Three pillars of year-end financial planning

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  • Introduction
  • Planning
  • Investment
  • Maintenance
  • Conclusion
  • The Fine Print

Wealth advisory market perspectives


When it comes to year-end tasks, personal financial planning usually takes a back seat to more immediate items, vacation scheduling, work project deadlines, etc. We offer busy entrepreneurs and investors three key pillars for year-end personal financial optimization—Planning, Investment and Maintenance. Although we think you'll find this checklist valuable, we always suggest working with a tax advisor and wealth planner to appropriately tailor solutions to your individual needs .


I. Tax Planning

  1. Roth conversion and Roth characterization. The uneven lifecycle and income streams of tech entrepreneurs and investors allows for possible substantial year-end tax planning, including the opportunity to accelerate or defer income. In a lower than usual income year, such as a year of bootstrapping a new business, it's often prudent to review existing traditional IRAs and former employer 401(k) plans, and work with a tax professional to determine whether a conversion to a Roth IRA would be beneficial. Conversions require federal and state income taxes in the year of the transaction, however, all principal and earnings could grow income tax-free from that point on. Executing a Roth conversion earlier in a tax year can open the opportunity to re-characterize a Roth conversion and avoid paying the tax liability on value that may no longer exist.
  2. Consolidating miscellaneous Tier 2 deductions. Tier 2 deductions include your investment advisory, CPA, and attorney fees, and also employee business and education expenses, home office cost, etc. Entrepreneurs and investors with advisors can aggregate and apply these costs to the 2% Adjusted Gross Income (AGI), since only the amount above that would be tax deductible. These deductions may be disallowed if you are subject to the Alternative Minimum Tax (AMT).

  3. Stock options exercise. Entrepreneurs often take compensation in the form of incentive grants, such as stock options. If you are not affected by the Alternative Minimum Tax (AMT), you may have an opportunity to exercise Incentive Stock Options (ISOs) without incurring an immediate tax liability. If you are subject to AMT but anxious to get the clock ticking on the long-term capital gains treatment, you may consider exercising options early in the year, e.g., in January, since the AMT may not be due until April of the following year. Many investors weigh the potential tax benefits of exercising options early in a calendar year, while reducing capital gains tax, against potential market risk in the stock.

  4. Pre-pay state and property taxes before December 31, if not in the AMT this year. Prepaying allows some investors to create a larger current year tax deduction, although it requires a near-term cash outflow.

II. Retirement Planning

  1. Workplace retirement plans. Contributions to 401(k) plans are often among the best tax-effective savings vehicles, and eligible employees should consider maximizing contributions to a company's 401(k) plan by December 31. The maximum amount to defer in 2015 is $18,000 (or $24,000 if 50 years or older), and the contributions are pre-tax, effectively reducing gross income by the amount you contribute. It may take one to two pay periods for contribution amount changes to take effect, and contributions should be adjusted every new year.

  2. Self-employed retirement plans. The two most popular plans, the self-employed or "solo" 401(k) plan and the SEP IRA, allow for more than $53,000 in 2015 contributions and the potential for $6,000 in catch up contributions, all pre-tax to effectively reduce income tax liability. The deadline to establish a solo 401(k) is December 31, although the plan does not have to be funded until your tax-filing deadline plus extensions (usually April 15 or October 15 of the following year).

  3. Roth or Traditional IRA. Roth IRA eligibility, or the decision to contribute to an employee Roth 401(k) plan, often comes down to comparative tax projections based on contributions to one option vs. the other. There are tax incentives in both, and the appropriate choice often involves the decision to receive a tax break today vs. in the future, or to combine both plans while targeting a specific tax bracket and allowing for tax diversification in the future.

  4. Deferred Compensation Plan. Highly compensated employees are regularly offered participation in a non-qualified retirement plan in addition to an employee-sponsored 401(k). Participants elect to defer a portion of next year's salary or bonus, effectively reducing the amount of take-home pay and current year income tax liability. The contributions grow tax-deferred and are invested until a certain trigger event occurs (such as retirement or separation from service). These plans are not protected by the Employee Retirement Income Protection Act (ERISA), so there is the risk of forfeiture if the employer is unable to pay in the future.

  5. Required Minimum Distributions (RMDs). All retirement accounts (except for Roth IRAs) are subject to mandatory withdrawals starting at age 70.5. The withdrawals are taxable income and, at the onset, represent approximately 3.65% of the value of the account as of the end of the previous year. For the very first RMD, investors can defer the first distribution until April 1 of the following year, effectively avoiding additional income this year with the understanding that two RMDs would be taken the year after.

  6. Stretch IRA distributions. Inheriting a retirement account from a non-spouse, can force the obligation to start distributions from that account and pay income taxes on them if the account is not a Roth IRA. A way to reduce the tax liability is to take advantage of the "stretch IRA" provision and start taking annual required minimum distributions based on life expectancy. The deadline for these to commence is December 31 following the year of passing of the original owner. Missed deadlines may result in unwanted tax consequences.

III. Charitable Planning

  1. Charitable contributions. The end of the year is a popular time for donating cash to qualified non-profit organizations and other charitable causes. In addition to fulfilling a philanthropic aspiration, these contributions may provide valuable federal and state tax deductions. Many families donate directly to the charity, or for greater flexibility, utilize a private foundation or a Donor Advised Fund (DAF). DAFs provide an easy way to manage the timing of contributions when they make most sense from a tax standpoint, and allow for the deferral of grants until a later time, even years later. DAFs also avoid the overhead and the administrative burden of tracking tax receipts. Cash donations are accepted, but most entrepreneurs and investors get an even bigger benefit by contributing long-term appreciated assets, such as stocks which were purchased or received more than a year prior. In addition to receiving a charitable deduction for the fair market value of the stock on the day of donation, the donor avoids paying the capital gains tax on the appreciation.

  2. Qualified charitable rollovers. Individuals 70.5 years old or older are subject to Required Minimum Distributions (see above), and can be eligible to gift up to $100,000 from a retirement account to a public charity. Such gift RMDs can be excluded from the gifted amount of the income tax calculation. In many cases, the exclusion would be more valuable than a charitable income tax deduction. Investors may not transfer the money to your Donor Advised Fund at this time.

  3. California College Access Tax Credit fund (CATC).This temporary tax incentive is available to California residents, many of whom face the highest state income tax in the country. Individuals or companies that contribute to a new College Access Tax Credit Fund will get a generous state tax credit equal to 55% in 2015 vs. 50% in 2016. (Note: this tax credit decreases in 2016 and 2017). Tax credits would typically offset tax liability dollar-for-dollar (subject to certain limitations), while a charitable deduction (e.g., a gift to any public charity) reduces income before taxes are calculated. Thus, the value of the federal deduction depends on the donor's tax rate. It is best to work with a tax professional to determine the optimal way to gain tax benefits from your charitable inclinations.

IV. Estate Planning

  1. Annual gifting. Consider utilizing your annual gift tax exclusion amount to a non-spouse ($14,000 per donor, per recipient) by funding a custodial account (UTMA/UGMA). Ideally, gifts of low basis stock could be sold during a more preferential tax bracket environment (see below). Also, gifts to working individuals, including working children, can be provided within the gift exclusion amount to fund a Traditional IRA or a Roth IRA for him/her (up to $5,000/year, not to exceed the relative's earned income). This would greatly kick-start his/her savings plan and allow for tax-advantaged compounding of capital.

  2. Other ways to reduce your estate. Consider making college plan contributions to a 529 college savings plan (see below). From an estate planning point of view, the gifts to these plans are considered completed and grow outside of your estate, however, they are not irrevocable, allowing for a great amount of planning flexibility.

V. College Planning

  1. Contributions to a 529 college savings plan. A 529 plan provides the unique opportunity for an accelerated gift. Contributions are allowed up to 5 years of the annual gift tax exclusion amount ($70,000 for individuals, $140,000 for couples in 2015) without a gift tax consequence. Coupled with a December contribution of $14,000, investors could effectively contribute a 6-year up-front lump sum to a college savings program. A gift tax return is needed if you accelerate, or in some states, split the gift with a spouse.

  2. Distribution from 529 plans. Once children start college, income tax-free withdrawals from college savings plans for qualified education expenses should be incurred in the same calendar year. Don't miss the deadline of December 31. Qualified expenses incurred in 2015 should be reimbursed using withdrawals in the same calendar year.

  3. Direct payments to educational institutions. Direct payments for education do not count towards the annual gift tax exclusion. Families may take advantage of the fact that the IRS does not put a dollar limit on the amount paid to a school (or a hospital) on behalf of someone else as long as the payment is direct, so individuals can reserve $14,000 for other wealth transfer planning opportunities, such as gifts to irrevocable trusts, life insurance, etc. Making direct payments would also help reduce the value of the total taxable estate and result in a potentially lower estate tax liability for heirs.


I. Year-End Mutual Fund Distributions

The end of the year can be fraught with unwanted short-term or long-term capital gains distributions from mutual funds. Mutual funds held in non-retirement accounts can increase the amount of net investment income and may be subject to additional taxes. Be aware of these and try to manage them by not purchasing a fund that is expected to pay a distribution at the end of the year, but by waiting until the ex-dividend date. Consult your Wealth Advisor to consider employing an asset allocation strategy that places potential high turnover and tax-inefficient investments in tax-deferred retirement accounts, in order to avoid paying unnecessary taxes from investment activity and to allow for greater compounding of capital.

II. Tax Loss Harvesting
Review investments in non-retirement accounts to identify potential unrealized capital losses (e.g., the current market value of the position is below the purchase cost). When selling a position, investors may realize the loss and be able potentially to write off up to $3000 of collective losses against ordinary income, and utilize the rest against any realized capital gains this year. Any unused capital losses could be carried forward into future years indefinitely, providing a valuable tax-management tool. Be familiar with the wash sale rule, which may disallow the loss if a re-purchase of the same or a substantially equal security 30 days before or after the sale date. If the trade date is on or before December 31, there is a potential to deduct the loss this year.

III. Portfolio Rebalancing
Investment portfolios should be reviewed periodically, with a goal to re-balance to desired targets at least annually in case of shifts in the market, asset allocation, risk exposure, or goals and investing time frame. The end of the year is an opportune time to rebalance, as it may present an opportunity to match capital gains and losses in the portfolio and reduce the tax impact of a possible portfolio transition. Consider realizing some capital gains if an investment has run its course, especially if there is a chance to realize capital losses in 2015 or carry some losses from prior years.

IV. Reviewing/rebalancing college 529 plans
The U.S. Congress deems 529 plans to be College Investment Trusts (CITs), set up for the benefit of a future student, and effectively limits the amount of investment activity in them. CITs currently only allow two investment exchanges (i.e., changes in the investment portfolio within the plan) per calendar year (up from one exchange). Barring use of a glide-path, age-based portfolio* in the child's 529 plan, consider reviewing the investment risk taken commensurate with the changing time horizon and making an exchange before December 31 to allow for the flexibility of making additional such exchanges in the new calendar year.


I. Annual Benefits Enrollment

    1. Employee benefits elections are usually made in November or December each year. Review all available employee benefits, as they are a valuable part of your total compensation package. Consider participating in pre-tax flexible spending accounts such as a Medical Spending Account (you may contribute up to $2,550) or a Dependent Spending Account (up to $5,000), by allocating dollars from next year's paycheck. Similar to your 401(k), the contributions to these accounts effectively reduce income tax liability by deferring dollars before wages are taxed. Beware of requirements to spend the money allocated for qualified expenses by the end of the calendar year, and do not overfund.

    2. Employee Stock Purchase Plans (ESPPs). ESPPs offer the opportunity to purchase company stock with after-tax dollars at a typical discount of 5-15%. Contributions to an ESPP would be a disciplined way to put additional savings away and get the incentive of the price discount. Some tax planning and asset allocation consideration is needed, including the decision to sell immediately (and pay short-term capital gains tax) or wait a year and take advantage of the usually lower long-term capital gains tax rate.

II. Required Minimum Distributions

Individuals 70.5 years or older need to remember to take a Required Minimum Distribution (RMD) from each retirement account before December 31 (unless it is the first one, see above). Withdrawals as cash, or as shares "in kind" can be taken, and families not needing the income can consider making a direct gift to a public charity in the form of a qualified charitable rollover (see above).

III. Non-Monetary Charitable Contributions
Tax deductible charitable contributions do not have to be monetary in nature. Donating goods and services during the holidays would also help reduce income tax liability. It is a good practice to keep a log of hours spent volunteering, and tally receipts from your donations.

IV. Transfer Low-Basis Stock to Friends/Family
If your children or other relatives (including a non-spouse partner) are in a lower tax bracket, you may want to gift them appreciated stock or mutual fund shares to take advantage of possible low/no capital gains treatment upon liquidation; utilize your $14k annual gift tax exclusion to do that.

V. Get Guidance on Financial Tactical Moves
Reach out to your various investment professionals if you have not heard from them, to get specific guidance on tactical moves you might consider. Various tax credits and deductions might expire at the end of the year, or tax and estate law changes might be changing.


Congress and the IRS present us with various deadlines we may lose track of: December 31, April 1, April 15, October 15, etc. The three pillars of personal financial optimization—Planning, Investment Maintenance—are by no means exhaustive, and should not be followed in isolation. These are merely some key reminders for your year-end planning. Consultation with advisors (a CPA, estate attorney, and investment advisor) opens you to the best opportunity to optimize the highest potential year-end and long-run benefits.

SVB Private Bank leads entrepreneurs and investors through synchronized approaches to optimize a year-end plan. If you'd like more information on our approach, we'd be happy to discuss.

Completing a smart year-end plan is one more great reason to open the bubbly and celebrate a fulfilling year!

* Age-based portfolios have an allocation among stocks/bonds/cash based on the age of the child (the younger, the higher the equity exposure; the closer to college age 18, the lower the equity allocation). These portfolios change with time usually on a gradual basis, often called a "glide path." As time goes by and the student draws closer to starting college, the allocation becomes more conservative.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank and SVB Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein