The clock is winding down on 2018, but you’ve still got time to suggest some year-end financial moves to your clients. Here are a few possibilities:
- Remind your clients to fully fund their IRAs. As you know, they actually have until April 15, 2019 to contribute to their IRAs for the 2018 tax year, but you might point out to them that the sooner the money is in their accounts, the faster it will start working for them.
- Many companies allow employees to increase their 401(k) contributions outside the open enrollment period. Let your clients know that if they do bump up their contributions for the rest of the year, they’ll lower their taxable income and add to their retirement savings. At the very least, encourage them to put away enough to earn the employer’s matching contribution in the future.
- Remind those of your clients with young children, or grandchildren, about the benefits of a 529 college savings plan (i.e. tax-free withdrawals for qualified education expenses, possible state tax deductions, total control of assets until used by beneficiary, etc.). If your high net worth clients haven’t reached the gift tax exclusion of $15,000 per recipient yet, they’ve got until December 31 to do so.
- Some of your clients may not be aware that many mutual funds pay capital gains distributions in December. You might want to inform them that if they were to buy new shares of a fund just before the distribution date, they may get a larger distribution, but they’ll owe capital gains taxes on the money they just invested without really having received much benefit from their investment. To avoid this potential problem, clients may want to delay making additional investments until after the distribution date.
- Clients might want to consider selling investments that have lost value and are no longer needed for portfolio balance. You could remind these clients that their losses can offset any capital gains they might have achieved; if they don’t have any gains, the losses can offset up to $3,000 of their regular income. Plus, any losses that they don’t use in a given year can be carried forward indefinitely for use against future capital gains. Of course, if clients still liked the investment that they sold at a loss, and they wanted to keep it in your portfolio, they could repurchase it, but they’ll have to wait 31 days to avoid violating the IRS’ “wash sale” rules.
- Those clients who are 70½ or older must start taking their required minimum distributions (RMDs) from their traditional IRA and 401(k) or similar plan by December 31. However, if you have clients who turned 70½ in 2018, remind them that they can wait until April 1, 2019 until they must take their first RMD. They will then have to take a second RMD (the one for age 71) by December 31, 2019. Taking two RMDs in one year could give them an unexpectedly large taxable income for the year, possibly bumping them into a higher tax bracket and affecting the amount of their Social Security benefits subject to taxes. So, you may want to encourage clients to consult with their tax advisors before deciding to delay their first RMDs.
- Previously, your clients may have been able to deduct their charitable donations if they itemized deductions on their income tax returns. But under the new tax laws, the standard deduction has almost doubled for 2018, to $24,000 for joint filers, and $12,000 for single filers. As a result, far fewer people are likely to itemize their deductions. If your clients are in this group, they may have less incentive, at least for tax reasons, to make charitable gifts. Nonetheless, receiving a tax deduction is not the only tax benefit of making a charitable gift, particularly for those of your clients subject to RMDs. If, instead of withdrawing the money, the IRA owner decides to transfer the funds directly to a qualified charity, the distributed amount can be excluded from the IRA owner's income. So, in effect, your clients can get a sizable tax benefit from their generosity. In fact, clients 70½ or older can transfer up to $100,000, tax-free, from their IRA to charities each year -- even if the amount is more than their RMDs.
Those of your clients who aren’t yet 70 ½ can still gain some tax benefits from certain types of charitable donations, such as gifts of appreciated securities. Even if they won’t itemize this year, they can still avoid the capital gains taxes they’d have to pay if they were to eventually sell those securities.
One final word: Encourage those of your clients considering charitable gifts to make sure the charitable groups they want to support are reputable and will use their gifts wisely. To learn more about choosing well-run charitable groups, read our article on helping clients put their charitable dollars to work – wisely.
These aren’t the only year-end moves you may want to suggest, but, taken together, they can certainly provide you with some good reasons for getting in front of your clients – and helping them close out 2018 on a positive note.
RBC does not provide tax or legal advice. All decisions regarding the tax or legal implications of investments should be made with a tax or legal advisor.