taxes from non-IRA resources
  • Intend to leave your retirement accounts to individuals, not charities
  • Think your future income tax rates may be higher than your current rate

Seek the guidance of your investment and tax advisors ahead of any conversion to ensure you understand the benefits and tax implications of this strategy in your situation. 

⇒ PSA: Don’t forget to take your RMD if you are aged 72 or older. Your required minimum distribution (RMD) is the amount of money you must withdraw from your retirement accounts each calendar year once you reach age 72. If you don’t withdraw your RMD by December 31st each year, IRS penalties apply.   

If you are charitably inclined and do not need the RMD to support your lifestyle, consider a qualified charitable distribution (QCD) to satisfy your RMD. A QCD is a direct transfer of funds from your IRA (up to $100,000) to a 501(c)(3) charity – private foundations, supporting organizations and DAFs do not qualify for QCDs.   

*Note: If you are the beneficiary of an inherited IRA, the RMD rules differ. Consult with your tax advisor prior to year-end to ensure you take the appropriate action for your situation.

Charitable Giving and Philanthropy

6. Benefit from your charitable gifts. Many of our clients identify philanthropy as a priority in their lives, together with a desire to be tax-efficient. And, understanding how tax laws view different types of donated assets and the type of charitable entity receiving your donations is important. Just as critical, from a tax-efficiency perspective, can be the timing of your gifts. Understanding these details can help your dollars go farther for you and the organizations you wish to benefit.   

For individuals who wish to maximize their charitable deduction, consider combining or prefunding a few years of charitable gifts into a donor-advised fund (DAF). You receive a tax deduction for your gift to the DAF immediately, while reserving the ability to distribute funds to charities over time. 

7. Revisit a charitable remainder trust. The low interest rate environment of the past several years left charitable remainder trusts largely on the bench. However, rising interest rates have brought CRTs back onto the field as a viable strategy. In general, higher interest rates equate to higher charitable deductions for CRTs. If you are looking for a way to continue providing cash flow for yourself or another family member while still realizing your charitable goals, a CRT could be worth exploring. If you have questions about this or any other philanthropic vehicle, reach out to our Private Wealth philanthropy specialists.

⇒ PSA: If you have a private foundation, do not forget to satisfy the 5% required distribution. Private foundations must distribute at least 5% from the organization each year or face an IRS penalty. 

Wealth Planning

8. Annual gifting. The IRS allows individuals to give up to $16,000 ($32,000 for married couples) to as many people as they choose each year. This can be a meaningful way for high-net-worth individuals to help family members and other beneficiaries while moving assets outside of their estate. The deadline to complete gifts this year is December 31st.  

*Note: The annual exclusion amount will increase to $17,000 per person in 2023.

9. Maximize 529 plan contributions. It is never too early to start saving for educational expenses. A 529 plan is a tax-advantaged investment account specifically designed for education savings. Withdrawals are not subject to federal income tax, provided the funds are used for qualified education expenses. Annual exclusion gifts can be used to make contributions toward these accounts. In addition, many states provide their own tax incentives for contributions to these accounts. Reach out to your tax and investment advisors for details. 

10. Use or lose your lifetime exclusion. If you have both the desire and capacity to make gifts above and beyond the annual exclusion, you may wish to consider your options in the near future.  

The 2022 gift and estate exemption amount is $12.06 million (double those amounts for married couples). However, this historically high exclusion has an expiration date – it is set to decrease to $5 million, inflation-adjusted, as of January 1, 2026. While there is still time, we recommend that you start these conversations today to ensure you are able to make an informed decision. 

There are many options, vehicles and strategies that can be utilized if you wish to consider lifetime exclusion gifts. Prior to transferring any assets, we recommend meeting with your wealth advisor to understand your capacity to gift without jeopardizing your financial well-being. Thereafter, conversations with your financial, tax and legal advisors will help you confidently decide if and what kind of gifting might be beneficial for your situation. 

Lean on the Private Wealth Team

Year-end planning encompasses many areas of your financial life. Decisions you make today may have short- and long-term impacts for you and your family, and should be evaluated against your personal situation and goals. At Private Wealth, we have a team of specialists to address all of your wealth planning priorities, questions, and concerns. Reach out to a Private Wealth advisor today to determine which year-end moves will benefit you.

Investment Advisory Services offered through Private Wealth Asset Management, 411 6th Avenue SE, Suite 360, Cedar Rapids, IA 52401. 888-611-7926. This report is being provided for informational purposes only and should not be used as the sole basis for financial decisions, nor be construed as investment advice designed to meet the particular needs of an individual’s situation. Contact your investment advisor to discuss your specific goals and objectives.

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