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7 Important Tax, Retirement Topics for Year-End Planning

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What You Need to Know

  • Year-end planning is important so that your clients end 2021 in the best possible position and have a good start for 2022.
  • Many of these issues involve tax planning.
  • A lot of potential changes are looming, and communicating with your clients about the future is perhaps more important than ever. 

As 2021 comes to a close, there are a number of year-end planning issues for advisors to discuss with their clients. The list will vary from client to client.

As we head into 2022, we face the prospect of higher inflation, potential changes in tax and retirement rules, and other issues. Here are some issues to consider with your clients.

1. Tax Planning

Much of the year-end planning you do with your clients will touch on tax planning in one form or another. This includes looking at where your client stands and in many cases looking for ways to reduce their 2021 tax hit. Items such as charitable donations, retirement plan contributions and deciding which year to make some deductible expenditures come into play. Planning required minimum distributions is a key item here as well. 

You and your client will also want to assess what is and isn’t included in the final version of President Joe Biden’s tax plan to decide if there are moves to make in 2021 and to start your planning for 2022 and beyond. 

2. Charitable Contributions

For clients who are charitably inclined, 2021 provides unique opportunities. As a carryover from legislation passed in 2020 in connection with the COVID-19 pandemic, charitable contributions made with cash can be deducted up to 100% of adjusted gross income. 

This can provide a lot of planning options for clients. For example, they might bunch several years’ contributions into 2021 in order to take full advantage of this tax deduction, assuming they can itemize. Charitable deductions can be used to offset taxes on income from things such as Roth IRA conversions, capital gains from stock sales, retirement account distributions and many other types of income.   

Note that in order to take advantage of the 100% of AGI deduction, the contributions must be made directly to the charitable organizations, not to a donor-advised fund. 

Another charitable giving tactic to consider for 2021 is using appreciated securities as the gifting vehicle. With the stock market gains of 2021 and the past few years, your clients probably have a number of stocks, ETFs and mutual funds with significant unrealized capital gains in their taxable accounts. 

Donating these appreciated shares directly to a charity offers a tax deduction based on the market value of the shares on the date of donation. In addition to the tax deduction, your client will not have to pay any capital gains taxes on these appreciated shares. This can be helpful in rebalancing their portfolio without triggering taxes on these transactions. 

Appreciated securities and other assets can generally be used to make contributions to a donor-advised fund as well. The AGI limits for donating appreciated securities are lower than for cash; any excess amounts can be carried over to subsequent years.  

3. Portfolio Rebalancing

With the stock market at record levels, it is important to be sure that your client’s portfolio is properly allocated to ensure they are not taking on excessive risk. Rebalancing is critical every year, but especially so this year. 

It’s important to be as tax-efficient as possible. If your client does have any tax losses on positions in taxable accounts, it may make sense to harvest those losses to offset any gains. Rebalancing positions in IRAs or other retirement accounts should be looked at closely. As discussed above, donating appreciated taxable securities is another tax-efficient rebalancing tactic in terms of reducing the allocation to equities. 

While taxes are a consideration, it’s important to ensure that your client’s portfolio reflects an asset allocation that is aligned with their goals and risk tolerance as the markets sit at or near all-time high levels. 

4. Estate Planning

The end of the year is a good time to review your client’s estate planning with them. Has anything changed during the year? Are these changes properly reflected in their beneficiary designations or estate planning documents? These issues typically include marriage, divorce or the death of a spouse, as well as the birth or adoption of a child, or a child getting married. This is a perfect time of the year to ensure that any needed actions are taken. 

If your client owns a business, have they done any succession planning? This is a perfect time to visit or revisit this issue in the context of both their estate and retirement planning. 

Lastly, a number of issues have been in the news surrounding tax and estate planning issues pushed by Biden and Congress. Some of the issues that didn’t make the final cut this time around may resurface later. This is a good time to ensure that your client’s estate planning is on track and these issues are on the radar for the future. 

5. Retirement Plan Contributions

Year-end is a good time to ensure that your client is on track to maximize contributions to various retirement plans. If they will come up short of the maximum in their 401(k) or other employer-sponsored retirement plan, this is a good time to have them increase their salary deferrals for the remainder of the year. Ideally, they have cash elsewhere that can be used to offset any reduction in take-home pay that results. 

This is also a good time to be sure that their deferrals are in line for 2022. The limits for 401(k) contributions have been raised to $20,500, with an additional $6,500 catch-up contribution for those who are 50 or older.  

For clients who are self-employed, you will want to ensure they are fully funding their solo 401(k) or SEP-IRA

While employee contributions to a solo 401(k) are limited to the same $19,500 or $26,000 for those 50 or older and must be made by the end of the year, contributions to the profit-sharing portion of the plan can be made up to the date the business files its return, including extensions. The maximum is 25% of the client’s compensation up to a maximum of $58,000 or $64,500 for those who are 50 or older. This total includes the employee contributions as well. 

In the case of a SEP-IRA, these accounts can be opened and funded up to the date the client files their business tax return, including extensions. The maximum contributions here are 25% of their compensation up to a maximum of $58,000. The percentage of compensation might be lower if the client files using Schedule C. 

6. RMD Planning 

It’s important to be sure that clients have taken their RMDs by year-end to ensure they are not hit with penalties that can be steep. Clients who are charitably inclined might consider a QCD (qualified charitable distribution)

Those who are at least age 70½ can divert up to $100,000 from their traditional IRA to a qualified charitable organization. The benefit here is that QCDs are not subject to taxes, though there is no charitable tax deduction on QCDs. The QCD amount is not limited to their RMD. 

7. Roth IRA Conversions 

Roth IRA conversions are a popular topic in the financial press. They can be an effective planning tool for your clients in a number of areas. 

With the changes to the rules for most non-spousal beneficiaries of inherited IRAs, converting to a Roth IRA can be a way for the account owner to pre-pay taxes for their beneficiaries

Roth IRA conversions can also be a way for clients to reduce their future RMDs and to diversify the tax structure of their retirement accounts. In this case, you will need to look at the ramifications of the taxes that will be due now versus the potential savings down the road. 

While these seven issues are not the full extent of potential year-end client planning issues, they can be significant issues for many of your clients. While you are likely to do planning throughout the year with your clients, it’s a good idea to ensure everything is buttoned up for 2021 and that your client has a solid planning foundation heading into 2022. 

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.


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