What financial, business, or life priorities do you need to address in 2019? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to lowering your taxes.
Can you contribute more to your retirement plans this year? In 2019, the yearly contribution limit for a Roth or traditional IRA rises to $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $137,000 and joint filers with MAGI above $203,000 cannot make 2019 Roth contributions.
For tax year 2019, you can contribute up to $19,000 to 401(k), 403(b), and most 457 plans, with a $6,000 catch-up contribution allowed if you are age 50 or older. If you are self-employed, you should look into whether you can establish and fund a solo 401(k) before the end of 2019.
If you won’t turn 70½ in 2019 and you participate in a traditional qualified retirement plan or have a traditional IRA, you can cut your taxable income through a contribution.
Roth IRAs and Roth 401(k)s, 403(b)s, and 457 plans are funded with after-tax dollars, so you may not take an immediate federal tax deduction for your contributions to them. The upside is that if you follow I.R.S. rules, the account assets may eventually be withdrawn tax free.
Your tax year 2019 contribution to a Roth or traditional IRA may be made as late as the 2020 federal tax deadline – and, for that matter, you can make a 2018 IRA contribution as late as April 15, 2019, which is the deadline for filing your 2018 federal return.
Should you go Roth in 2019? You might be considering that if you only have a traditional IRA. This is no quick decision as the Internal Revenue Service no longer gives you a chance to undo it, and the tax impact of the conversion must be weighed versus the potential future benefits. If you are a high earner, you should know that income phase-out limits may affect your chance to make Roth IRA contributions. For 2019, phase-outs kick in at $193,000 for joint filers and $122,000 for single filers and heads of household. Should your income prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2019 and go Roth later.
Consult us here at Kendall Capital or a Tax professional before you make any IRA moves to see how those changes may affect your overall financial picture.
What else should you consider in 2019?
Make charitable gifts. The individual standard deduction rises to $12,000 in 2019, so there will be less incentive to itemize deductions for many taxpayers – but charitable donations are still deductible if they are itemized. You can find more details on this in an article we previously published here on Charitable Gifting.
Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2019. You can make fully tax-deductible HSA contributions of up to $3,500 (singles) or $7,000 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older. HSA assets grow tax deferred, and withdrawals from these accounts are tax free if used to pay for qualified health care expenses.
Practice tax-loss harvesting. By selling depreciated shares in a taxable investment account, you can offset capital gains or up to $3,000 in regular income ($1,500 is the annual limit for married couples who file separately). In fact, you may use this tactic to offset all your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2020 (and future tax years) to offset ordinary income or capital gains again.
Pay attention to asset location. Tax-efficient asset location is sometimes an ignored fundamental of investing. Generally speaking, your least tax-efficient securities should go in pre-tax accounts, and your most tax-efficient securities should be held in taxable accounts.
Review your withholding status. You may have updated it last year when the I.R.S. introduced new withholding tables; you may want to adjust for 2019 due to any of the following factors.
* You tend to pay a great deal of income tax each year.
* You tend to get a big federal tax refund each year.
* You recently married or divorced.
* A family member recently passed away.
* You have a new job, and you are earning much more than you previously did.
* You started a business venture or became self-employed.
Are you marrying in 2019? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? You may also want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2019, you will need a new Social Security card.
Are you coming home from active duty? If so, go ahead and check the status of your credit and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still in place. Revoke any power of attorney you may have granted to another person.
Consider the tax impact of any upcoming transactions. Are you planning to sell (or buy) real estate next year? How about a business? Do you think you might exercise a stock option in the coming months? Will any large commissions or bonuses come your way in 2019? Do you anticipate selling an investment that is held outside of a tax-deferred account? Any of these actions might significantly impact your 2019 taxes.
If you are retired and older than 70½, remember your year-end RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs by December 31 of each year. The I.R.S. penalty for failing to take an RMD equals 50% of the RMD amount that is not withdrawn.
If you turned 70½ in 2018, you can postpone your initial RMD from an account until April 1, 2019. All subsequent RMDs must be taken by December 31 of the calendar year to which the RMD applies. The downside of delaying your 2018 RMD into 2019 is that you will have to take two RMDs in 2019, with both RMDs being taxable events.
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your adjusted gross income, plus any non-taxable interest income you earn, plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.
Lastly, should you make 13 mortgage payments in 2019? There may be some merit to making a January 2020 mortgage payment in December 2019. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more.
We encourage you to reach out to us here at Kendall Capital to help guide you through your 2019 financial to-do’s.