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Year End Planning Tips

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With the end of 2010 right around the corner, I offer the following year-end financial planning tips:
  • Contribute to your state’s 529 Plan by the end of the year. Many states, such as Michigan, offer a state income tax deduction if you make contributions to the plan that the state sponsors.
  • Convert your Traditional IRA to a Roth IRA by year end. The IRS created a special election for conversions made in 2010 that will allow you to spread the income from the conversion over 2011 and 2012. You can learn about Roth conversions at Vanguard and use its Roth IRA Conversion Calculator to decide if conversion is right for you.
  • Lock-in capital gains and pay at current capital gains rates. Long-term capital gains rates are scheduled to increase in 2011 unless new laws are enacted. If you have unrealized capital gains in a taxable investment account, consider selling your long-term winners and pay at the 15% rate (or 0% if you are in the 10% or 15% ordinary income tax brackets). You can even sell and immediately re-buy the same security to reset its cost basis. The wash sale rule does not apply to gains. You can learn more about this strategy and whether it is in your best interest by reading this article at Fairmark.com.
  • Avoid buying mutual funds in a taxable account late in the year. Mutual funds are required to distributed realized gains each year, and you should avoid paying taxes on distributions when you were not around to participate in the gain. Many fund companies report their expected distributions prior to year-end. Check for planned distributions before you buy or wait until the new year.
  • Take Required Minimum Distributions (RMD) from your IRAs or employer-sponsored retirement plans if you have reached age 70 1/2. Failure to take a required withdrawal can result in a 50% penalty on the amount not withdrawn.
  • Make annual exclusion gifts before year-end. You can give $13,000 in 2010 to an unlimited number of individuals free of gift tax. You cannot carry over unused exclusions from one year to the next.

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

529 Plan Red Flag

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There are a number of clear signs that your financial advisor may not have your best interest in mind. Is your IRA invested in a variable annuity? Red flag! Do the names of your mutual funds end in “A” or “B”? Red flag!

When it comes to saving for college education expenses, it’s hard to beat 529 tuition savings plans. I regularly recommend them to my clients. Each state has its own plans and it usually makes sense to use a plan sponsored by your state. If your advisor recommended that you use another state’s plan, it’s another red flag that he or she may not be working in your best interest.

I’m advising new clients who are residents of Ohio but are using a 529 Plan from Maine. I happen to know that Ohio has a very strong 529 Plan that offers low-cost investment options and a state tax deduction for Ohio residents. It’s a no-brainer for Ohio residents to use it. So why is this couple using one of Maine’s plans? The answer is clear to me – because their former advisor can’t sell Ohio’s plan and earn a commission. Instead, he directed them to an advisor-sold plan that did pay him a commission.

Unfortunately, I see this breach of fiduciary duty on a regular basis. I’m not saying that there aren’t reasons to use another state’s 529 Plan, but when I see it, it’s usually for the wrong reasons.

How can you make sure that you are using the right 529 Plan?

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.