When it Comes to Financial Planning, Begin with the End in Mind




Photo provided by Northwestern Mutual

As part of a comprehensive financial plan, my team at Northwestern Mutual works with our clients to help identify risks to retirement income. One of the biggest retirement risks is taxes – reducing your income and leaving you with less money to spend on what’s important to you.

Taxes can be very confusing, but here are a few ideas to make this time of year a little less stressful. As always, please consult your tax professional before implementing as these ideas are meant to help inspire creativity around tax time, but are not a comprehensive strategy in themselves.

1. Charitable Contributions

The IRS allows for a tax deduction for qualified 501(c)(3) organizations. This deduction is allowed up to a maximum of 50 percent of your adjusted gross income (30 percent if you are giving appreciated stock). This is a great year-end idea to get in the holiday spirit and give back. The tax savings can be even greater if you give appreciated stock because you get the tax deduction, and you get to forego the capital gains that you would have paid. If you don’t have a charity in mind yet, you can set up a donor advised fund. With this tool, you can make a donation and receive a tax deduction this year, and decide which charities you want to support in the future. That kind of flexibility – combined with tax advantages – makes this an attractive option for people who want to donate to charity.

2. Retirement Savings

One of the easiest ways that you can get a deduction is by funding a retirement account. The maximum you can put into a 401k/403b for both 2015 and 2016 is $18,000 and if you don’t have a retirement plan through work, you can contribute up to $5,500 to an IRA. Both the 401k and IRA allow something called “catch up contributions” that allow for a larger contribution if you are age 50 or older. In addition, if you own your own business, you may be able to set up a profit sharing plan or a pension plan which could allow you to contribute even more. It is important you consult a professional on these decisions as the exact rules depend on your circumstances and can vary dramatically from person to person depending on income, marital status, and more.

3. Tax Loss Harvesting

2015 was not a kind year for many investors. On a positive note, in years when market volatility has a negative impact on your portfolio, this may present an opportunity to lower your tax bill. The IRS allows for a deduction of up to $3,000 against your ordinary income for realized capital losses – investments sold at a loss – and also allows you to carry forward unused deductions in excess of $3,000, which you may be able to use to offset future gains. While seemingly complicated, it’s an easy way for a tax attorney to help maximize a family’s retirement income.

4. Deduction Bunching

Currently the standard deduction for those who do not itemize is $6,300 for single individuals and $12,600 for families. If you think your itemized deduction is close to the standard deduction, it may make sense to bunch your deductions and alternate the years you itemize and the years that you take the standard deduction. For example, you could pay your next property tax bill for 2017 early and capture the deduction in 2016. You could also make two years worth of charitable gifts in 2016, and could make extra retirement contributions in 2016. This maximizes your itemized deduction in 2016, and then you can use the standard deduction for 2017. This simple technique helps many manage their taxes and maximize their retirement income.

Many of our clients are eligible to fund Health Savings Accounts (HSA), but forget to make their contributions. These contributions are tax deductible. To be eligible, you need to be in an HSA qualified health insurance program. The maximum contribution is $3350/year for individuals and $6750 for families in 2016 ($2250/$6,650 in 2015). Unlike an Flexible Savings Account, which is use it or lose it, the HSA rolls over from year to year. Also, there is a way you can pay expenses out of pocket and use your HSA to reimburse yourself tax free – assuming you’ve kept meticulous records and receipts and meet other IRS criteria.

One more health care tax tip is to remember that if health care expenses (health care premiums, prescription drugs, out of pocket cost for medical, dental, vision expenses, and many other expenses outlined at irs.gov) exceed 10 percent of your adjusted gross income, they are deductible. If you are over 65, this threshold is only 7.5 percent through the end of 2016. It is important to run this calculation, as I have found many clients who don’t think they will qualify, actually do.

The Cincinnati business owners and professionals I know are living life differently. They’re multitaskers, managing conference call meetings while shuttling kids to holiday activities. They push work/life balance to the limit.

They want to protect their loved ones and protect their wealth – so earned dollars fund dreams. The last thing these professionals want to do is leave hard-earned retirement money on the table. But many times, that’s exactly what we see.

By managing taxes at year-end, you can help to maximize your retirement income. An effective and efficient retirement plan can help you fund retirement dreams. If you haven’t ever imagined working with an expert to help protect your wealth, now may be the right time to take action.

Article prepared by Ben Beshear with the cooperation of Northwestern Mutual. To contact Ben, please visit www.benbeshear.com.

Beshear Financial is a marketing name for Ben Beshear and is not a broker-dealer, registered investment adviser, federal savings bank, subsidiary or other corporate affiliate of The Northwestern Mutual Life Insurance Company, Milwaukee, WI, including its subsidiaries, nor is it a legal partnership or entity. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) and its subsidiaries. Ben Beshear is a Representative of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (investment management, trust services, and fee-based financial planning), a subsidiary of NM and limited purpose federal savings bank.

This article is not intended as legal or tax advice. Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.