Things
you can do for your future as the year unfolds.
What financial, business, or life priorities do you need to address for
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. You have plenty of options. Here are a
few that might prove convenient.
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.1
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 may want to look into whether you
can establish and fund a solo 401(k) before the end of 2019; as employer
contributions may also be made to solo 401(k)s, you may direct up to $56,000
into one of those plans.1
Your
retirement plan contribution could help your tax picture. 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. Should you be in the new 24% federal tax bracket, you can save
$1,440 in taxes as a byproduct of a $6,000 traditional IRA contribution.2
What are the income limits on deducting
traditional IRA contributions? If you
participate in a workplace retirement plan, the 2019 MAGI phase-out ranges are
$64,000-$74,000 for singles and heads of households, $103,000-$123,000 for
joint filers when the spouse making IRA contributions is covered by a workplace
retirement plan, and $193,000-$203,000 for an IRA contributor not covered by a
workplace retirement plan, but married to someone who is.1
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account assets may eventually be withdrawn tax free.3
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. There is no merit in waiting until April
of the successive year, however, since delaying a contribution only delays
tax-advantaged compounding of those dollars.1,3
Should you go Roth in 2019? You might be considering that if you only have a
traditional IRA. This is no snap decision; 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.1,4
Incidentally, a footnote: distributions from certain qualified
retirement plans, such as 401(k)s, are not subject to the 3.8% Net Investment
Income Tax (NIIT) affecting single/joint filers with MAGIs over
$200,000/$250,000. If your MAGI does surpass these thresholds, then dividends,
royalties, the taxable part of non-qualified annuity income, taxable interest,
passive income (such as partnership and rental income), and net capital gains
from the sale of real estate and investments are subject to that surtax. (Please
note that the NIIT threshold is just $125,000 for spouses who choose to file
their federal taxes separately.)5
Consult a tax or financial professional before you make any IRA moves
to see how those changes may affect your overall financial picture. If you have
a large, traditional IRA, the projected tax resulting from a Roth conversion
may make you think twice.
What else should you consider in 2019? There are other things you may want to do or review.
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. If you
plan to gift more than $12,000 to qualified charities and non-profits in 2019,
remember that the paper trail is important.6
If you give cash, you need to document it. Even small
contributions need to be demonstrated by a bank record or a written
communication from the charity with the date and amount. Incidentally, the I.R.S.
does not equate a pledge with a donation. You must contribute to a qualified
charity to claim a federal charitable tax deduction. Incidentally, the Tax Cuts
and Jobs Act lifted the ceiling on the amount of cash you can give to a charity
per year – you can now gift up to 60% of your adjusted gross income in cash per
year, rather than 50%.6,7
What if you gift appreciated securities? If you have
owned them for more than a year, you will be in line to take a deduction for
100% of their fair market value and avoid capital gains tax that would have
resulted from simply selling the investment and donating the proceeds. The
non-profit organization gets the full amount of the gift, and you can claim a
deduction of up to 30% of your adjusted gross income.8
Does the value of your gift exceed $250? It may, and
if you gift that amount or larger to a qualified charitable organization, you
should ask that charity or non-profit group for a receipt. You should always
request a receipt for a cash gift, no matter how large or small the amount.8
If you aren’t sure if an
organization is eligible to receive charitable gifts, check it out at
irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.
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.9
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.10
Pay attention to asset location. Tax-efficient asset location is an ignored fundamental
of investing. Broadly 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? In light of your
marriage, you may 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. Additionally, the two of you, no
doubt, have individual retirement saving and investment strategies. Will they
need to be revised or adjusted once you are married?
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? Might 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.4,11
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. You will have to make your 2018 tax year RMD by
April 1, 2019, and then take your 2019 tax year RMD by December 31, 2019.11
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.11
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.
Talk with a qualified financial or tax professional today. Vow to focus
on being healthy and wealthy in 2019.
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.com
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates.
This information has been derived from sources believed to be accurate. Please
note - investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC,
a registered broker/dealer and investment advisor. CBSI is under
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Citations.
1 -
forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more
[11/1/18]
2 -
irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions
[11/2/17]
3 - irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs
[7/10/18]
4 - forbes.com/sites/bobcarlson/2018/10/26/7-ira-strategies-for-year-end-2018/
[10/26/18]
5 -
irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax [6/18/18]
6 - crainsdetroit.com/philanthropy/what-donors-need-know-about-tax-reform
[10/21/18]
7 - thebalance.com/tax-deduction-for-charity-donations-3192983
[7/25/18]
8 - schwab.com/resource-center/insights/content/charitable-donations-the-basics-of-giving
[7/2/18]
9 - kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html
[8/28/18]
10 - schwab.com/resource-center/insights/content/reap-benefits-tax-loss-harvesting-to-lower-your-tax-bill
[10/7/18]
11 -
fool.com/retirement/2018/01/29/5-things-to-consider-before-tapping-your-retiremen.aspx
[1/29/18]
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