12 smart planning moves to consider

Peter Hafner | Dec 5, 2016

1. Is it time to rebalance your portfolio?

Changes in the market can cause your asset allocation to shift. As we head into the homestretch, gains have been modest this year, and year-end is a great time to review your portfolio and make any necessary adjustments.

But let's be careful, too. Let's be careful about taking profits in December when we can take them in January and push any capital gain into 2017. Note: current plans being debated suggest more favorable treatment in 2017 ( "Understanding The 2017 Income Tax Reform Proposals: President Trump vs. House Republicans," Kitces.com ).

2. Review your income or portfolio strategy.

Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.

3. Take stock of changes in your life.

Take stock of your life and review insurance and beneficiaries. Let's be sure you are adequately covered. At the same time, it's a good idea to update beneficiaries if the need has arisen.

Tax planning

4. Tax reform.

The possibility of tax reform looms large over 2017. What shape it will take and how it may affect a various array of investments and tax-deferred accounts is an unknown. While headlines suggest that terms will be more favorable, the devil is in the details.

Furthermore, Republicans have long wanted to kill the estate tax. And Donald Trump has said he would like to repeal the gift tax. Until Congress passes the appropriate legislation, estate and tax planning in general will be a murky endeavor.

5. Tax loss deadline.

You have until December 31, 2016 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules ( IRS Publication 550 ) that could disallow a capital loss.

6. This brings us to mutual funds and taxable distributions .

This is best described using an example. If you buy a mutual fund on December 15 and it pays a dividend and capital gain December 17, you will be responsible for reporting the entire distribution, even if that distribution covers the entire year.

Following that payment, the net asset value of the fund will fall by the amount of the distribution; yet, your investment in the fund remains the same.

That's a tax sting that's best avoided. So it may be a good idea to wait until after the annual distribution to make the purchase.

7. Take Required Minimum Distributions.

RMDs generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year he or she reaches 70½ years of age or, if later, the year in which he or she retires ( IRS Retirement Plan and IRA Required Minimum Distributions FAQs ).

However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plan as well as SEP IRAs and Simple IRAs.

Don't miss the deadline or you could be subject to steep penalties.

8. Contribute to a Roth IRA.

A Roth IRA gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500 or $6,500 if you are 50 or older (IRS Retirement Topics - IRA Contribution Limits).

If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70½ and there are no requirements to take mandatory distributions.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.

You can make 2016 IRA contributions until April 17, 2017 (Note: Statewide holidays can impact final date).

9. Consider converting a traditional IRA to a Roth IRA .

There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform next year, but if the situation is right, it can be advantageous to convert to a Roth IRA .

10. College savings .

Explore the advantages of a 529 college savings plan for your child or a grandchild.

Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.

A second but more limited option includes a Coverdale Education Savings Account ( IRS Publication 970 ). Total contributions for a beneficiary of this account cannot be more than $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.

Contribution limits get phased out after hitting the respective limits.

11. Achieving a Better Life Experience (ABLE) account.

This is a newer savings account for individuals with disabilities and their families. For 2016, you can contribute up to $14,000. Distributions are tax free if used to pay the beneficiary's qualified disability expenses, which may include education expenses (IRS Publication 970, Ablenrc.org).

12. Charitable giving .

Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.

Did you know that you may qualify for what's called a "qualified charitable distribution?" A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity ( "Rules to Do an IRA Qualified Charitable Distribution," Kitces.com ). The IRA owner must be at least 70½ when the distribution is made.

Thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015, this has become a permanent feature in the tax code (assuming Congress doesn't tinker with the law), but specific conditions must be met.

You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.

I hope you've found this review to be educational and helpful, but it is not all encompassing. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.

12 smart planning moves to consider