Financial Intelligence Newsletter for Q4 2024
In this publication of Financial Intelligence, I have included a year end financial planning article which includes actions to consider as we near the end of the year. If you need assistance in deciding if any of these strategies are applicable to your specific situation, please let us know. I have also added a separate piece on the considerations of when to use either a Will or Living Trust as the main estate planning disposition tool. I perform this basic assessment with every estate plan review at Peak. I hope you find the information provided helpful.
2024 Year-End Financial Planning Considerations
The following are some year-end planning considerations as 2024 comes to a close. Below is a list of actions, contribution amounts and deadlines we have compiled that may be helpful to know as we approach the last few weeks of the year. We are available if you have questions or need assistance.
Retirement and Medical Expense Account Planning
Make contributions to Qualified Defined Contribution Plans, Tax Advantaged Plans, and IRAs to take advantage of current year deductions and tax-deferred growth within the account. IRA and SEP IRA contributions for tax year 2024 must be made by April 15, 2025. Employee contributions to 401(k)s, 403(b)s and Simple IRAs must be made by December 31, 2024. The maximum contribution amounts for 2024 are:
- Traditional or Roth IRA: $7,000 (plus a $1,000 catch-up if workers are 50 or older)
- Traditional or Roth 401(k) through an employer: $23,000 (plus a $7,500 catch-up for workers who are 50 or order)
- SEP IRA: the lesser of 25% of qualified income, up to $69,000.
Contribute to a Health Savings Account. If you have a high deductible health plan with a Health Savings Account (HSA) and sufficient cash flow, consider maximizing your tax-deductible contributions. Earnings within an HSA are not taxable, and amounts distributed from an HSA for qualified medical expenses are also tax free.
The maximum contribution for tax year 2024 is $4,150 for individuals and $8,350 for families with a catch-up amount of $1,000 for those 55 and older. The contribution deadline is April 15, 2025. (Distributions from an HSA for non medical expenses are subject to income taxes, plus an additional 20% excise tax penalty for such expenses before age 65).
Spend available Flexible Savings Account money. Contributions to an FSA are tax deductible to an employee, much like an HSA account. Unlike an HSA, if the employee fails to use all contributed amounts within a certain period, usually the end of the year, contributions are forfeited back to the employer because you either “use it or lose it.” Check with your plan sponsor as deadlines may vary depending on the plan.
Roth Conversions
An individual may convert a Traditional IRA to a Roth IRA to enjoy tax free growth and distributions. The amount converted, however, will be included as taxable income in the year of conversion. Unlike Traditional IRAs, funds in a Roth IRA are not subject to required minimum distributions (RMDs) at age 73. Conversions are a great strategy in years where the market drops, in lower income years, years in which you have a large taxable loss to deploy, and for those expecting to pay higher marginal tax rates in the future. If there is time before the end of the year, we recommend running a break-even analysis to see if a conversion makes sense from a tax planning standpoint.
The “backdoor” Roth conversion technique is still available for 2024. Some company plans allow employees to make contributions beyond the annual maximum deferral limits with after tax dollars. The backdoor Roth conversion strategy allows the conversion of these post tax contributions directly to a Roth IRA, which in some cases can be significant. If you have post tax retirement funds in a company plan, a backdoor Roth conversion can be a prudent planning opportunity to take advantage of here in 2024.
Roth conversions must be done by December 31, 2024, but the analysis on whether to convert Traditional IRA money, or how much to convert, should begin much sooner.
Required Minimum Distributions (RMDs)
RMDs apply to assets in a qualified plan, IRA, Qualified Annuity, 403(b), SEP, SIMPLE, or 457 plan. While minimum distribution rules do not apply to Roth IRAs, they do apply to Roth accounts in a 401(k) or 403(b). Typically, if you are over 73 you are required to take RMDs before December 31st (or for your very first distribution, April 1st following the year you turn 73) to avoid a potential 25% penalty. RMDs are included in taxable income and taxed at ordinary income tax rates.
If you don’t need the distribution to cover your living expenses, you might want to consider making a qualified charitable distribution (QCD). This strategy allows a retirement account owner over the age of 70.5 to donate up to $105,000 for 2024 directly to qualified charities. If the RMD amount of the account owner is under the $105,000 limit, then the entire RMD can be excluded from taxable income and Adjusted Gross Income (AGI). For some retirees whose AGI levels are near the Medicare premium surcharge thresholds, this strategy can be extra beneficial, as they can potentially avoid triggering a premium surcharge.
Charitable Planning and Gifting Considerations
All charitable deductions for 2024 must be itemized, if you plan for your overall allowable deductions to be above the standard deduction. The traditional charitable deduction rules apply for 2024: deductions are limited to 60% of Adjusted Gross Income (AGI) on cash gifts and 30% of AGI on non-cash contributions (i.e., appreciated stock held for more than one year).
If you are considering charitable donations this holiday season, it is worth understanding what your other estimated itemized deductions will be for 2024. If you will be close to or over the standard deduction ($14,600 for single filers, and $29,200 for married filers), then it might be sensible to make additional, concentrated charitable gifts this year to push you much further over the threshold so you expand on the tax savings available. This strategy is commonly referred to as ‘bunching’ in planning circles. Bunching means concentrating contributions in a single year, then skipping for a few years thereafter, utilizing the standard deduction in these subsequent years. A donor advised fund (DAF) may be appealing if you are considering this bunching strategy.
DAFs are accounts established at firms such as Charles Schwab and Fidelity to facilitate charitable contributions while receiving an immediate income tax deduction. You can contribute to the fund as often as you like, and then recommend gifts to your favorite charities whenever it makes sense for you. We regularly assist in setting up these types of accounts for clients.
Using a DAF can be especially ideal for those who have highly appreciated securities in a taxable account. The contribution of long-term appreciated assets can be one of the most tax-efficient ways to give and can simultaneously rebalance your investment portfolio. Over time, long held positions in a stock can create substantial unrealized gains and overweight the portfolio. With a charitable rebalance, you can donate a highly appreciated stock position to a charity or DAF, allowing for both the exclusion of unrealized capital gains and a qualifying charitable deduction. The final deadline for gifting is December 31, 2024, but as with Roth conversions, the planning and process should be started well in advance, especially if you are considering a qualified charitable distribution from an IRA, or a “bunching” charitable donation strategy.
Wealth Transfers. The 2024 annual gift tax exclusion allows you to gift up to $18,000 per donee per year ($36,000 if “split-gifting” is elected between spouses). Gifting over these amounts will require a gift tax return to be filed, but no taxes would be owed unless you have gifted more than the unified exemption amount ($13.6 million for individuals and $27.2 million for married couples for 2024) during your lifetime. The amount gifted over the annual exclusion simply reduces the available unified exemption for tax free gifting during life and at death. If your estate could be subject to estate tax (at an approximate rate of 40% on assets gifted over the above thresholds), gifting during your lifetime is a great way to reduce your gross estate that could be subject to estate tax, and allow assets to appreciate outside of your balance sheet. Let us know if you would like to model out any specific gifting scenarios and discuss any tax consequences associated with making gifts.
For a taxpayer with a considerable amount of appreciated assets in a taxable account and adult children in low tax brackets, a strategy involving the gift of appreciated stock to the adult child could be a highly tax efficient technique to employ. As an example, let’s assume that a taxpayer and spouse in a high tax bracket gifts $30,000 of appreciated stock with a $5,000 basis to their adult child who is in a much lower tax bracket. Taxpayer and spouse accomplish gifting goals while also removing $25,000 of unrealized capital gains from their portfolio. Although the $5,000 basis carries over to the adult child, the same adult child could sell the stock, realizing the $25,000 of capital gains, but at a potentially 0% capital gains tax rate, if their taxable income is projected to be below $94,050 as a married couple filing jointly for 2024, resulting in no tax on the transaction.
Gifts must be made on or before December 31, 2024. For gifts over the annual exclusion amount, the deadline for filing a 709 Gift Tax Return is April 15, 2025.
Fund a 529 College Savings Plan
In recent years, there have been some changes regarding the tax deduction available to you when it comes to contributing to a 529 plan. If you are a resident of Colorado, when you contribute to a Colorado 529 plan, you can deduct up to $22,700 annually for single filers, and $34,000 for joint filers, from your state income tax return for 2024. Once contributed, the funds in the account grow tax free and are distributed tax free if used for qualified higher education expenses. Contributions to 529 accounts are also considered a completed gift for federal gift and estate tax purposes.
But remember this as well: There is a special rule allowing individuals to contribute up to $90,000 per person (5 years x $18,000) to a 529 plan in 2024 without requiring the use of a gift tax return, nor incurring any specific gift tax consequences. A couple electing to “gift-split” the contribution can double this amount, or contribute $180,000 per person. This might be worth considering if you have received a liquidity windfall in 2024 such as an inheritance, or the proceeds from the sale of a business interest. The deadline for contributions to a 529 is December 31, 2024.
Investment Portfolio Decisions
Loss (and Gain) Harvesting. Investment losses can help you reduce taxes by offsetting income or gains. Even if you don’t currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or gains in future years. If you have more capital losses than income or gains, you can carryover up to $3,000 of losses to offset income or gains on future tax returns. Harvesting gains in long held appreciated positions within your portfolio to balance out losses already taken in 2024 can be savvy portfolio management. Your advisor at Peak is actively and routinely looking for opportunities to balance individual stock losses with some profit taking. If you have questions about this process, or how it could play out within your specific portfolio of investments, feel free to reach out to your advisor. The deadline for tax loss harvesting is December 31, 2024.
Final thoughts. Good tax planning starts with calculating your estimated taxable income for the year and understanding your current tax bracket. Having a clear understanding of which tax bracket your taxable income is likely to fall in is critically important to recognizing potential year-end tax planning opportunities.
We have had inflationary increases to the tax bracket thresholds in 2024, and there will be further increases in 2025. Next year marks the last year of the Tax Cuts and Jobs Act legislation passed at the end of 2017. The law is automatically set to sunset in 2026 and resort to pre-2018 tax brackets and rates, unless legislation is passed to extend it. We plan to discuss the ramifications and effect on clients and their specific tax situation throughout the 2025 calendar year, whether the laws are allowed to simply sunset, or if they are modified and/or extended by Congress. Let us know if you have questions associated with any of the year-end planning strategies discussed, and how we can help you save taxes.
Wills vs. Living Trusts – What Should I Use and Why?
I am often asked whether a client should have a Will or a Living Trust as the main estate planning document that will manage the distribution of their assets according to their intentions after they pass away. As with most decisions involved in drafting a legal document, the answer ultimately depends on what the client’s objectives are with their legacy plan and what is most important to the client when it comes to the administration of the estate plan.
A Living Trust is a separate legal entity that holds assets during your lifetime for your benefit and distributes these assets after your passing according to your wishes. Legal title of assets is transferred out of your name and into the trust. The Living Trust is completely revocable, meaning you can dissolve it whenever you would like, or move assets in and out of it as you please. There are no tax ramifications, nor does this entity require a separate Tax Identification Number (TIN). All taxes incurred by assets owned by the Living Trust are paid by you on your own tax return. Consider the entity your alter ego. You will have complete control over the assets transferred into a Living Trust, thus no real asset protection is provided by using such a trust, as can be the case with irrevocable trusts. Assets owned by the Living Trust will also continue to enjoy a step-up in basis, as if they are still owned by the individual grantor who created the trust.
What are the advantages and disadvantages of using a Living Trust over a Will? If you are resolute on avoiding a probate administration and the time and expense associated with this process, a Living Trust can be beneficial. A Living Trust does not get filed with the probate court like a Will does. The entire administration of a Living Trust takes place outside any court supervision by a Successor Trustee, which could save both time and money. Keep in mind the probate process is governed by state law, and the process and laws are very different from state to state. Some states have time consuming and expensive probate processes, such as California and most East Coast states. Other states, including Colorado, are streamlined and easy to navigate, without much court involvement, assuming complexities are minimized.
Probate is a very public process in which full estate balance sheets and accountings must be filed. The entire world can access these documents, see the size of your net worth, and discover where your assets will go. Your heirs will be exposed, including what and how much they will receive from your estate plan. For some clients, this is of no consequence, but other clients do not want this type of exposure for their estate or their heirs, especially if the framework and distributions are atypical.
If a Living Trust is created and properly funded, it also avoids having to go through the probate process in other jurisdictions. For example, if you own real property in multiple states and you were utilizing a Will as part of your estate plan, your executor would have to open up a probate in each state where you owned real estate, and be subject to different probate processes and filing requirements in each state – not efficient or ideal. But if all property is owned by your Living Trust, no probate would be required anywhere.
With all of that said, there can be some advantages to probate depending on your specific circumstances. If there are significant creditors of the estate, they can be organized by priority, closed out, and satisfied. Probate can provide a forum for disagreements to be resolved and can provide clear deadlines for the challenging of the Will or final distribution of estate assets, whereas Living Trusts are generally not contestable. Thus, depending on the situation and facts, probate could be preferable compared to the unsupervised estate administration by a Successor Trustee.
Utilizing a Will is certainly less time consuming and typically a more cost-effective process upfront. Simplicity in drafting and application is the key to a Will. It is effective on death only, and there is no need to transfer assets, whether financial accounts or real estate, into an entity during life for management purposes. But, as stated above, it can be more costly to administer on the back end.
If the owner of a Will is incapacitated prior to death, agents under a power of attorney will assist in making decisions related to financial matters and healthcare decisions. Once the owner of the Will passes, the power of attorney documents are no longer relevant and the executor of the estate now manages the assets, which became frozen, as of the date of death. Assets owned by the Living Trust would be managed by a Successor Trustee during both incapacity and after death. The power of attorney documents still play a role during incapacity, however, because typically there are assets not owned by the Living Trust (i.e., retirement accounts). The Successor Trustee is also not assisting in healthcare decisions like an agent under a medical power of attorney would.
The Living Trust is an entity that survives death and becomes irrevocable, however, and the administration of assets can be fluid and efficient. The continuity of management of the Living Trust’s assets upon your death is a major benefit. Stocks, securities, real estate, business interests, and any other assets of the trust can continue to be managed without interruption while debts, expenses of last illness, funeral bills, taxes, etc., can be paid. Transferring assets immediately can be important when the family has immediate financial needs and requirements upon your passing. Assets not owned by the Living Trust during your lifetime will transfer to the Living Trust after death via a “pour over” Will. This type of Will “catches” non-transferred assets and puts them into the trust to avoid a full probate administration of the estate. Beneficiary and Transfer on Death designations, and the titling of property, will also manage the distribution and disbursement of assets, regardless of whether you are using a Living Trust or a Will. You can create testamentary trusts in either a Living Trust or Will. These are trusts created when the owner of a Will or a Trust dies. In a way, they “spring to life” upon the death of the owner or creator.
There are some formalities of operation concerning the use of a Living Trust during your lifetime. Assets held by the trust are handled in a slightly different manner than would be the case if you owned them outright. But these concerns are manageable with proper instruction and guidance.
Less of a disadvantage, but more of an observation – assets transferred into Living Trusts do not provide creditor or liability protection. Thus, if one of your goals is to shelter assets from such claims in the future, this approach to asset protection is generally not successful. Also, neither a Will nor Living Trust, on its own, is a tax savings vehicle. Both need the requisite language to protect exemption amounts or to do other tax planning.
Whether a Living Trust or Will is the best approach for you, depends on many of the factors discussed within this article. A careful review of the types of assets you have and a discussion concerning your objectives will help you in making an informed decision. If you have any questions about your estate plan, I am happy to review your plan and provide my observations and recommendations to you.
Jason Foster, JD, AEP®
Terry Hefty, Noel Bennett, John McCorvie, Tara Hefty, Jason Foster, Terry Robinette, Brent Yanagida, Julie Pribble, Johnny Russell, Bethany Aylor, Sophie Berglund, Grant Bugner
Peak Asset Management, LLC | 303.926.0100 | 800.298.9081 | 1371 E. Hecla Drive, Suite A | Louisville, CO 80027 | PEAKAM.COM
Advisory Services offered through Peak Asset Management, LLC, an SEC registered investment advisor. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This content is developed from sources believed to be providing accurate information and may have been developed and produced by a third party to provide information on a topic that may be of interest. This third party is not affiliated with Peak Asset Management. It is not our intention to state or imply in any manner that past results are an indication of future performance. Copyright © 2024 Peak Asset Management
