Episode 530 – Year-End Financial Planning Checklist

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker:
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you and, as always, joined by my great colleague and co-host, Mr. Jason O’Meara, certified financial planner® and market leader here at Mercer with me. Jay, great to have you back as always.

Jason O’Meara:
Of course, this is gonna be a good topic today.

John Walker:
Yeah, you know, it’s that time and it’s time for our — those of you who’ve been listening for years will know — it’s time for our year-end financial planning checklist. You know, we try to make a point of doing this every year so that folks listening can really finish the year strong and make sure that they’ve ticked all the key boxes before the calendar flips over, right? There’s a lot of things, Jason, in our business that are time sensitive, that are calendar sensitive, right? You know, when we talk about financial planning, everything is obviously specific to each individual family, but there are certain things that really are outside of our control and that the regulatory forces, that the calendar itself dictates some of the things that may need your attention before the end of the year.

And so let’s start with the basics. Before the calendar flips over, there is still time to make contributions to your retirement accounts, right? The key is you may not want to wait until the deadline, of course, to make sure that you’ve maxed out your contributions.

Jason O’Meara:
Exactly. You take a look at your current 401k contributions, like how much have you put in so far this year, because you know you can put in $24,500 assuming you’re under 50. If you’re over 50, you can contribute up to $32,500. So there’s — you want to make sure that you’re actually maxing out if that’s the plan, right? Your savings plan is to max out your retirement plan for work. You want to make sure you can put into that net amount before the end of the year. And then there’s a special provision right now where if you’re between 60 and 63, you’re also able to contribute, instead of that $8,000 catch up, it’s $11,250. So instead of only doing $32,500 you can defer up to $35,750. So you want to make sure that you’re aware of that and take advantage of those as much as possible, and you have to do that contribution by 12/31/2026.

If you’re contributing to like IRAs, you have a little bit more time. You have up until you file your tax return.

John Walker:
So glad you brought that up, Jason, because that is the key, right? Like there are some different timelines depending on the type of retirement account you are planning to contribute to. But for employer plans, the contributions for 2026 have to happen before December 31, 2026, right? So, you know, there are some special caveats for things like SIMPLEs and SEPs — they can be made generally up until the employer has actually filed their taxes — but, and again, as you said, traditional and Roth IRAs, you have until the April 15th tax filing deadline or until you file your returns, right? So, you know, really important.

The other thing, Jason, is you can’t forget that your IRA contributions cannot exceed either the amount of income you earn for the year or the IRS-imposed limits for your age bracket, right, whichever is less. Your actual earnings can limit or restrict your ability to contribute. So, you know, there’s just a lot of things that you need to be mindful of. What were my retirement funding vehicles that I was going to use, what were my objectives to fund those for the year? And as you said, take an assessment. Am I on track for what I was trying to do? Is there an ability to make sure I get to the number that I’d like to? And how do I maximize that from a tax perspective?

Jason O’Meara:
Now, if we reverse that, John, this is adding to your retirement plans. If you’re above the age in which you have to start taking required minimum distributions, that’s a completely different story, right? You have to start taking money out of your accounts, and the government mandates how much you have to take out. So what we need to look at is what is your RMD, your required minimum distribution requirement, and have you met that yet, right?

John Walker:
Yeah, if you’re on the other end of the spectrum and not saving, but now in the retirement phase or in at least the required minimum distribution phase, you need to act before the end of the year to avoid paying a penalty, right? If you turn 73 this year, and you are taking your first RMD, your first required minimum distribution, you do have until April 1st, 2027 to take your 2026 RMD. However, you have to be mindful that if you do delay it, that means you need to take both your 2026 and your 2027 RMD during the 2027 calendar year, right? So from a tax planning perspective, you need to be really cognizant of the impact of deferring it, right? But what you really, really need to make sure, Jason, and we can’t say this enough, is this is not one of those ones that you want to miss, right? You do not want to face a penalty for failing to take your appropriate required minimum distribution. That is a really onerous penalty and one that you definitely want to steer clear of.

Jason O’Meara:
Yeah, think of it this way. If your required minimum distribution for easy math is $10,000 you’re supposed to take out and you don’t take it out, here’s what happens. You still have to take that $10,000 out and get exposed to taxes, which usually happens in the following year, right? But on top of that, there’s a 25% penalty. So $2,500 in that scenario is just gone.

John Walker:
Just gone from penalties for failure to act.

Jason O’Meara:
Right, when you could have taken the money out at the end of December and been fine and not had to pay that. So it’s a steep penalty, and I don’t know many people whose RMD is only $10,000, so it’s usually much higher than that.

John Walker:
Well, I mean, I don’t know too many people who want to pay a 25% penalty on anything, right? Giving up a quarter of anything is a pretty — if I handed you a dollar and said, no problem, Jason, I just need a quarter back, I don’t think you’d be happy. Just for that, right? Just that math is not great.

And speaking of IRAs, Jason, we don’t speak about this as much, but it is really important to understand this. If you inherited an IRA from someone on or after January 1st, 2020, you may be subject to the 10-year rule, right? So under the current tax law, there is a new requirement that you must liquidate the account that you inherited by the end of the 10th year following the year of the original owner’s death, right? So if you are in that case, there’s two really important things you need to understand about your inherited IRA. If you are required to take distributions from that IRA, which many, many folks are, right — they’re required to either continue or maintain the required minimum distributions of the IRA they inherited — you also must satisfy those before the end of the calendar year, right?

So in a similar manner to retirement RMDs, if you have an inherited IRA and have an RMD, you need to make sure you take that before the end of the year. If you are coming up on that 10-year mark, you really need to be aware of this because you are required to liquidate the entirety of the account, right? And so as you do your planning for taxes, that is going to be counted as ordinary income in your name. So really important, you know the timelines of when did I receive this, what are the rules governing it, right? Am I under this 10-year rule? And if I am, have I satisfied those requirements for this year?

Jason, we’re often talking to families about tax strategy around that of do we just take what’s required? How do we mitigate some of the impact of this, right? There’s a lot of strategies around that.

Jason O’Meara:
There’s a lot of moving parts in that, right? Like if you’re somebody who’s still in your high earning years, maybe it does make sense to take the minimum amount, especially if you’re going to retire at some point during that 10-year window, right? It doesn’t make sense to just take the minimum amount and then just balloon it later. But if your income is going to stay pretty steady through the whole 10-year period, then it probably makes sense to take more than the minimum out of that, right? So yeah, there’s a lot of planning considerations on that. So what you don’t want to do is just do things, right? You want to make sure what we’re doing is intentional and has a specific purpose.

John Walker:
Exactly. Just be cognizant of the timelines, right? That’s the key. You just need to know what is coming and when they’re due so that you don’t miss these deadlines and end up with really onerous penalties and things that really can cost you significant amounts of money, right? That’s the real key thing. You don’t want to miss.

Jason O’Meara:
Final note on the required minimum distributions. Just be aware that if you have Roth IRAs or Roth 401k, just Roth accounts in general, they are not subject to a required minimum distribution. Therefore, you do not have to take money out of your Roth IRA. I don’t want anybody looking at their Roth IRA going, “Oh wait, I’m supposed to take money out of this,” because you don’t have to. You never have to take money out of that account again, which is one of the benefits of having the Roth.

John Walker:
Yeah, the only thing is, just like with the traditional IRAs or other qualified non-Roth qualified accounts, depending on when you inherited it, it still may be subject to the 10-year — you have to be aware of that 10-year rule. They are still, you know, if it is within the right parameters, it will still have that 10-year window. But as Jason rightly notes, not those required minimum distributions. So really important to — you can sit there for 10 years and take it all out at the end if you want. Yep, just make sure you don’t miss that 10-year end mark, right?

So that’s the key. That’s the key. In another positive, right, if you are helping children, grandchildren, nieces, nephews, people you love, whomever it is, help put money away for their educational savings, you have until December 30th in most states to contribute to a 529 education savings plan and still qualify for a tax deduction or credit in that tax year, right? There are some states that are a little different that allow a little more space till April 15th or even, I believe it’s Iowa allows you to April 30th, so know your own individual state tax law, but the lion’s share of them, Jason, you have until the end of the calendar year to make a contribution to a 529 plan and still be potentially eligible for some sort of state tax deduction or credit.

Jason O’Meara:
Mhm. Exactly. And I would just say if you just live your life under the assumption that you have to have your 529 funded by the end of the year, by 12/31, you’re gonna be safe. If you live in, I don’t know, Georgia, Indiana, Kansas, Mississippi, Oklahoma, South Carolina, and Wisconsin, just to name them off the top of my head, you have until April 15th, and as John noted, Iowa’s April 30th, but use that for an overflow in just in case there is a miscommunication or something, but try to have them in by 12/31 just so there’s no confusion, right? And you can contribute up to in 2026, $19,000 per filer you can contribute, so that’s $38,000 for a married couple. So you’re able to contribute that much to a 529 and it’s, you know, it’s basically keeping you at that gift tax range, right? Where the IRS doesn’t care that you’re giving a gift and they don’t want you to do paperwork. So that’s where your limits stand.

John Walker:
Yeah, and I really want to underscore that because we get a lot of questions around this, Jason. Gifting that $19,000 for 2026 for single filers is what you can gift per beneficiary without triggering the federal gift tax, right? But that doesn’t mean that’s all you can gift, right? A lot of folks have a lot of misunderstandings around how this gift tax works. That’s what you can gift without having to just file some paperwork with the IRS, right? You can superfund a 529 plan in a single year. You can make up to 5 years’ worth of contributions, right? So that’s $95,000 for a single donor, $190,000 for married couples in 2026. You can do that all at once. It just requires you to file a simple form, right? I think where people get confused, Jason, with gifting, as long as you file the required paperwork with the IRS, you have up to your lifetime federal gift and estate tax exemption.

And where people get confused because we get this question more often than you’d imagine, folks — neither the recipient of the gift nor you as the donor owe any taxes. There is no tax to gift as long as you file the appropriate paperwork. All it does is reduce your lifetime gift exemption by whatever amount that you choose to gift, right? So where we get questions is like, well, if I go over the limit, Jason, now my grandchild’s going to pay the tax, who pays the tax, right? Who pays the tax? And the important note is there is no tax due. You are able to as long as you’re under that lifetime exclusion amount.

Jason O’Meara:
Correct? Exactly right, which right now at time of recording is like $15 million a person is rather generous, $30 million for a couple. So yeah.

John Walker:
So it’s really important. It’s simply a matter of paperwork, right? As long as you are under the lifetime exemption, you’re going to be fine. If you are going to exceed it in a given tax year, you simply need to file IRS Form 709, right? You’re just letting the IRS know you need to reduce my exemption by this dollar amount. It’s a matter of course, but the real critical thing, just to not put too fine a point on it: there is, as long as you do the appropriate paperwork, there is no tax owed, OK.

Jason, one of the things that we often are helping families execute at this time of year as we approach the end of the calendar year is, as we are executing on a lot of the tax strategies that we’ve built out for the year, right, we often are doing a lot of execution this time of year because we have a much more predictable sense of what the tax situation and landscape is going to be, right? You have a really, hopefully a clearer sense of what your annual income is going to be reported at. You have a sense of what your spending needs are going to be, and you’ve been really able to track it, right? So it gives us a little more clarity and context at the end of the year to really kind of execute. One of the things that we’re really often executing on is the completion of Roth conversions for the tax year, right? If you are implementing a Roth conversion strategy, right, it’s really important you understand, you need to execute it before the end of the calendar year, right? And once that calendar flips, you have lost the ability to leverage that opportunity for 2026.

Jason O’Meara:
Right, right. And one of the tripping points, John, that I often see — and this is really funny going back to my studying for my CFP days — there was somebody in my class who actually thought he was a genius. He’s like, “Oh, I figured out a way around the 59.5 rule. If I just convert everything to a Roth, then I can take back the principal.” And what he had forgotten or overlooked or maybe skipped that chapter is there’s a 5-year rule on those Roth conversions, right? So if you were to do a Roth conversion and you are under 59.5 and you haven’t held that Roth for 5 years, you can still pay a penalty if you pull out the principal, right? So make sure that we’re doing Roth conversions for all the right reasons and not for thinking that we’ve just found a loophole in the system. Those loopholes don’t generally exist unless they’re put in there intentionally. That’s my opinion, that’s not a fact, that’s my opinion. But you want to make sure that the reasons you’re doing Roth conversions are simple: you one, believe that your taxes will be higher later, right? So you think you’re in a lower tax bracket now than you would be much later.

Maybe that’s because of required minimum distributions, right? Try to reduce your required minimum distributions. Or two, you want to make sure that whoever’s inheriting your IRAs is inheriting them in a very tax-favorable way. You know, so we talked before about there’s a 10-year rule with a Roth IRA. They still have 10 years to take the money out of the account, but they don’t have to pay RMDs along the way, and they don’t have to pay tax on that money when they take it out. So make sure that we’re doing these Roth conversions for the right reasons and make sure that it’s all part of a well-organized plan, a well-put-together plan.

John Walker:
Absolutely. And just one other final point, if you are 73 or older and you’re in the required minimum distribution stage and you still want to convert assets, you’re certainly able to do so, but you must satisfy your required minimum distribution before you convert any IRA assets, right?

Jason O’Meara:
That’s another loophole people thought they found, was, “Hey, I could just instead of spending the money, I’ll just do a Roth conversion for the required minimum distribution,” and then they found out they have to take out more because Roth conversions do not satisfy your required minimum distribution. Absolutely. But yeah, speaking of required minimum distributions, John, there is one way you can send money out and be tax efficient and satisfy your required minimum distribution.

John Walker:
And that kind of gets into our next point, Jason, which is before the end of the year—

Jason O’Meara:
It’s almost like we planned this, John. So yeah, for the end of the year, qualified charitable distributions from your IRAs. You can satisfy your required minimum distribution and make a tax-deductible contribution to a qualified charity. That way, you kind of have your cake and eat it too.

John Walker:
Yup, absolutely, yeah. So if charitable giving is a part of your family’s plan, there’s a reason we do this at the end of the year. It’s really important that before the calendar flips, you make any of those contributions that you’re planning to make to the organizations or entities or people that are important to you, right? So charitable giving needs to be executed for 2026 prior to the December 31st cutoff, right? So whether that’s cash gifts to a qualifying charity, maybe it’s the qualified charitable distributions you talked about, Jason, whether it’s whatever it is — funding your donor-advised fund, getting money into a charitable remainder trust or a charitable gift annuity — whatever it is, you need to make those contributions prior to the end of the calendar year.

Qualified charitable distributions are a really, really effective way. If you are eligible to do them, you need to be 70.5 or older, and it needs to be donated directly from your IRA. But for our folks listening that are in that age bracket, right, this can be a really effective way to satisfy your charitable intentions but do it in maybe a really tax-favorable way. So make sure that it’s all a part of a broader tax plan with your tax advisor and your estate planner to make sure this all makes sense for you. But being able to just knowing that if this charitable intention is a part of your family’s plan, you need to be mindful of the calendar deadline to make those donations and contributions.

I guess, Jason, the last couple of things that I’d want to just remind folks of: it’s sort of a matter of course, right, and I think they kind of all go together. Whether it’s as the calendar year comes to an end or as we step into the first quarter of next year, it’s really just a good idea, kind of to be prudent, just like anything. This is a really good opportunity to just level-set expectations, review broadly your plan, and just do some basic maintenance of the things that you have going on, right?

So when we are working with families, this is where we’re often doing some sort of annual review both of their — hey, did the year go the way that we anticipated, right? Did we accomplish this year all the things that we set out to do, whatever those objectives may have been for that family — and as we turn into a new year, are we needing to make adjustments? Has anything materially changed? Has your long-term outcome changed? Do you want to make any shifts, right? Are there things that your priorities have changed, right? And so looking at your financial objectives and goals for the next year, right? Are you going to increase your retirement plan contributions? Do you want to be more charitable if your plan allows for it? Do you want to review your estate plan again because you’re anticipating some grandchildren being born, right? It’s all of those things that — look, this is the time to start having those conversations around, and I know our team’s doing it with families, you know, all the time, right? What are things going to look like for next year that we need to be prepared for?

Jason O’Meara:
Right, exactly. And then there’s also just a couple of little things that we need to think about this year, right, John? If you hold mutual funds, this is something that I’m personally looking into, so I’m dropping it in here. If you hold mutual funds in a taxable account, meaning non-IRA, non-Roth IRA account, most of the time those mutual funds have capital gains distributions that occur late in the year. So you need to be aware of those before you make some of these other maybe taxable events like Roth conversions and whatnot. But if you’re looking to donate to a donor-advised fund, maybe look at those mutual funds that are going to kick off a bunch of capital gains. If you can get them out of your account before they distribute the gains, you’re safe. So maybe use those for your charitable contributions. So there’s things to look at, there’s ways to go about this to try to be as effective as possible.

Review your beneficiaries on your insurances and your accounts and make sure everything’s in line with where you want it to be. It’s just a good time of year just take stock with what’s happened. I always refer to this time of year as my punch list time. You know, if you’re — if you ever had a home remodeling project going on and whatnot, there’s always that at the end of the project, there’s always a punch list that they go through, just make sure they tie up all loose ends, and that’s how I look at this time of year from the, you know, October through December. It’s your punch list time. Let’s make sure all your loose ends, all your objectives for the year are taken care of and you start the next year fresh and ready to go.

John Walker:
Absolutely, yeah, I love that analogy, right? It is, you know — I love just to put a finer point on it. Make sure you review your beneficiaries on everything. Make sure that all the things are titled properly. Make sure we do a health check on your plan. And if that requires it, hey, it’s the end of the year. If we need to rebalance the investment portfolio, if we need to assess the asset allocation to see if it’s still the right mix, right? Are you still aligned from an investment perspective with what your objectives are, right? All of these things, this is a great time. Are we considering realizing capital gains? Are you looking to do some tax-loss harvesting, right? Hopefully, you’ve been having these conversations with either internally or with the team that you’re working with throughout the year. But before the calendar flips, you know, as you said, Jason, it’s a really great time just to make sure that you’re feeling fresh and confident and purposeful and intentional as you head into a new year, hopefully with clear planning and clear objectives of what you want to accomplish.

Jason O’Meara, certified financial planner and market leader here at Mercer, thanks so much for joining me for this really important conversation.

Jason O’Meara:
Of course, John. Thank you.

John Walker:
And so if you have questions, if you don’t feel like you’re going into this or have a clear plan for how to resolve your year or start the new year fresh, we’re always here to help. Feel free to reach out to Jason and I anytime at Jomeara@MercerAdvisors.com or Jwalker@MercerAdvisors.com. We love to hear from you and we’re always available to help. I’m John Walker, regional vice president of Mercer Advisors. Thanks so much for listening to the Your Life, Your Wealth podcast. Talk to you next time.

Announcer:
If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.