Episode: 11-08-2022 | Year-End Planning

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Financial Planning Fee Structures

Allison Dubreuil, Wealthway Financial Advisors:  Tonight, we want to talk about proactive year-end planning. As planners, we try not to be last minute. We try to be proactive, not wait for the last minute because that’s when mistakes get made. Or that’s when things sometimes get expensive. We want to throw some ideas out today about things that you should be paying attention to before December 31.

Kevin Zywna, Wealthway Financial Advisors: Well, it’s less than two months away. But before we jump into year-end financial planning and moves to make before the year-end, as promised when we get the caller on the line, we’re going to jump in and speak with that caller. We’re going to go to Virginia Beach right now and speak with Paulette. Good evening, Paulette, you’re on Dollars & Common Sense. Thanks for the call.

Caller: Hi, good evening, I had two questions that the interviewer didn’t. The second question was, what is the minimum that you take for your accounts at Wealthway?

Kevin Zywna, Wealthway Financial Advisors:  Okay, well, the answer to the second question is we don’t have a minimum account size for the people that we work with. Now we do have a minimum fee. And so if your assets aren’t of a reasonable enough amount, then usually as we go through the introductory process and we will inform you of that. And if we think there’s a more cost effective solution for you, then we would make recommendations. But technically we have no minimum asset size.

Caller:  Okay, so you couldn’t say is it 250, 500, 700 thousand? A million? You really can’t say?

Kevin Zywna, Wealthway Financial Advisors:  Well, we have no asset minimum, we have a minimum fee.

Caller:  Okay, what is the minimum fee?

Kevin Zywna, Wealthway Financial Advisors:  It’s $1,250, a quarter, or $5,000 a year. And when we do the math on that, if the asset size is relatively modest means and your situation is simple, then we will, you know, pass you along to more cost effective means.

Digital Currency Questions

Caller:  Okay, the other question is, because I’ve heard a lot of talks, that on December 13, the government is going to go to a digital dollar. What have you heard about that? And what do you think?

Kevin Zywna, Wealthway Financial Advisors:  What date?

Caller:  I think it was December 13?

Kevin Zywna, Wealthway Financial:  Well, I’ve not heard that. I’ve not even heard that there’s anything confirmed about the nation going to a digital dollar.

Allison Dubreuil, Wealthway Financial Advisors:  No, the Fed is talking about implementing something like that. But I think they’re still in the very beginning stages of formulating that.

Kevin Zywna, Wealthway Financial Advisors:  Yes. Right. And if by digital dollars, are you referring to like cryptocurrencies?

Caller: No, all of our all of our assets would be wiped out. And it would be just like China. We would have social credit. And depending on our, what we do, or don’t say, and all that, that is how we would have in any money. I mean, it’s crazy, but it’s been in the works. There’s a lot of information out there on this. And I was just wondering if you’d heard anything and what your opinion was of it?

Allison Dubreuil, Wealthway Financial Advisors:  Yes. So far, I believe the Biden administration has tasked the Federal Reserve with looking into the potential of creating a digital currency. But that would take I think, a fair amount of time and effort before anything would be implemented. And it’s not my understanding that that would completely replace the fiat system, it would be in addition to is my understanding.

Kevin Zywna, Wealthway Financial Advisors:  I can’t conceive of a world where it would wipe out the existing value of assets, whether they be monetarily or real estate or, or securities or that type of thing.

Caller:  I certainly hope you’re right. I’m going to hang my hat on what you’re saying. That’s good news. Okay, thank you. Thank you so much.

Maximize Your Savings Opportunities – Take Advantage of 401K Plans

Allison Dubreuil, Wealthway Financial Advisors:  All right, tonight, we want to talk about proactive year-end planning and what you need to look out for before December 31. That is fast approaching. And one of the big ones is your savings. We talk all year long about maximizing your savings opportunities. Well, if you haven’t taken advantage of it, yet, you still have time to stock away some money in some tax advantaged vehicles. For example, 401K contributions. 401k contributions or employer sponsored retirement plan contributions have to be made via payroll deduct, so from your paycheck a deduction from your paycheck and they have to go into the account by December 31. If you haven’t maximized your 401 K plan, there still is a little bit of time to significantly increase your contributions. You just have to probably reach out to your HR and pull some levers to make that increase.

Kevin Zywna, Wealthway Financial Advisors:  Yes, sometimes if the circumstances permit. And we find that a client can sort of backload a lot of 401K contributions. In other words, they probably under withheld throughout the course of the year, and they have a few more paychecks left and more room to contribute. We see if they can max-contribute what they’re entitled to. Like, contribute their entire paycheck to the 401K plan or, and when I say 401K plan, that’s a proxy for TSPs and 457s, 403Bs, and so on, so forth. But if you have enough savings built up over the course of the year, you can live off that savings, while you put the entirety of your paycheck into your company sponsored retirement plan, if your human resources and payroll department will allow it.

Allison Dubreuil, Wealthway Financial Advisors:  When we’re talking about 401K contributions, the limits for 2022 are for a typical employee is $20,500. But if you’re older than 50, you can contribute an additional $6,500 as a catch up. Maybe you’ve already been doing your regular contributions. Maybe you’ve maxed that out, but you’re over 50 and you haven’t taken advantage of your catch-up. Well, there’s still time to do it. You just have to do that through payroll. And that can be in traditional, pretax money.

That means you take a tax deduction today and that the funds will be taxable in retirement. Or some employer sponsored plans offer Roth options which are after tax contributions. Which would then be tax free in retirement. You may have the ability to switch between pretax and after tax contributions to kind of build both buckets and have flexibility.

Required Minimum Distribution Questions Answered

Kevin Zywna, Wealthway Financial Advisors:  We’re talking about year-end financial planning moves to make. But before we get into more of that, we got a call online this time we’re going to go out to Chesapeake. Speak with George. Good evening, George, you’re on Dollars & Common Sense.

Caller:  Nice to hear you. Thanks for having me on. I think, in the past, if you had an IRA you had to get minimum required distributions at like seven year and a half. Didn’t that change to 72?

Allison Dubreuil, Wealthway Financial Advisors:  You got it. That’s exactly right.

Caller:  That’s what I heard. That’s what I heard. I have to have that done by the time I turned 72 in June. I need to have that done by the end of the year. Is that correct?

Allison Dubreuil, Wealthway Financial Advisors:  Yes, in theory, that is correct. That required minimum distributions have to be taken by December 31. However, because you just turned 72, this year, you get a little bit of a grace period, you actually have until the end of the year, following the year you turn 72 to take the distribution. But there’s a caveat. If you wait until next year, then George, that means next year, you really have to take two because, you’d have to take the distribution for 2022 and 2023 next year.

Kevin Zywna, Wealthway Financial Advisors:  And so we don’t really recommend that unless there’s a good reason to do that. And there’s rarely a good reason to do that. I think they put that in place for us people who woke up one day, realize they’re 72, had to start taking required minimum distributions and didn’t realize they missed it. Or didn’t realize they’d missed it. Then there’s a little grace period there for that first one.

Caller:  Yes. Awesome. If I take that distribution and send it to a charity, would those be tax deductible?

Make A Qualified Charitable Distribution

Allison Dubreuil, Wealthway Financial Advisors:  Great question, George. You’re hitting all the points I wanted to hit today. Thank you. You are talking about the strategy of a qualified charitable distribution. When you take funds out of an IRA or 401K or retirement account and send them directly to a charity as a qualified charitable distribution. It is not included in taxable income.

Kevin Zywna, Wealthway Financial Advisors:  That makes it a more tax efficient way of contributing to charities.

Caller:  That’s exactly what I’ll do. Thanks, Kevin. And Alison, I really appreciate you. Thank you very much.

Kevin Zywna, Wealthway Financial Advisors:  You’re welcome. All right, George, thanks for the call. We appreciate you.

Allison Dubreuil, Wealthway Financial Advisors:  Yes. While we’re on the topic of charitable donations from IRAs, or 401K’s or qualified retirement plans, those distributions do count towards your required minimum distribution. And as long as they go directly to charity, they’re not included in your taxable income. But there’s a little bit of administration with that. Because you still have to collect your receipts from charity. And you have to make sure that you let your tax preparer know about this. Because it will look like it was a taxable distribution, you’ll typically get a tax form that says it was a taxable distribution. And it’s up to you, as the taxpayer to make the proper notations on your tax return, showing that it should be excluded from taxable income.

Kevin Zywna, Wealthway Financial Advisors:  Yes, and we have special checkbooks that we set our clients up with who want to make charitable contributions directly from their IRA. That helps make that administration a little bit easier. But just know that, like Alison said, there is a little bit of behind the scenes work involved in order to ensure you get the maximum tax break,

Allison Dubreuil, Wealthway Financial Advisors:  But typically worth it because most people, I think 90% of Americans now take the standard deduction. If you’re just taking the money into your bank account, and then making your charitable donations, and then you’re adding them up, you’re probably not going to itemize, so you’re not getting really any deduction for those donations. Making the donation directly from your retirement account allows you to get that deduction, right off the top of your income and enjoy the standard deduction. You can really increase your tax benefits this way.

Kevin Zywna, Wealthway Financial Advisors:  Yes. Essentially, that distribution from the IRA, because it went directly to a charity doesn’t show up as ordinary income. And so you are never taxed on it. As long as you make sure you do your record keeping and bookkeeping properly.

Allison Dubreuil, Wealthway Financial Advisors:  Right. If you are charitably inclined and you have not taken your required minimum distribution for the year, consider making your distributions directly out of your retirement account. You’d have to get in touch with the custodian of your money, and see what would be involved with making that happen. And we recommend doing that this month. You don’t want to wait until the end of December because the charity has to cash the check. And that takes time.

Kevin Zywna, Wealthway Financial Advisors:  Yes,the cheque needs to clear your IRA account by December 31, in order for it to count for the current tax year. And so there’s mail, there’s getting to the charity, there’s opening an envelope there sitting on someone’s desk. There’s getting into the bank, then it’s clearing your account. You want to have that check to the charity by the end of November or the first week of December at the latest in order to ensure that you get proper credit for it.

Invest In The Stock Market

Allison Dubreuil, Wealthway Financial Advisors:  The top of the show, we were talking about maxing out 401K contributions. If you have room to go on 401k contributions, then this is a great time. You can contribute up to $20,500 a year through your payroll. And if you’re over 50, you can add on top of that, another $6,500. $27,000 total that can go tax deferred into a company sponsored retirement plan. And we haven’t really touched on the market too much right now. But we do seem to get this question a lot. “is now a good time to invest?” Yes, this is a great time to ramp up your investing if you’re in the accumulation phase because the market is in a temporary decline. And so essentially you are buying shares on sale. Anybody who has any extra cash lying around, we would typically encourage to put that money to work for you.

Kevin Zywna, Wealthway Financial Advisors:  Yes, although it can feel uncomfortable at the time. Now, if you are contributing to your company retirement plan, keep doing it. If you have the ability to, increase the amount that you are contributing to your retirement plan. This is an excellent time to increase what you were putting into your retirement plan. And if you haven’t started, then now’s a great time to start. Yes, this is buying low. This is what buying low feels like and why most people, left to their own devices, tend not to do investing optimally. This is a great buying opportunity. We are excited when we get to add new client money to the market in these types of situations.

Allison Dubreuil, Wealthway Financial Advisors:  And you’re not just limited to company sponsored retirement accounts. Some people may be eligible to make IRA contributions. That could be a traditional IRA or a Roth IRA, depending on your income. The end of the year is not the deadline for those. You actually do have until the tax filing deadline, probably April 15, give or take a day, depending on the year. You have a little bit more time but if you already know you want to do it and you have the funds read. Then the sooner the better, really because that’s just more time getting tax sheltered growth.

Kevin Zywna, Wealthway Financial Advisors:  Yes, and it doesn’t have to be through a company retirement plan, you can directly invest in mutual funds at Vanguard, or you can open up a brokerage account at Schwab, or Fidelity, and contribute just after tax money as well. And almost any savings is good savings. Now’s a great time to be adding to your investment portfolio. Okay, going to take a timeout here for a caller. We have Bill in Smithfield. Good evening, Bill, you’re on Dollars & Common Sense.

Roll Funds Into A Roth IRA

Caller:  Hi. My question is, if I retire, and I have a traditional 401k, with also Roth contributions in there, can I just take part of that out and roll it into an already existing Roth IRA and still leave the traditional there so I can take it between 55 and 59 and a half without problems?

Allison Dubreuil, Wealthway Financial Advisors:  That’s a great question, Bill. You’re saying you have some pretax money and some after tax or Roth contribution contributions, all in the same company sponsored retirement plan right now?

Caller:  Correct.

Allison Dubreuil, Wealthway Financial Advisors:  And you’re wanting to preserve the ability to take penalty free withdrawals?

Caller:  Yes, they have to be 59 and a half.

Allison Dubreuil, Wealthway Financial Advisors:  Yes. How old are you, Bill? Just out of curiosity?

Caller:  54

Allison Dubreuil, Wealthway Financial Advisors: Okay, yes. It’s a great question. When you contribute pretax money and Roth or after tax money in a company sponsored retirement plan, and it all goes into the same bucket, you know, how best to maximize those different tax treated dollars. And you do typically want to separate the after tax or the Roth money out of that account at some point and get it into the Roth IRA, because Roth IRAs are not subject to required minimum distributions, but all of the funds in a 401k or a company sponsored retirement plan are subject to required minimum distributions. Your custodian, whoever is the custodian of the account, should be able to take instruction from you to move the after tax or Roth money directly to a Roth IRA and keep it in that tax protected wrapper.

Caller:  But it will depend on you know, tax consequences for doing that.

Allison Dubreuil, Wealthway Financial Advisors:  Not if it’s done directly, it should be done directly from the current custodian to the new custodian, or if they insist on issuing you a check, you would have to make sure you get it into the Roth IRA within 60 days. There’s a 60 day rollover time.

Caller:  All right, thank you very much.

Kevin Zywna, Wealthway Financial Advisors:  All right. Thanks for the call, Bill. A lot of complexity there. Yes, it’s not uncommon, we’re finding it more common. I should say that company retirement plans offer a Roth component to it, which is contributions of after tax dollars. And there can be some great planning opportunities with Roth 401Ks or retirement plan.

Allison Dubreuil, Wealthway Financial Advisors:  Assets, right? You don’t maximize those unless you eventually separate those funds out. Bill was thinking exactly right. Where you want to separate out the after tax into a Roth when you retire. Or before you start making withdrawals and keep that protected going forward, because that’s tax free. But what he was saying was, he didn’t want to close his 401k and move the whole thing to an IRA because some 401K plans allow you to start withdrawals before 59 and a half without penalty. If you move it to an IRA, and we are getting really technical, you can’t withdraw without penalty before 59 and a half. It’s complex. I mean, like everything in our tax code, and that’s why we always recommend being very careful when you start withdrawing or moving money and we of course, advise working with a certified financial planning professional that can help you avoid any major missteps which could be big tax bills.

Handling Required Minimum Distributions

Kevin Zywna, Wealthway Financial Advisors:  Alright, talking about some year-end financial planning moves while we still have a almost a couple months left to go and you still might have some opportunity to work on a few things to maximize all your opportunities for 2022 and set yourself up for a good 2023.

But back to year-end planning, a lot of it centers around tax. If you haven’t maximized your 401K savings, you still have time to do so. You can still make IRA contributions. We touched on required minimum distributions earlier on in the show with George. But I thought it’d be worth circling back to that because that’s a big one. It does affect a lot of people. To give you kind of a rundown if you have any pretax 401K, TSPs, 403Bs, traditional IRAs. Most retirement accounts other than a Roth IRA are subject to annual required minimum distributions once you turn the age 72. And you have to take a certain amount out of your account, once you turn 72. The amount that has to come out is calculated each year. It will change. It’s based on the account balance as of December 31 of the prior year. And it’s based on your life expectancy. There’s a whole table and how you calculate this. It’s roughly 3.65% of the account when you have to start at age 72. And then it goes up the older you get, the more the higher the percentage of the account that has to come out of its tax protected wrapper.

Now you don’t have to spend what comes out of the IRA, but you do have to withdraw it, it will be taxed as ordinary income. We have our clients set up with automatic federal and state withholding limits so that gets taken out for them and then the net amount what’s leftover is deposit into their bank account for spending or it can be reinvested into a brokerage account if they don’t need the funds right away. We transfer it over to an investable brokerage account, just turn around and reinvest that cash and save it for a rainy day in the future. And as we talked about earlier in show, it also can be donated.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, so you can spend it, you can reinvest it, or you can donate it but it does have to come out of the IRA wrapper because the IRS wants its tax revenue.

Kevin Zywna, Wealthway Financial Advisors:  And if you don’t take it out, if you don’t take all of it out on time the penalty is steep it is 50% of what should have come out. If you had a $10,000 required minimum distribution that you failed to take, then you will suffer a $5,000 IRS penalty on that amount. It’s not something you want to miss.

Allison Dubreuil, Wealthway Financial Advisors:  Right and if you have inherited an IRA, you also may be subject to required minimum distribution shins. Now there’s been a whole bunch of confusion about this in recent years because there was a big law change that took place at the end of 2020. Anyone who inherited an IRA after the year 2020 is navigating some really confusing information out of the IRS right now. It’s really not clear exactly how they should proceed. But you if you inherited an IRA, after 2020, we would recommend checking, hopefully, you’re working with a financial advisor, they can guide you on what you need to do. Or if you’re not working with an advisor, your custodian should be able to guide you on whether you need to take an annual required distribution or not. It depends on whether your relationship to the original account owner, it depends on how old you are, there are a lot of different factors, and it gets very complicated. But just know that you might have to do something. You should figure out what it is.

Kevin Zywna, Wealthway Financial Advisors: Yes. And that applies to inherited IRA. These are not IRAs in your own name. These are ones that you inherited, because you were a beneficiary of an IRA, such as from your parents, or an aunt or an uncle or something like that. If you inherited an IRA, that’s where the tax code has drafted by your friends in Congress was not very clear. And therefore, the IRS which administers the tax code is struggling with giving the proper guidance and making the proper regulations around how the money should be distributed out of inherited IRA accounts, and we are hearing conflicting information among different custodians, and some experts on how they think it should be done. It is kind of a mess right now, but just be on guard and realize you probably have to distribute something.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, and not this doesn’t relate directly to your and planning. But I guess on the note of inheritance, if you inherit a retirement account, we would really recommend getting some help and some advice, because there are definitely there can be tax consequences. And there can be optimal strategies depending on, like I said, your age, your relationship to who you inherited the account from, there are different things that can be done. And there are pros and cons to different strategies. Just don’t just cash it out and put it in the bank talk to someone.

Kevin Zywna, Wealthway Financial Advisors:  Right? Yes, that would say, Yes, that’s probably the like, the last thing you want to do, you have a great gift with inherited IRA. But taking it withdrawing all the money out in one tax year, is probably the least advantage and the most expensive way of dealing with the with the inheritance. And there are other opportunities that you can allow the gift to stretch out for a significant amount of time, take advantage of the power of investing, and turn whatever the inheritance was into a lifetime income stream, if you handle it properly.

Allison Dubreuil, Wealthway Financial Advisors:  A little off topic, but always something to be on the lookout for if you find yourself in receipt of of a new inheritance. Your end strategies are always best when done proactively instead of reactively. That’s why we’re trying to talk about this in November, not on December 31, you still have opportunity to max out your 401 K to contribute to your IRAs. One thing we didn’t mention was health savings account. That’s our probably our preferred savings vehicle before anything because it is triple tax advantage. If you are eligible for a health savings account, which means you have a qualified high deductible health plan, then we would recommend considering making a Health Savings Account contribution. You typically have until the tax filing deadline to do so. It’s not a December 31 thing but again, it’s the case of the earlier you get the money in that tax protected account, the more you can benefit the more time it has in the tax deferred wrapper.

Kevin Zywna, Wealthway Financial Advisors:  And the know on the tax filing deadline. I think we got a few extra days a week and 2023 I think the official date is April 18. Now it hasn’t been on the 15th and like four years.

Allison Dubreuil, Wealthway Financial Advisors: You sound disappointed by that.

Kevin Zywna, Wealthway Financial Advisors:  And we’ll talk about all those things as those deadlines approach because I’m sure there will be more procrastinators that will need to hear it. But you don’t have to wait. In fact, do it now do it before you blow it on extravagant Christmas spending or unless it’s on me. Something unnecessary. Pay yourself first. I know it sounds trite, right? sounds trite. But this is your opportunity to pay yourself first to get your savings in before the end of the year before you end up going overboard on all those Christmas gifts. And then we will be kicking things off in January talking about 2023 contribution limits, because they did go up a little bit because of inflation. So naturally, we all have more to save right? Yes. The regular 401k contribution is going up.

Allison Dubreuil, Wealthway Financial Advisors:  Yes. And IRAs so you can contribute. Let’s see more to a 401k. It has increased from 20,500 to 22,500. For 2023, lots of numbers there. And you your IRA contribution next year can be 6500 versus the 6000. For this year,

Kevin Zywna, Wealthway Financial Advisors:  Yes, for those 50 and over so that means a total of $30,000. Now you can put away and it’s not just 401 K plans again, this goes for tsp Thrift Savings Plans, it goes for 457 plans that goes for 403 B’s as well.

Allison Dubreuil, Wealthway Financial Advisors: We’ll be talking about that. We’ll kick things off in the new year with you know how to get your financial, your finances in shape.