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Not Another Year-End Financial Planning Article

detail of a blank yearly planner and a ball-point pen.

Come December, as sure as the appearance of “best of the year” lists and more gift guides than one person could possibly need, you can count on seeing a bunch of year-end financial roundups in your favorite news outlets.

As a financial planner, I’ve helped plenty of journalists who were writing that sort of article. Depending on how you look at it, I may be writing that sort of article right now. Even so, one aspect of these year-end roundups is a pet peeve of mine.

Along with standard year-end recommendations they ask for, I always provide the writers with the following comment:

Proper tax planning goes beyond just making one-time moves at the end of the year or near tax time. To minimize your tax burden, you always need to be considering how you structure your finances. Consistently funding retirement accounts, investing in a tax-efficient manner, and managing the type and timing of income you receive is essential.

Some year-end articles read like fad diets: a bunch of quick fixes that seem like they will solve your problems, but that don’t make a major difference in the long run. This type of thinking doesn’t encourage people to take the consistent steps that lead to sustainable financial success. Often the advice is valid in theory but unrealistic for the average reader to put into action before year-end.

One of the most common pieces of advice in year-end financial articles is to remember to contribute to tax-favored accounts, especially retirement accounts. While you can contribute to Individual Retirement Accounts until April 15 of the following year and still count contributions toward the previous year’s taxes, the same is not true for 401(k) plans.

However, the truth is that most people are not in a position to maximize their retirement account contributions in December if they have not thought about it at all for the previous 11 months. Depending on how your employer’s plan is structured, you may not even have the ability to catch up. If your 401(k) does permit lump-sum salary deferrals or contributions at the end of the year, many people still may not have the flexibility in their budgets to catch up all at once.

The same principle holds true for taking advantage of the individual annual gift exclusion. You can give up to $15,000 to any individual each year without triggering federal gift tax reporting requirements, and in many cases these sorts of gifts are a great way to transfer wealth to loved ones. But most sizeable gifts require planning to execute well. Scrambling to get all of them done before Jan. 1 simply isn’t practical. The same can hold true for substantial charitable contributions.

Speaking of scrambling, many articles also remind people with flexible spending arrangements through their employers that such accounts are subject to “use-it-or-lose-it” rules. But no one I know wants to stuff the last few weeks of the year with last-minute medical appointments. And this assumes your team of medical professionals hasn’t closed the office for the holidays.

Many of these year-end tax articles suggest evaluating your potential for tax loss harvesting – that is, selling assets that have suffered losses in order to offset capital gains for the year. This is a useful strategy, but waiting until year-end leaves you at the mercy of current market conditions and may give you less flexibility than taking a longer view would have allowed.

None of these suggestions are inherently bad, but all of them point to the same reality: effective tax planning is not something to do on Dec. 1 – or April 1 – and ignore the rest of the year. Instead, you should structure your finances so that, as the next year approaches, you’ve funded your retirement account, used your FSA, funded a child’s 529 savings account or met any of your other financial goals steadily over the preceding months.

The best tax planning involves major decisions about how you structure your business or what types of investments you choose. It means identifying ways to minimize your taxable income throughout the year, optimizing the timing and type of income you receive, and ensuing that you’re taxed at the lowest possible rate. Financial planning, when done right, is based on structuring your affairs in a way that makes the most of your resources, while allowing you to enjoy your days and sleep well at night. Regardless of how much you earn, it means regularly spending less or understanding when it is acceptable to dip into your portfolio’s principal.

I don’t mean to pick on these year-end articles too much. They typically do include valid recommendations, and doing some financial planning is better than none. But the articles also tend to overemphasize the potential for year-end recommendations to significantly change your financial life. Doing so takes more than a couple of pen strokes at the end of the year. In 2019, resolve to pay more attention to your finances each month or consider outsourcing this resolution to a professional. Happy New Year!

Client Service Manager Benjamin C. Sullivan, who is based in our Austin, Texas office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 13, “Federal Income Tax,” and Chapter 16, “Investment Psychology.”

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