December 14, 2024 9:00 am
The end of the year is a great time to start thinking about your finances for the upcoming year. So Peter with Richon Planning and Erin Kennedy are sharing 5 tips you can start now, to help you get on track for 2025.
1. Perform a Budget and Emergency Fund CheckupÂ
2. Max Out Your Roth IRA (and HSA)
3. Consider Tax Loss Harvesting
4. Rebalance
5. Consider a QCD
If you'd like to talk through your financial goals for 2025 and how you can achieve them, please reach out to Peter for a complimentary consultation by calling (919) 300-5886 or visit www.RichonPlanning.com
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Peter Richon
Peter, good to see you.
Welcome back, everyone. Let's talk through five money moves for a better 2025. The end of the year is always a great time to start thinking about your finances for the upcoming year.
So again, we're sharing five tips that you can start now to help us get on track for 2025. Tip number one is perform a budget checkup and shore up your emergency fund. Yeah, you should have an emergency fund. Money can do only a limited number of things.
Growth, safety, liquidity, income. Those are basically the four qualities that any one dollar can provide for us, and any one dollar can really only do two of those effectively. So we don't want to have too much money in that emergency fund, but three to six months worth of living expenses. Those dollars' job is not growth. It is to sit there and wait for life to happen or an emergency to pop up because if you can just pay to make a problem go away or stroke a check and take care of a problem, it's an inconvenience, not an emergency.
But if you can't, an inconvenience could qualify as an emergency. So make sure that you've got three to six months worth of living expenses in that emergency account. Now that takes some budgeting because you have to understand what your monthly living expenses are, and I can almost promise that they are more than they were three to five years ago due to inflation that we have seen. So you need to reassess that budget on an ongoing basis. The easiest way I tell people to do this is to pull out your last six to 12 months worth of bank statements. If you don't want to do the line item budget and show every expense that you have and work through every bill and obligation and then kind of work out where the extra money went to, just pull out your last six to 12 months worth of bank statements and do what I call the look back budget. On the front cover of your core bank account there are four numbers. Beginning balance, credits, debits, and ending balance.
The debits is what you have spent and that should be the root for working that emergency account and then doing a budget based off of that. So we get the six to twelve months, some months will be high, some months will be low, but the average number is what we should be shooting for in that emergency account. All right next tip, max out your IRA, your Roth IRA, or consider a conversion. We love Roth IRAs don't we Erin?
We talk about them all the time because they are one of the best opportunities that we have financially. Go ahead and pay the taxes now and be done with taxes forever and you know the last generation saved in kind of a different mindset. They deferred and delayed and waited to pay their taxes until retirement.
It was not a mistake. That was probably the right thing to do but right now we are at a paradigm shift where I believe and almost everyone I talk to to a person believes that taxes are going to be going up into the future and we are in a historically low tax environment right now. So now is a good time to go ahead and manage those taxes and again it's easy to pay taxes from your paycheck while you're earning a paycheck maybe easier than it is out of your finite amount of money that you have on the day after you retire with an unknown amount of time to make that money last. If we have deferred and delayed paying taxes then taxes are probably your largest known expense in retirement and so we want to try to manage that manage it ahead of time plan for it proactively and efficiently and so Roth IRAs are one of the best opportunities. So if you've got the ability go ahead and max out that Roth IRA. Now there are a couple kind of qualifications there where you may not be able to take part in a Roth IRA contribution directly. Don't worry there's still ways that you can get money into a Roth IRA. So if you are income eliminated from being able to make direct Roth IRA contributions you're making good money hey it's a good problem to have it means that you've got to look at a couple alternatives. Number one you can still do the back door Roth conversion however be aware be cautious that if you've got other IRA money the government is going to look at that conversion as a percentage of your total IRA balance. So that leads me to option number two which is just do some Roth conversions if you've got those other traditional tax deferred IRA dollars then effectively it may make sense to do a conversion rather than try to contribute new dollars and then number three you do not have the income problem inside of a 401k. So if your 401k has a Roth option in it and you are otherwise income eliminated from making Roth IRA contributions or just if you want to max out your retirement savings completely number one we're saving more by prepaying the tax number two you've got higher limits of what you can contribute inside of the 401k so really that's a win-win-win if we can take advantage of that Roth inside of the 401k that allows you to put more away and prepay your taxes on those dollars for retirement. Speaking of Roth accounts I know it's one of your favorites maybe the only one you like a little bit more Peter tell me an HSA a health savings account if we have access to this max that out as well.
Well we get very few opportunities for truly tax-free money and even a Roth IRA you've got to pay tax up front as the money gets contributed but HSAs are an opportunity for truly tax-free money that is you get a deduction when you contribute to the HSA and if those dollars grow inside that is tax deferred and if you need them for qualifying medical expenses you can withdraw them tax-free fantastic opportunity and if you get to retirement time and you end up not needing those dollars for qualifying health care expenses you could keep them around inside but you may want to convert them over to IRA dollars where you'll lose that final piece of tax leverage there you won't be able to withdraw them tax-free at that point in time but you've gotten the same advantage as basically an extra traditional IRA. Right but geez I mean even when we're retired probably gonna have those qualified withdrawals for medical care I would assume. All right next you suggest offset your gains by harvesting your losses this is known as tax loss harvesting. Yeah and hey nobody wants losses right but from time to time when we are investors we have losses maybe the whole account is not at a loss but specific positions within the account could be at a loss.
Take the opportunity to evaluate your gains and your losses. Normally if you sold something that has had a gain and appreciated in value there would be a tax implication with that and and right now specifically we are talking about non-retirement accounts. So tax loss harvesting is not for IRAs it's not for Roths this is for non-qualified brokerage or investment accounts non-retirement accounts. If you've got gains in a non-retirement account and you sell off and realize those gains that's a taxable event but wait if you've got losses on the other hand and you sell those off at the same time simultaneously the gains wash against the losses and net net maybe you can realize some of those gains and not pay tax on the gain when when you do that as well as kind of assess those positions that you've sold as losses and see if there's something that you actually want to stay invested in if so you've got to wait a little bit of time and then you can buy back into them again. So tax loss harvesting is a good strategy for non-qualified non-retirement investment accounts. All right next tip you know it's been a great year in the markets for most of us which is why it's probably a good time to think about rebalancing. Yeah we should do this on an ongoing basis. Say I'm 40 years old and so I'm comfortable being a moderately aggressive investor and I've got 80 percent of my investment account in equities and then 10 years goes by the last 10 years have been very good in the market not only have I been putting more money away but the side of the account that was equity exposed was in the stock market has also grown in value so now I'm 10 years older I should theoretically be moving a little bit more conservative but the equity side of my portfolio has grown more than the fixed income so now I've got more risk than I was even comfortable with 10 years ago and that's why rebalancing on an ongoing basis is important to keep you in the guardrail so to speak with your risk comfort level as well as take profits off the table when there are some if that equity side of the portfolio has moved and gone up that means there's profits there we should take some of those profits off the table and put them into the fixed income side and vice versa if markets go down and then we rebalance that means we're buying in at a lower price now I do want to caution that while rebalancing I think is one of the fundamentals for long-term investment success it is not something that you do every day that turns into day trading or trying to time the market rebalancing is just something that you do periodically on an ongoing basis at a point when you're younger maybe you could get away with just kind of doing that once a year or once every other year or so but as you get into your 40s 50s 60s it does become a little bit more important I think to do at least annually if not semi-annually or quarterly okay and then of course Peter at the end of the year a lot of us like to make charitable donations and if you are of RMD age you may want to consider a QCD also known as a qualified charitable distribution yeah we do a lot of these and by the way you could still be a little younger than RMD age because a few years back with the secure act they moved RMDs up to 73 they did not move the age for QCDs back so this is one of the other fantastic uh examples that we're talking about today of a financial strategy that allows us for truly tax-free money so we've we've covered one here's the second and that is if you have a traditional IRA you made those contributions you got a tax deduction those dollars grew tax deferred now you are 70 and a half or above and you are charitably inclined you're giving you're gifting you're tithing you're donating to a 501c3 don't do it out of cash do that out of your IRA it is one of the best opportunities that we have because you've already paid tax on your cash you have not paid tax on the IRA and this is your opportunity to use those dollars the charity gets the full value they do not pay tax on it or the church still gets the tithe dollars that you would have otherwise donated you get to remove dollars from your IRA without ever having to pay tax on them and once we do cross that threshold of 73 where RMDs required minimum distributions kick in and again this is where the IRS requires you to take money out of your IRA whether you need it or not once we cross that threshold it checks that box and satisfies that requirement as well so really it's a win win win we get to save money grow that money without ever paying tax on it we get to donate that money to our church or charity they get the full value of it without ever paying tax on it and we satisfy the RMD requirements again if you are over 70 and a half and you are donating you are tithing you are giving to a charity do it out of your IRA do not do it out of cash and everybody who meets that description if you are charitably inclined over 70 and a half I hope I hope that you have had that conversation with your financial advisor and if not give me a call because what other opportunities could you be missing right if not you may want to speak with another advisor and get a second opinion you're missing something this was this was really helpful and you know I think some of these strategies feel a little bit advanced so if somebody wants to talk through them with you what's the best way to reach you give me a call 919-300-5886 919-300-5886 we also have a great website available online it's your retirement tax bill calculator you don't need to sit down or pay for this or have a conversation if you just want to kind of run the numbers you can go to 919 retired.com 919 like our area code and I know there's a couple other numbers that have come in in recent years but the Raleigh area code has been 919 traditionally and then retired past tense with a d 919 retired.com is the retirement tax bill calculator I'm hearing this advertised in in other places as a service that you you have to pay for we've put it online it's available for free for you you can run your own numbers and see what that retirement tax bill is likely to be don't act on that without consulting an experienced qualified professional because this is just kind of generic example information and and there there are some caveats here that can cause unintended consequences but this is where it can kind of shows you how you could control that retirement tax bill 919 retired.com you can also go online to be in touch with me and we can run through those numbers rich on planning is what it looks like it's my last name rashan it looks like rich on planning.com or email me peter at rashan planning.com great peter thank you yeah and we talked about year-end money moves we want to do these things before the holidays which means now so yeah it's year-end planning is the topic but we we're basically at that point so these are year-end last minute moves to make good reminder peter thank you thank you hey folks peter rashan here with rashan planning so glad that you are enjoying the podcast planning matters radio you know one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at 919 retired.com it is your retirement tax bill calculator if you've got any kind of retirement account your tax deferred 401k or ira this is the website this is the resource where you can go you can plug in your own numbers your information you can slide the the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the irs's plan versus what you could potentially bring that tax bill down to a lot of times it is a very significant saving so if you have not yet go to the website 919 retired.com run your numbers on the retirement tax bill calculator this has been planning matters radio radio the content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy you are encouraged to seek investment tax or legal advice from an independent professional advisor any investments and or investment strategies mentioned involve risk including the possible loss principle advisory services offered through brooks own capital management a registered investment advisor fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.
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