Year-End Musings

Year-End Musings

Things we are thinking about as we approach the end of the year...

#1 | "Fill Up" your Tax Bracket with Roth Conversions 

For married couples, the 24% bracket extends up to $321,450 ($160,725 for singles). Additionally, the 22% bracket starts at $78,951 ($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. We would challenge every family to consider “filling up” their current tax bracket by converting IRA dollars into a Roth IRA. While a conversion means you have to pay the tax now, remember the current rates are very attractive. We, like many Americans, believe these incredibly effective tax brackets coupled with the state’s “hands off” approach will not be around forever, so take advantage of it now if it makes sense for your family. 

#2 | Fund your Roth IRA 

If your 2019 Modified Adjusted Gross Income (MAGI) is less than $122,000 for single tax payers or $193,000 for married filers, you can (and likely should) make a direct contribution into a Roth IRA of $6,000 if you’re under age 50 or $7,000 if you’re above age 50. If your income is too high, there may still be a way to fund your Roth IRA via an annual conversion strategy typically referred to as a “Backdoor Roth”. Call us to review your personal situation to determine if this may be a good option for your family.

Additionally, if you have children with reported earned income (even smaller amounts from odd jobs like babysitting, mowing lawns, etc.), consider funding a Roth IRA on their behalf or challenge them to do so. This can be a great teaching tool, and an incredibly powerful investment strategy for the next generation. See our video about the 5 Year and 10 Year Challenge for additional information on this topic. 

#3 | Harvest Capital Gains 

Although nobody likes paying taxes, capital gains tax rates are still among the lowest ever. For joint filers, the 15% (plus 3.8% Obama Care surcharge) capital gains rate extends up to $488,850. If you ever plan on spending your own money, take advantage of these low capital gains rates. Also know that for Illinois residents, state taxes are increasing in 2021!

Check out our recent article “Step Up…Or Get Out” for additional insights on this topic. 

#4 | Charitable Giving 

The tax reform that went into effect last year nearly doubled the Standard Deduction, leading many families to file with the Standard Deduction as opposed to Itemized Deductions. As such, the tax benefits of "normal" charitable giving have been greatly diminished. However, if you’re charitably inclined, there is still a way to “get the best of both worlds”.

Above Age 70.5

For those over age 70.5 in 2019, required minimum distributions (RMD’s) from an IRA 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.

Under Age 70.5

For those under age 70.5 in 2019, it may make sense to “stack” charitable gifts of cash and/or securities for many years into one year. This can be done in various ways, but one common and easy way is through the use of Donor Advised Funds. “Stacking” your gifts will create a large tax deduction in a single tax year, and then gifts can be distributed over time. Highly appreciated assets in an after-tax account are best utilized for such a strategy, as you get a tax deduction based on the value of the asset at the time of the donation AND you avoid paying the Capital Gains Tax on the appreciation – win-win! 

#5 | After-Tax Assets in your 401k 

Take a quick look at your current 401k. Oftentimes employer plans allow after-tax dollars to be added to the plan. These after-tax assets can be rolled directly into a Roth IRA. This can be magical if your employer's plan allows for this! 

#6 | Set your "Cash Zero"

This is all about having an awarenewss around your Spend Rate. 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)

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 current 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)!! Watch our video How to Calculate Your Annual Spend Rate for a step-by-step guide on how to do the math. 

#7 | 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... Let's assume 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. Also note that this program accepts appreciated stock as well as cash!! Call us if you’re interested in learning more about this program and how you can participate. 

#8 | Heath Savings Accounts (HSA) 

If you have a high deductible health plan ($1,350+ for single, $2,700+ for family), make sure you fully fund your HSA ($3,500 for single, $7,000 for married) and try NOT TO SPEND IT! Instead, invest these dollars, get the tax deduction, AND allow for tax-free growth!

Check out our article “HSA Euphoria” for additional detail on this topic. 

#9 | Medicare Prescription Drug Plan 

Everyone ages 65 and over with Medicare should evaluate their prescription coverage. Annually between October 15 – December 7 you can join or switch Medicare Drug plans, with an effective date of January 1. You can compare coverage options and costs online using the Medicare Plan Finder at

#10 | Review your Dashboard 

2019 has been a solid investment year as we’ve continued to ride this glorious 10-year bull market. While we don’t anticipate an imminent market downturn, we should always be prepared for one. We believe the best approach to combat such fear is open and frequent communication around your personalized strategy and long-term plan. We must always remain steadfastly committed to our long-term goals of building real financial independence and continuing to invest into properly risk-aligned portfolios. If you feel that we should dial down the risk in your portfolios, call us to schedule a review of your Dashboard so we can discuss your family’s personal circumstances.