Happy New Year everyone!
So, let’s get right into it. The 5 things you NEED to do this year when it comes to your financial planning.
1. Look at your year-end statements.
I can’t tell you how many people put these statements into a drawer or just shred them without even opening the envelope. Don’t do this!
The information contained in these statements is critical. Obviously, you’ll see account balances but the year-ends show you how much in fees you paid over the course of the year. The statements will also show you cost basis for each holding you have, which is hugely important for this years tax planning. (Remember cost basis info is irrelevant when it comes to an IRA/401k etc.)
Finally, the year end statements will show you how much in taxable interest, capital gains and dividends you received too. Which leads us to number 2:
2. Look at your 1040!
Now, I don’t know what the new tax forms will look like exactly so I can’t give you specific line numbers to review. However, you need to find your AGI AND your Taxable Income too. Remember these are two completely different things. See my video here. It’s only your taxable income that matters when it comes to the actual amount of taxes you pay.
Is your taxable income well below the threshold for the next tax bracket? Say you are married filing jointly with taxable income of $40k. You have nearly $40k more of taxable income before you move from the 12% bracket to the 22%. Are there opportunities here to move to Roth IRAs?
What if you have NO TAXABLE INCOME? Are you taking advantage of this?
Lots of numbers for dividends, capital gains and interest income? Well, you have planning to do! Which leads us to number 3:
3. Look at WHERE your investments are:
If you have taxable income from your investments, the first question you need to ask yourself is WHY??? Should the accounts that yield taxable income better serve you by being placed in your IRAs/401k or Roths?
Do you have tax-exempt bonds in your taxable accounts and stocks in your IRAs? Again, why? Your stocks grow, guess what else grows? Your future taxes! Municipal bonds though don’t grow, they just give you minimal tax-exempt interest. When you look at this in the totality you’ll see that tax-free interest from the municipal bond side does not come close to offfsetting the increasing taxes from the stock/IRA side.
Ideally, we want low income producing stocks in your taxable accounts. High income producing stocks in your Roth and taxable bonds if you have them,(and I’d ask why?) in your traditional IRA. That is asset LOCATION, which has the affect of taking advantage of the tax code to maximize your investment wealth.
4. Pay off debt. YES MORTGAGES TOO!
With the gigantic increase in standard deductions it’s highly, HIGHLY unlikely you’ll be itemizing your taxes anymore. The vast majority of taxpayers, we’re talking over 90%, will no longer itemize. People who don’t itemize do not get mortgage interest deductions. It’s really that simple.
If you’re married filing jointly under the age of 65 you have $24k in standard deductions. Let’s say you have $11k in mortgage interest and say $5k in property taxes. You still need $8k in other deductions to even think about itemizing. Are you tithing? Have large medical expenses? If not, it’s hard to see how you’re going to break that $24k threshold to itemize.
Now, let’s say you do have $30k in total itemized deductions. That’s still only $6k above the threshold for the standard deductions. So, of ALL that mortgage interest you’re paying, you’re only getting of fraction of it deductible anyway!
Thus stop losing money to the mortgage company on the guise of “deductible interest”. Most taxpayers are not deducting anything for the next few years.
5. STOP PAYING INVESTMENT FEES!
One of my biggest pet peeves is financial planners/advisors/wealth managers etc, who charge a fee for investing. There is NO value in this at all. None. You are losing money in this exchange.
The investment advisory industry realizes this too. They know the gig is slowing being exposed. So, what they’re doing is using terms like ‘behavioral consulting” and “evidence-based” to make it seem there is more to their offerings than simply picking investments for you. There isn’t.
Look, I’ve no problem using a service like Vanguard or some other service that charges a ‘reasonable fee” say .50% or less for automatic rebalancing and diversification with a once or twice a year consulting call. But paying someone 1% to put you in mutual funds which cost on average .70% simply doesn’t make sense. Skip the middle man and just go buy the funds directly and be done with it.
It’s actually even worse if the advisor is charging 1% to put you in low cost ETFs too. That guy is literally doing nothing.
Now, if this guy is actually doing financial planning to go along with his investment ‘guidance’ simply tell him you no longer want to pay for the investment management but would rather just pay for the financial planning.
What I tell the folks who consult with me is that twice a year meetings will typically be adequate. Once to review the year end statements. And again, to review the 1040. Those two occasions should prompt you to be thinking of your financial planning indeed.
So, there is my summary of 5 things you should be doing for 2019.
1. Open your year end statements
2. Look at your 1040
3. Know where your investments are located
4. Pay off debt
5. Stop paying investment fees.
Here’s to a wonderful 2019!