Glance Back, Move Forward: 8 Financial Ideas for Over 50s to End the Year on a Solid Note
With the end of 2019 drawing near, it’s time to figure out how to be financially wise to our best advantage.
Max Out and Catch Up on Contributions If You Are Still Working
For those of you over 50, it’s time to put money into your own or a spousal IRA. The limit is $7,000, and though you do have until April 15th of next year – it’s best to do it now.
Do you have an employer sponsored plan – such as 401K, 403B, or 457 – with a maxed out self-contribution of $19,000? You have room to put in another $6,000 as “catch up” if you are over 50.
In a SIMPLE plan, you can contribute up to $13,000 or 25% of your income. If you are over 50, you can contribute an additional $3,000.
Fund your H.S.A. where individuals can get $3,500 in and families up to $7,000. If you are over 55 – you can add an additional $1,000 to both the individual and family contribution.
Did You Take Your Required Minimum Distribution?
If you are age 70 ½ or older, and don’t take your IRA distribution, you get penalized 50% of what you should have withdrawn, and then taxed on that amount. Your RMD is based on the IRA account value as of December 31st the previous year.
It is considered ordinary income on your tax return. If you want to keep it off your tax return, give it away to a qualified charitable organization. This lowers your tax and impacts what you will pay for Medicare premiums.
Chunk Your Charitable Donations
For those who aren’t familiar, the standard deductions went up in 2018. That’s $12,000 per individual with an extra $1,300 if you are over age 65. So, for a married couple over the ages of 65 your standard deduction is $26,600. You may want to get creative and lump your donations into 2019.
Here’s an example:
If a couple over the age of 65 has $8,000 in state, local, and property taxes, $2,000 in deductible medical expenses, $6,000 in mortgage interest expense, and have given $8,000 in charitable contributions so far, their itemized expenses add up to $24,000.
If this were year-end, they would be better off taking the standard deduction. If, however, they wanted to use a donor advised fund, or “lump” donations into 2019, they could give cash or appreciated assets away this year. This would increase the amount they could claim on an itemization schedule and lower their taxes.
Using the Donor Advised fund gives you the benefit of the tax deduction in the year the contribution is made, but you have to choose the organizations that you want to receive funding into next year or beyond. You would then take the standard deduction in 2020.
Revisit Your Mortgage
Interest rates ticked down a bit lower this fall. If you have put off the idea of refinancing, now is probably a good time to look at it again.
There are many things to consider. How long do you anticipate being in your home? What type of mortgage do you have now? What would the closing costs be? What are your cash flow or income needs?
Harvest Investment Gains and Losses
Look at any investments that are exposed to taxation (outside of your retirement accounts). You can strategically rebalance your portfolio in a way to minimize taxation.
If you have paper losses on stocks or mutual funds, you should be able to deduct up to $3,000 in losses from your ordinary income and carry forward any unused amounts to future years. If you have gains in the same type of investments, look at selling them before the end of the year.
If your taxable income (which would include the gains from a sale) keeps you in the 10 or 12% tax bracket, you would not be taxed on long-term capital gains.
Taking income off of these accounts? Now may be an opportune time to harvest gains and build up cash, even if you do have to pay 15% on the gains. If you are still in your working years and have gains in your brokerage account, consider harvesting and repositioning into your tax sheltered accounts.
Gifting Investment Gains
If you have children or grandchildren in lower tax brackets, it may make sense to gift them stock holdings instead of giving them cash for the holiday season. This could be a learning opportunity or a way to help fund advanced education.
The cost basis gets gifted to them as well, but if they are in a lower tax bracket and sell the holdings, they would not be taxed on the gain. If you are in a higher tax bracket, you avoid paying taxes on harvesting the gain.
Reduce the Financial Clutter
On another note, it might be time to close down the memberships, subscription services, or apps that you didn’t use this year. Additionally, look at consolidating accounts.
Do you have old, employer sponsored plans that could be rolled into your own personal IRA? What other financial tools do you have that are either no longer serving you, or need to be recalibrated to fit into your current life season?
Prioritize Planning and Build on Your Wins
Consider getting a guide and advisor to help you discern the details of everything mentioned above. Don’t do anything in a vacuum, but in the context of your entire financial life. Look at what 2020 has in store: what opportunities you are looking forward to, what challenges may lie in wait.
Be pro-active in a world that vacillates towards reactive. Look at what you accomplished this year, or what you are proud of.
Everything has financial implications. It may have been a positive conversation with a family member about finances. It may have been a purchase, or a decision not to make a purchase. What do you want to replicate in 2020 and what do you want to leave behind?
When you sit down and look at your finances, what makes the most sense to do to minimize taxes? Do you have a trustworthy financial advisor to help you out? What financial tools have you used in previous years? Which of them worked for you – which didn’t? Please share with our community!