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Year-End Financial Checklist

Year-End Financial Checklist

2022 has been a difficult and trying year for stock and bond indexes in both emerging and developed markets. We are on pace to post the first double-digit loss in the major US markets since 2008. After a run of 13 years, it is understandable for investors to want to close their eyes and wait for the storm to pass. However, in times of market runoffs, it is important to review your finances and check the boxes on year-end tasks to ensure you are well-positioned for when the markets rebound. Here is our list of things to consider as we come to the end.

CONTRIBUTIONS ACCOUNTS

Employer-Sponsored Accounts such as 401(k) and 403(b)

The maximum contribution amount for these respective accounts is $20,500, with an additional catch-up contribution limit of $6,500 for individuals aged 50 or older. We are advocates of trying to contribute the maximum amount to these accounts every year. However, if your budget doesn’t allow for that level of contribution, we encourage you to contribute at least enough to receive your full company match, if that is offered. As we look forward to 2023, the IRS recently announced that the contribution limits for employer-sponsored retirement plans are going up. You may want to review your contribution amounts and adjust for January payrolls if your goal is to maximize funding your retirement plan contributions. 

IRA Accounts

For Roth IRA and traditional IRA accounts, the maximum contribution amount is $6,000, with an additional $1,000 allowed if you are age 50 or older. Bear in mind that IRA accounts do have income restrictions so it is important to work with your financial advisor or tax preparer to determine if you are eligible to contribute in 2022. Assuming you are eligible, these accounts can be quite tax advantageous for your overall financial situation.

529 College Savings Plans

For 529 plans, contribution amounts are tied to annual/lifetime gifting limits. The gift limit for 2022 is $16,000. However, there is a provision that allows for five years of gifting to be given in one year so long as it is accounted for. Should you decide to contribute more than $16,000 in 2022, we would recommend that you work with your tax professional to ensure that you are properly documenting the gift. The deadline for 529 contributions is December 31, 2022. The owners of a 529 account receive tax benefits on the growth of the investment account and may also receive state tax benefits depending on each state plan.

Health Savings Accounts (HSA) & Flex Spending Accounts (FSA)

Depending on your employer’s benefits package, you may be eligible for an HSA or FSA account. Both of these respective plans offer generous tax benefits, but the two plans have significant differences. Here is a great side-by-side comparison of the two plans.

These plans will not be offered to everyone and have restrictions for use. I would encourage you to check with your employer to see if these accounts are an option. 

 

TAX AND ESTATE PLANNING

Tax Loss Harvesting

If there is a silver lining to this year’s market sell-off, it is the opportunity to harvest tax losses. Investors have until year-end to realize capital losses by selling poorly performing investments. Losses can be used to offset capital gains and reduce your tax liability. Tax loss harvesting requires careful consideration and awareness of certain restrictions (such as the wash sale rule), but if done correctly, it can be a powerful way to defer taxable gains. In addition to offsetting taxable gains, the IRS allows investors to deduct up to $3,000 worth of unused losses against their income tax liability. Any remaining unused losses can be carried forward indefinitely to be used in future tax years.

Gifts and Charitable Donations

Charitable donations are another common way of reducing taxable income. Taxpayers can claim a deduction of up 30% of adjusted gross income (AGI) for charitable gifts of non-cash assets, and up to 60% of AGI for gifts of cash (note that the temporary provisions allowing deductions up to 100% no longer apply in 2022). While charitable donations have fallen out of favor somewhat in recent years due to increased standard deductions amounts, there may still be opportunities for tax-efficient gifting, such as donating highly appreciated assets or making a qualified charitable distribution (gifting from an IRA).

Those looking to manage their exposure to gift and inheritance tax also have until December 31 to make use of the annual gift exclusion amount. For 2022, a taxpayer can give up to $16,000 to as many people as they wish without reducing their lifetime gift and estate tax allowance.

Roth Conversions

For some, 2022 may present a good opportunity to convert some money to Roth. If your income has reduced significantly you may have an opportunity to convert money to Roth at a lower tax bracket than you have been in years past. Once the money is in the Roth bucket, it can grow tax-free. There are many factors at play to determine if a Roth conversion makes sense, some of which include the following: 1) income received year-to-date, 2) capital gains/dividends/interest from investments, and 3) projected future tax brackets. Before making a decision, coordinate a discussion with your accountant and financial advisor (sometimes a quick three-way can be very impactful!). If a Roth Conversion is part of your strategy for the 2022 tax year, it must be completed by 12/31/22.

 

YEAR-END REVIEW

Beneficiary Updates 

The closing out of a year provides a great opportunity for us to take stock of the events of that year and determine if any changes need to be made. Beneficiary designations are often overlooked as our lives change. Marriages, divorces, children growing from minors to adults, and individuals passing away all represent significant events and will likely warrant changes to the beneficiaries listed on our retirement accounts, life insurance, and estate plans. We recommend reviewing your beneficiary designations on an annual basis unless you have major changes in your life.

Insurance Amounts 

Another overlooked area of a sound financial plan is insurance coverage and their respective coverage amounts. We should review our personal insurance coverage yearly as our assets and liabilities change. If we complete a major improvement to our home or experience significant real estate appreciation, there may be a gap in our homeowner’s coverage. It is our recommendation to work with your insurance professional to better understand the replacement coverage in your homeowner’s insurance policy. You may also be overexposed to personal liability if your net worth has grown significantly through market gains or company stock options for example. This is where a personal umbrella policy can help to pass some of the liability risk to the insurance company. 

We are happy to discuss any of these items in greater detail and how they may apply to your specific situation. The end of a calendar year can become hectic with holidays, gatherings with friends and family, and ringing in a new year. Taking the time now to review your financial situation and checking a few of these items off of your list will help you start 2023 off on the right foot.

ABOUT THE AUTHOR

NATE CONDON

FINANCIAL ADVISOR

Nate Condon is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What Should I Do with My 401k After Leaving a Job?

What Should I Do with My 401k After Leaving a Job?

One of the first things that people think of when they leave their job is what to do with their 401(k) from that employer. While there is plenty of advice out there, much of it could be conflicted with pre-existing bias, depending on what benefit certain people or entities have in moving it or making it stay put. Hopefully, the options below will assist in your decision-making process as you decide what to do with your old 401(k). 

Three Options for Your Old 401(K)

For those looking for a quick and dirty list of your potential options for the 401(k) from your previous employer, that’s below. We dive further into each possibility and its pros and cons in the rest of this piece.

  1. Leave It
  2. Roll It Into Your New Plan
  3. Roll It Into an Individual Retirement Account (IRA)

Note: if you have a Roth of after-tax option, it does not impact the advice given here, though there are some nuances to Roth that should be explored as well.

Related Reading: What to Do With An Old 403(b)

1. Leave Your 401(k) With Your Previous Employer’s Plan

In most cases with 401(k) plans, as long as you have a balance that is large enough, you are not forced to do anything. Your investment options will likely remain the same, and you are simply put in a “separated service” section of participants. The pros of selecting this option? You will still have the ability to receive reports and reallocate the assets when you see fit. While you cannot contribute to it, you may hold it at the investment company. It’s not always the case, but typically, the larger the 401(k) plan, the lower the expenses. There can be some economies of scale that may allow you to reduce prices on some of your funds as well as administrative costs. 

The downside to leaving it there is that any changes to the 401(k) product company or investment lineup will impact you. If you like a particular fund and the plan sponsor gets rid of it, you will not be able to keep it. You are also governed by the plan document of the plan, which is basically the instructions that the participants have to follow. There can be additional fees that are passed down to participants as well, including potential financial advisory fees.  

 

2. Move Your Old 401(k) to Your New Employer’s Plan

If you are moving to a new job and you are offered another 401(k) plan, regardless of whether or not you are eligible to contribute funds out of your paycheck, you should be able to roll your existing 401(k) balance into the plan. This will be a tax-free event, and you will have to select new funds out of the lineup your plan sponsor offers. You likely will have to call your previous 401(k) company to initiate this rollover, and in many cases, there is paperwork involved. This allows you to consolidate your assets into one 401(k) plan for potentially better continuity in your investments. 

The downside is that fees may not be lower than your previous plan and the investment lineup will also be different. You could have fewer choices than your last plan, as well, so you will want to do a full side-by-side comparison of each plan’s investment options, expenses, and documentation to assure that this is the best option for you.

3. Roll Your Old 401(k) into an IRA

The “I” in IRA stands for individual. If you prefer to have more control over your assets, this may be a viable option. This involves contacting your previous employer and instructing them where to send the assets. It will remain free of taxation if you move the assets to an IRA held at a financial institution for your benefit (also known as FBO). For example, the check could be made payable to Charles Schwab FBO Jane Smith. An IRA is just a checkbox from the IRS, in that there is a significant amount of choice available to you in investment options. You may buy stocks and bonds, ETFs, mutual funds, real estate, cryptocurrencies, savings accounts, and many other options. 

The downside to rolling your old 401(k) into an IRA might come down to choice. There can be an overwhelmingly large amount of choices. Each choice carries its own risk and fees as well. Many financial advisors often recommend that clients roll their assets into IRAs. 

But this isn’t free of conflict. In many cases, financial advisors cannot receive compensation in the 401(k) plan, but can if they roll it into an IRA. Before you choose to move your assets into an IRA, you should consider the management fees, expenses, and objectives of your investment versus other alternatives. 

Considering the options above is essential to your future financial picture. Making the right choice can be very important, so take your time to understand how each option impacts you.

ABOUT THE AUTHOR

CLINT WALKNER

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What Assets Get a Step-Up in Basis at Death?

What Assets Get a Step-Up in Basis at Death?

With the death of a loved one, one question we often get is, “What assets are entitled to a step-up in basis and what assets aren’t entitled to a step-up in basis at death?” To define what we mean by step-up in basis, sometimes referred to as stepped-up basis, here is an example:

Your mother purchased 100 shares of XYZ company at $10 per share in 1950, costing her $1,000, which is her “basis.” She holds the shares without selling until she passes away in 2022. The share price is $1,000 per share at her date of death. 

Despite the fact that she has a significant gain of $99,000 in this example, the basis “steps up” on the date of death to the share price on that date – or $100,000. If the beneficiary of this stock decides to sell it a few months later, their basis is $100,000 and the gain or loss is simply the value of the shares sold minus the basis. For example, if they were sold at a value of $110,000, they would owe tax on $10,000 of capital gains (and in this case, short-term capital gains).

Examples of Assets That Step-Up in Basis

  • Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts.
  • Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. 
  • Businesses and the equipment in the business.
  • Art, collectibles, home furnishings – such as antiques that may have increased in value.
  • Cryptocurrencies.
  • Non-fungible tokens, or NFTs.

Examples of Assets That Do NOT Step-Up in Basis

  • Individual retirement accounts, including IRAs and Roth IRAs.
  • 401(k), 403(b), 457 employer-sponsored retirement plans and pensions.
  • Real estate that was gifted prior to inheritance.
  • Tax-deferred annuities.

We encourage our clients to seek out the counsel of a qualified estate planning attorney to plan out their wishes and assure that they are making good choices regarding future taxation of their assets and avoiding unintended consequences of their actions.

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

ABOUT THE AUTHOR

CLINT WALKNER

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What is the Difference Between a 401k and an IRA?

What is the Difference Between a 401k and an IRA?

A 401(k) is a qualified retirement plan that is sponsored by an employer. It allows employees to deduct a portion of their salary and put it into an account that is invested for their retirement. An IRA can be opened by an individual (hence the name Individual Retirement Arrangement) and is another vehicle that can help someone save for their retirement goals. You can participate in an employer-sponsored 401(k) and contribute to an IRA; you do not have to choose one or the other.

Both 401(k)s and IRAs are Tax-Advantageous Accounts

Before highlighting a few differences, let’s chat about the why. Why utilize either of these types of accounts? The short answer is that they are tax-advantageous vehicles that can help you get to your retirement goals. These types of retirement accounts can be tax-deferred or have tax-free growth characteristics. Most Americans enjoy the idea of delaying a tax bill from Uncle Sam and allowing their assets to compound. This is a powerful way to accumulate wealth long-term. 

401(k)s May Offer an Employer Match

Participating in your employer’s 401(k) plan can be advantageous because they might match a portion of your contributions. This is about as close an opportunity for “free money” as you will ever find. A 401(k) makes it easy for you to put money away from each paycheck toward your retirement. Once you are enrolled, the plan automatically takes a portion of your wages and puts it into your account. There are also ways to automatically contribute towards an IRA.

IRAs Need More Initiative from the Investor

Opening an IRA takes some initiative by the individual. This can be done through many channels but we have chosen to use TD Ameritrade/Schwab as the custodian for our clients’ IRA accounts. There are many flavors of IRAs; I’ll stick to the basics of a Traditional IRA and a Roth IRA in this blog post. In short, a Traditional IRA is considered a “tax-deferred” vehicle, and a Roth IRA is considered a “tax-free” vehicle. Keep in mind that very few things are truly tax-free and that the money you contribute to a Roth IRA has already been taxed. However, the “tax-free” piece of it refers to the capital appreciation, dividends, and earnings that can be tax-free if you follow the IRS rules. You can think of the tax treatment similarly when it comes to the difference between a Traditional 401(k) and a Roth 401(k).     

IRAs are typically funded from your bank account or from a rollover from your former employer’s 401(k) plan. You (or your spouse) must have earned income to contribute to an IRA. Note that Traditional IRA contributions can be tax deductible, if you are eligible (it depends on if you’re covered by a retirement plan at work, tax filing status, and income). The tax code allows you to contribute more money in a given year to a 401(k) than an IRA (for 2023 you can contribute $22,500 to your 401(k) and $6,500 to your IRA unless you are over the age of 50 you can contribute $30,000 to the 401(k) and $7,500 to your IRA). It is worth noting that for 401(k) plans with profit-sharing, the maximum annual additions (which includes employer profit-sharing contributions to a participant’s account) in 2023 is $66,000 ($73,500 including catch-up contributions). A rollover contribution to a Traditional IRA or Roth IRA is not subject to the annual contribution limit (or vice versa: A rollover from an IRA to a 401(k) is not subject to the annual contribution limit). 

Investment Option Differences Between 401(k)s and IRAs

A couple of other differences between a 401(k) and an IRA are the investment options and the ability to take a loan from the account. IRAs will have greater investment options whereas with a 401(k) you are often stuck with the investment lineup that is provided by your advisor on your employer’s plan. Your investment options might be somewhere around 20 mutual funds versus an IRA that has access to thousands of investment options. Some 401(k) plans will offer the ability to take a loan from the account and pay it back, with interest. IRAs do not allow this.

For the sake of keeping this a blog post vs. an all-out white paper, I decided to pick a few of the common topics that come up frequently in my conversations. There are other differences that might be worth considering when determining your strategy of how to divvy up your contributions to your 401(k) or your IRA (or a hybrid of utilizing both). Know that you are not alone in asking questions about the differences between these two common forms of retirement vehicles!

ABOUT THE AUTHOR

Mitch DeWitt, CFP®, MBA

FINANCIAL ADVISOR

Mitch DeWitt is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

Related Reading: What to do With Your Previous Job’s 401(k) Plan

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA