Checklist for Year-End Planning

I recently attended a large public seminar that focused on educating consumers about the value of financial planning. The headliner of the seminar was a very well-known “financial guru,” giving advice about what investments to buy, how to handle under-water mortgages, what life insurance was best, how to write a “do it yourself” will and estate plan, etc. The audience was busy taking notes while the speaker spouted forth this so-called “advice.” 

What struck me about this scenario was 1) how general the advice was and 2) how each member of the audience seemed to believe the advice was directed to THEM. Yet, what did this speaker actually know about the individual circumstances of the audience members? Practically nothing, I would bet. But even more discouraging was the fact that the audience didn’t seem to care, or even to realize, that many of the speaker’s recommendations wouldn’t necessarily fit their own particular circumstances, and in some cases might be downright detrimental to them.

After that presentation, I had the opportunity to speak individually to a number of the audience members. In each case, I asked if the individual was currently working with a financial planner. In 99 percent of the cases, the initial response was “Yes!” But as they eagerly scooped up our brochures on planning for retirement, buying a home, etc., I pointed out to them that their financial planner should certainly be helping them with those particular items. That’s when those emphatic “Yes” answers changed to “Yes, but…”

Turns out the vast majority of those folks were NOT working with a financial planner. They were working with someone who managed their money, or were using online websites for advice, or were relying on advice from “experts” such as the seminar headliner. No one was discussing their personal, individual goals with them; no one was looking at their entire financial picture; no one was providing objective, third-person advice as they struggled with life’s day-to-day financial decisions.

So before giving you a checklist about planning steps to take as we approach year-end, I want to state yet again that nothing, and I do mean nothing, can replace personalized financial advice from a financial planner that knows you and your situation — personally, deeply, and with your best interests in mind.

1. Year-end means Open Enrollment. It’s open enrollment time, both for Medicare as well as for many private plans. From October 15 to December 7, 2011, if you currently have Medicare, now is the time to review your coverage and decide whether you want to change your plan (Traditional Part B, Part D, or Advantage), or continue with your current one. There are a multitude of websites to help you with this decision — try Medicare.com to find or compare plans. Any changes will not take place until January 1, 2012. For private plans, consult with your company’s benefits or human resources department to find out the deadlines for any changes in coverage.
2. Year-end means Mutual Fund Distributions. There are a few types of mutual fund distributions, but the one that counts the most at year-end is the capital gains distribution. If you own mutual funds in a taxable account [i.e. not an Individual Retirement Account (IRA), 401(k), 403(b), etc.], you should check with your mutual fund family to determine if any significant capital gains will be paid out of your fund. Because there is no real advantage to receiving a capital gains distribution from a mutual fund, you may want to consider selling the fund before the distribution and buying it back after 31 days (to avoid IRS wash sale rules). Note you need to take into consideration transaction costs as well as possible price appreciation in the fund during the wash sale period.
3. Year-end means Capital Gain/Loss Harvesting opportunities. Investments should be examined to take advantage of the capital gain/loss offset for investment property. If capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income up to an annual limit of $3,000 ($1,500 for married filing separately). Note that current capital gains rates (the maximum rate for most people is 15 percent) are due to expire on 12/31/2011, and will increase in most cases to 20 percent. You should consult with your tax adviser to determine whether it makes sense to take losses now, or hold onto them with an eye toward using them to offset the higher capital gains rates expected for 2012.
4. Year-end means Required Minimum Distribution (RMD) deadlines. Make sure you’ve taken your RMD from your qualified plan if you are at least 70 ½ in 2011, or have an inherited IRA.

These are just a few of the items you should be looking at as we approach year-end. Consult your financial planner or tax adviser to see if these ideas, and more, apply to your individual situation.

FPA member Leslie T. Beck, CFP®, MBA, is a founding member of Compass Wealth Management LLC in Maplewood N.J.