Tying Up Loose (Financial) Ends for the Holidays

To spark maximum joy during winter, consider tidying up your finances so you can relax during the holidays. Before festivities kick off, here is a list of moves you may want—or need—to make before singing Auld Lang Syne.

Take the money: The most obvious loose end is one we highlight yearly, so apologies if we sound like a broken record: Before yearend, be sure to take your required minimum distribution (RMD). If you are at least 70 ½ years old and have a traditional retirement account—like an IRA or 401(k) funded with pre-tax dollars—the IRS requires you to withdraw a minimum amount or face a penalty up to 50% on it. If you turned 70 ½ this year (meaning, if your 70th birthday was after June 30, 2018), you don’t need to take your RMD until April 1, 2020. But if you use this longer window, you will have to take a second RMD in calendar year 2020 covering that tax year. Two RMDs in one calendar year can raise your taxable income more than you may want.

Now, you generally don’t have to calculate the amount you need to withdraw yourself. The brokerage firm or bank that holds your assets usually does. Many firms even cite it on monthly statements or in your account online. But if you are inclined to do it yourself, you can calculate your RMD by dividing your account’s yearend 2018 value by the IRS’s estimate of your life expectancy. Or, if your spouse is more than 10 years younger (and your IRA’s sole beneficiary), use this table, which reduces your RMD because of their longer life expectancy. If you inherited an IRA from someone other than your spouse, you likely have to take an RMD even if you are under age 70 ½. These can get complex—talk to your financial or tax professional for details.

The IRS taxes your RMD as ordinary income—that is how Uncle Sam gets his cut after years of deferring growth. But if you don’t need your RMD for living expenses, you can mitigate this by directly donating all or part of your RMD to an eligible charity (up to a $100,000 annual limit). Speaking of which ...

Donate to your favorite charities—and deduct: Planning to donate from taxable accounts? Consider gifting stock versus selling something that may trigger gains and giving cash. Transferring stock in kind—rather than selling it—lets you avoid capital gains taxes and claim the charitable deduction. Charitable giving may make less tax sense now, given the 2017 Tax Cut and Jobs Act’s higher standard deduction ($12,200 individually or $24,400 married filing jointly). But itemizing and donating to charity could still help. For help deciding, talk to your tax advisor.

If you aren’t retired, but aim to be, fill up your retirement plan kitty: One of the best ways to save is with an employer-sponsored 401(k) plan—alternatively, 403(b) plans for public school and non-profit employees, 457 plans for government workers or even “solo” 401(k) plans for sole proprietorships. 2019’s contribution limit for most is $19,000, but if you are 50 or older, it is $25,000. (Solo 401(k)s carry far higher limits but are uncommon.) Moreover, employers often match contributions to some degree. But even if they don’t match at all, contributing is likely in your long-term interest.

Does your employer not offer a plan? Consider contributing to an IRA or Roth IRA. The contribution limit for either one is $6,000 this year ($7,000 for those 50 and over). Traditional IRA contributions may be tax-deductible (depending on your filing status and income) and grow tax deferred, like most 401(k)s. Roth contributions aren’t deductible but grow completely tax free and have no RMDs. Eligibility will also hinge on your filing status and income. While you don’t need to make IRA contributions before yearend—you have until April 15, 2020 to make 2019’s—saving sooner is generally saving better.

A tax strategy for diversifying big positions: Yearend offers an opportunity for those with undiversified positions with large unrealized gains: the ability to get more diversified and spread realized gains across two tax years. Sometimes folks find themselves with big blocks of stock from, say, a previous or current employer. These undiversified positions massively increase risk—any single-company or sector-specific risk could cause outsized damage to your wealth. Many think they are trapped by large embedded gains, but yearend allows them to be split. To diversify, consider selling a portion this year and another early next. This way, you divide the tax impact from realizing large gains across two years, lowering the burden—as you reduce the risk from a concentrated position.

Be cognizant of quirks from select investments’ odd tax statuses: Not every asset you can invest in is taxed equivalently—even many that look or trade like stocks. Educating yourself on these nuances is a valuable move at any time of year. For example, gold and silver aren’t just shiny malleable commodities. The IRS classifies all precious metals as collectibles, including gold and silver ETFs. That means gains are taxed at ordinary income rates, with rates on long-term gains (over one year) capped at 28%, higher than stocks and other assets.

The bitcoin craze may have faded, but its tax effects could still linger. If you sold bitcoin—or any cryptocurrency—for a gain, you need to report it to the IRS, which labels them as property for tax purposes. The tricky thing here is if you bought anything with bitcoin (and the like), this also constitutes a “sale.” As such, keep a record of all your virtual currency payments and transactions to file your taxes. Be diligent about this! The IRS’s enforcement folks have paid a lot of attention to crypto in recent years.

Holdings in publicly traded partnerships—including master limited partnerships (MLPs), business development companies (BDCs) and special-purpose acquisition companies (SPACs)—come with additional tax complications. If you don’t know what a “K-1” is—or your way around one—consult a tax advisor.

Make April 2020 less painful with tax-loss harvesting: If you realized long-term gains earlier this year in a taxable account and haven’t yet realized losses to fully or partially offset them, it isn’t too late. You can sell securities that have declined since you purchased them to offset those gains or up to $3,000 in income. Note, however, that “wash sale” rules dictate that if you buy back the same security within 30 days, the sale won’t qualify for tax-loss purposes. In the interim, you can buy a similar replacement security or simply hold an ETF for the broad market or the relevant sector. At the end of the wash sale period, you can sell your replacement and buy your original holding back, if you choose. Though you may wish to keep in mind any gains in your replacement holding.