Beginning of Year Planning

Beginning of Year Planning

Key Planning Topics to Consider as we Kick Off a New Year

The majority of all financial planning articles focus on End of Year thoughts and planning. At Dashboard, we strongly feel that "Beginning of Year" planning is far and away more important. As such, we will discuss key concepts to focus on RIGHT NOW!!!


Charitable Giving using Required Minimum Distributions

For those over 70.5 in 2019, required minimum distributions (RMD’s) can be used to gift monies directly to charities up to $100,000 per year. These contributions not only satisfy RMD’s, but also DO NOT count as income. All charitable giving for those over 70.5 should start with this type of gifting.


Take advantage of the 24% tax bracket

For married couples, the 24% bracket extends up to $321,450 of income ($160,725 for singles). Additionally, the 22% bracket starts at $78,951 of income ($39,476 for singles). As such, we strongly believe that families need to take advantage of these HISTORICALLY LOW federal tax rates. Additionally, if you live in a state that currently does NOT TAX RETIREMENT INCOME (Illinois for instance), one must think long and hard about harvesting IRA assets into Roth IRA’s. These incredibly effective tax brackets, coupled with the state’s “hands off” approach will not be around forever!


IRA Distributions early in the year

Make some lemonade!

As the old adage goes, when you’re given a lemon, simply make some lemonade! With the end of the year sell-off, there were certain asset classes that were hit quite hard – Emerging Market Equities, Small-Cap and Large Cap Domestic Equities. Whether it’s for a Roth conversion or to satisfy RMDs, consider using these asset classes to let Uncle Sam help absorb some of the decrease in their market value!


Invest in Kids IL state tax credit program

If you’re charitably inclined, live in the state of Illinois, and are not a huge fan of paying state taxes, here’s something to consider. In 2017, Illinois enacted the Invest in Kids Scholarship Tax Credit Program. This program offers a 75% state tax credit and is used to provide scholarships to families who meet the income requirements to attend qualified, non-public schools in Illinois. Here's how it works... If your family makes $250,000, your state tax bill would approximate $12,375 ($250,000 X 4.95% = $12,375). You could either pay state taxes of $12,375, or donate $16,500 ($16,500 X 75% = $12,375 state tax liability) to the Invest in Kids program.


DO NOT contribute directly to your Roth 401k at work

As many of you know, at Dashboard we’re huge fans of Roth IRA’s and Roth 401k’s. However, now is the time to “fix” your 401k elections at work. If your 401k allows for Roth 401k contributions, see if it also allows for “In-Plan” conversions of Traditional 401k amounts into your Roth 401k. If so, then first make all 401k contributions on a Traditional pre-tax basis. Then, periodically, convert your Traditional 401k assets to your Roth 401k and pay Federal tax. In many states (including Illinois), this conversion does not require the payment of State taxes. Therefore, by using this In-Plan conversion strategy, rather than direct Roth contributions, you can save $940 per year ($19,000 X 4.95% state tax = $940) if under age 50, and upward of $1,237 per year ($25,000 X 4.95% state tax = $1,237) if over 50.


Set your "Cash Zero"

There are two ways to determine how much your family really spends: Option 1 - Tally every single expense that your family incurs over the course of a year...all 2,200+ of them (on average), OR, Option 2 - Leave your desired “Cash Zero” in your checking account – we recommend approximately 6 months of living expenses. Then, periodically check your cash balance against your “Cash Zero” amount. To track your spending, all you need to know is how much your family saves per month. By subtracting your savings and the difference between your cash balance and your "Cash Zero" from your income, you get your Spend Rate. This math of subtraction is much easier than adding up spending (and it’s typically a lot more accurate)!!


Review your portfolio allocation, not just your portfolio balances

Invariably every investor remembers with fond memories the highest value that their portfolio ever attained. As humans, we are commonly afflicted with a “Recency Bias”, where we most easily remember events that have occurred in the not too distant past. However, rather than focusing on our “all-time highs” versus our current portfolio balances, let’s focus on our long-term strategy and allocation plans that help us through both the highs and lows of investing. Let’s ensure that our portfolio’s risk profile is consistent with our current financial situation. Remember, as prudent investors in command of our long-term success, we have to avoid letting our “Recency Bias” improperly influence our long-term decisions.