As year-end approaches, there are several things that every advisor should be considering on behalf of their clients. At Taylor Financial Group (TFG), we like to schedule all our year-end meetings to wrap up by the end of November or early December, so we have enough time to take action on the ideas discussed during those meetings. Below we detail the nine year-end planning items that should be addressed with your clients now.
And to be clear, we have a very organized approach to these items. We basically create a spreadsheet for each item to track the clients who have exposure and who we should be meeting with. So, we have a spreadsheet tracking Roth conversions, RMDs, IRA contributions and estate planning issues. That way we can track the clients, the specific recommendations made, and next steps.
1. End-of-year checklists for client meetings
Pull fpPathfinder’s “What Issues Should I Consider Before the End of the Year?” Checklist (see Figure 2) and the Horsesmouth “2021 Last Chance Financial Planning Checklist” (see Figure 1) and provide to clients before your review meeting. By providing these documents in advance, clients have time to formulate thoughts and questions before the meeting.
Figure 1: The TFG Imprint of Horsesmouth’s ‘Last Chance’ Checklist
Source: Taylor Financial Group
Figure 2: A Round-Up of End of Year Issues
Source: fpPathfinder
2. General tax and estate planning conversations
If any upcoming changes in legislation are a concern to your client, then the time is now to address these items. That legislation might not pass until mid-December, and at that point, there may not be enough time to take action.
We have been targeting clients with large estates (anything around $10 million), clients who are making around $400,000, clients with large traditional IRA balances, clients with after-tax accounts and clients who want to do Roth backdoor conversions. Figure 3 shows the most recent announcement we sent to our clients updating them on the pending tax proposal.
Figure 3: TFG Client Announcement About Tax Proposal
Source: Taylor Financial Group
3. Backdoor Roth conversions
Although we have until April to make IRA contributions, we like to address these items before year-end when possible. And with the ever-changing tax laws, backdoor Roth conversions are on the chopping block. This change in legislation may pass effective for 2022, so it’s best to speak to your clients about this strategy now.
If your client’s income is above $125,000 for single (or $198,000 for married filing jointly), you can still perform a backdoor Roth conversion. To accomplish a backdoor conversion, your client would first make after-tax contributions to a traditional IRA account with a zero balance and then immediately convert those IRA contributions into a Roth IRA account.
We usually send an announcement to all clients in June (see the June announcement below), but we then circle back on this topic at the end of the year.
Figure 4: TFG June Announcement About Backdoor Roth Conversions
Source: Taylor Financial Group
4. Roth IRA contributions
Although your clients technically have until April of next year to make their maximum contribution to a Roth IRA, it’s always important to address this strategy with them at each meeting. At TFG, we create a spreadsheet of each client’s contributions for that fiscal year and review that before speaking to clients to see if we need to encourage them to contribute more to satisfy the maximum allowed.
A large Roth account helps keep your client’s taxable income lower, thus limiting your client’s taxes in retirement, lowering their taxes on Social Security, and decreasing Medicare surcharges. And Roth IRAs hold significant advantages for their heirs, as monies can be withdrawn income-tax-free for them.
If your client has earned income in 2021, speak to them now about building their Roth IRA account. For 2021 the maximum contribution is up to $6,000 (or $7,000 for the age 50 catch-up).
5. Regular Roth conversions
At TFG, we also perform regular Roth conversions for clients at all times during the year (particularly when the market goes down as it did in March 2020), although we do wait until the fourth quarter in many instances to make sure our projections are correct. We think of Roth conversions from a number of vantage points: tax bracket arbitrage, maximizing lifetime after-tax wealth, preventing the widow’s penalty, and lessening the impact of the SECURE Act. We have special software and analytic tools so that we can view the Roth IRA from several perspectives.
We are very busy during Q4 doing these Roth conversion analysis for the clients. It is very complex entailing multiple steps, starting with the tax return analysis, then filling the tax bracket, then considering lifetime wealth maximization accomplished by a Roth conversion. We are also considering the widows penalty and the SECURE Act, which the software doesn’t consider.
6. Take RMDs before year-end
The CARES Act passed on March 27, 2020, allowed IRA owners to forgo their 2020 required minimum distributions (RMD’s). With no required distributions, many traditional IRA owners could keep their monies invested and take advantage of the incredible rebound that the market experienced from early April until the end of 2020.
Many of these clients may have forgotten about taking their RMD; they may not realize they can take a QCD, and they may not realize how their larger account balances affect their RMDs and their taxes. This fantastic market recovery has led to traditional IRA balances growing much larger than expected. Although these accounts look great on a balance sheet, higher IRA balances mean higher RMDs for those who are 72 and over—and higher taxes.
For example, with the S&P 500 Index returning -6.24% in 2018, a $1 million IRA would have a required minimum distribution of $43,668.12 in 2019 for a 75-year-old client. That same account could have grown to around $1.375 million as of December 31, 2020, and would therefore require a distribution of at least $64,500 in 2021.
While we send an announcement to clients mid-year (see Figure 5) regarding their RMD and the QCD opportunity, we also touch upon it again to ensure they satisfy their obligation at the end of the year.
Figure 5: TFG Mid-Year RMD Announcement
Source: Taylor Financial Group
7. Tax-loss trading or harvesting
Tax-loss harvesting can and should be done throughout the year. But since it is also a calendar-year activity, you should do a final review at year-end of missed opportunities. Despite a generally strong year in the market, some stocks and mutual funds are still posting a loss for 2021 and if your client was invested in any of these, it is likely that some items in their portfolio show up in red under the “unrealized gains and losses.” Your client may be able to use their loss to lower their overall tax liability, or that loss can be used to offset a gain. While this is likely to be limited toward the end of the year, it’s always good to check on it. Beware, though, of the wash-sale rule: If your client buys back their sold positions within 30 days, they will have negated the benefit.
8. Annual gifting and estate planning review
Estate planning is always in order, but particularly right now, when many of the most beneficiary estate planning laws may be changing. And don’t forget the sunsetting in 2025 of the existing—and very beneficial—lifetime exclusion. Any client couple worth $10 million or so has received an extensive review by us.
The annual gift tax exclusion is $15,000 per recipient for the 2021 tax year. If your clients have extra income and would like to disperse some of that, now is the time to give those gifts before the year ends. A married couple can gift up to $15,000 each per recipient as well.
A bit of new information about 2022 to provide to your clients: The official estate and gift tax exemption climbs to $12.06 million per individual for 2022 and the gift tax annual exclusion amount jumps to $16,000 for 2022, up from $15,000 where it’s been stuck since 2018.
9. Check on beneficiary RMDs and do a beneficiary review
In my experience, custodians don’t usually do a good job at tracking these, so you want to ensure your clients are taking their required minimum distribution if they are the beneficiary of an IRA.
And one more thought: An agenda, like the one shown in Figure 6, is an essential part of the year-end meeting so you can ensure that no items are overlooked. This is the year-end agenda we are now using for our client meetings.
Figure 6: TFG Always Uses and Meeting Agenda
Source: Taylor Financial Group
Scheduling your year-end meetings and discussing these nine items with your clients during those meetings will ensure everyone starts the new year off right. Review your client list and schedule those you haven’t checked in with yet today.