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Financial Perspectives: Year-end planning


We all know the government does a very poor job with planning – evidenced by the fact that we have no idea what our income or estate tax rates are going to be next year. There a number of things you can do before year-end to help ensure that you do not miss out on some favorable planning opportunities.

First, if our tax rates revert back to 2001 levels, you could owe Uncle Sam additional money on your investment gains. Normally, we recommend deferring gains as long as you can; however, if you had intended to cash in some investments in 2011, it could make sense to do it in 2010, if we learn that the tax rates will be higher in 2011.

Another more typical tax planning opportunity is tax-lost harvesting. Here you evaluate your investment accounts to find positions where you may have a loss that you can use to offset gains in other positions. This exercise can result in the elimination of a significant portion of your capital gains.

Second, if you have not made your 2010 IRA contribution you still have time. Many folks make their IRA contributions during the calendar year, but the IRS will allow you to make a 2010 IRA contribution up to April 15, 2011 and still claim credit for it on your 2010 tax return. If you are in your 20s or 30s it may be much more beneficial for you to begin making Roth IRA contributions. You will not receive a tax break, but your contribution will grow tax free and when you retire, the distributions will be tax-free.

Another great planning opportunity around Roth IRAs is the ability to convert your traditional IRAs, or 401ks, into Roth IRAs and pay the taxes in 2011 and 2012. This helps to stagger the tax burden to make it more palatable for folks to get into a Roth IRA. You cannot pay the taxes using money from the IRA, as this would count as a distribution and would be subject to a 10 percent penalty if you are under 59 ½.

The benefits are greater the younger you are, as the money has a chance to compound tax-free for a longer period of time. Prior to 2010 you could not convert your IRAs if your adjusted gross income exceeded $100k. This limit was lifted in 2010 and now there is no income limit.

Third, this is a great time to review the beneficiary designations on your investment and retirement accounts. If you have listed your “Estate” as the beneficiary, I urge you to consider naming a specific individual(s) or a charity as your beneficiary. The reason this is a concern is that your assets would have to pass through probate if you were to pass away. This adds additional cost and can complicate the process of settling your estate.

Even worse, many people do not have wills, and if you die without a will, your assets will pass to your heirs according to a formula established by the state. In this instance, your money could potentially go to people you did not intend.

Finally, if you have not done so, please consider getting a will, power of attorney and a living will completed as soon as possible. This is important for all adults, single and married alike. The will makes certain your assets pass to the heirs you designate. A power of attorney gives someone the ability to act on your behalf to make legal and health care decisions. A living will states what your wishes would be for life sustaining care should you suffer some irreversible and life threatening injury or terminal illness.

There are several attorneys in the Northeast who can draft these documents at a very reasonable cost. No one likes to think about their own mortality, but you can save your family or friends an immense amount of trouble by taking care of this now.

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

James A. Heisler, CFP®, CASL™, CDFA™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 215-332-4968 215-332-4969 (fax)

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.

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