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Media Room

Date: 11/09/2020

Are investors ready for end of year?

The final quarter of 2020 is an opportune time to review finances, maximize tax efficiencies and improve long-term financial outlook by taking action before the new year begins.

“Regardless of your stage in life, whether you are close to retirement or just getting started on your portfolio, there are steps to take now from adjusting your asset mix to reviewing your estate planning,” said Kristine Davenport, a relationship manager and Certified Financial Planner for The Trust Company of Tennessee. “It can seem overwhelming, especially with some new requirements in place due to COVID-19, but The Trust Company of Tennessee can help you sort through all of it and make sure your financial plan is aligned with your financial goals.”

One change involves Required Minimum Distributions (RMDs) from certain retirement savings accounts, such as 401(k)s and Traditional IRAs, that begin at age 72, formerly 70½ before the SECURE Act passed earlier this year.  However, for 2020 only, the requirement to take these distributions has been waived as part of pandemic relief introduced with the CARES Act.

“Despite this temporary change, you may still want to take some amount of distribution from these accounts now if it makes financial sense,” Davenport said. “If you delay taking money from these accounts this year, it likely will result in a higher RMD next year since the minimum distribution is calculated based on the balance on Dec. 31 of the previous year.”

Other options include paying taxes on distributions now and moving some savings into a Roth IRA that can continue to grow tax-free. Investors who make a Qualified Charitable Distribution (QCD) also can see significant tax savings.

“The charitable organization must be ‘qualified’ with contributions made directly from your IRA to that organization,” Davenport said. “You should work with your CPA and financial advisor to make sure any contributions are executed correctly. Our financial planners can assist with this process.”

Davenport also advises every investor who is still working and not retired to increase 401(k) contributions, even by 1%. If already maximizing your 401(k), other options include contributing to a Roth IRA or doing back-door Roth contributions, depending on income level.

For those on a high-deductible health insurance plan, a Health Savings Account (HSA) can be a tax-free tool. Late fall also is open enrollment period for health insurance, so individuals and families should review their options and see if an HSA-qualified plan makes sense for them.

“Not only are the contributions and growth in these accounts tax-free, but the distributions also are exempt from taxes as long as they are used for qualified medical expenses,” Davenport said.

The Trust Company of Tennessee can assist with an overall review of an investor’s financial plan and determine what, if any, modifications need to be made.

“It’s also a time to make sure any life changes, such as birth of a child, death of a family member or divorce, are reflected in your plan and estate documents,” said Davenport, who also is a Certified Divorce Financial Analyst and helps both men and women address the financial aspects of major life transitions.

The final step of the fourth quarter of 2020 is to review all investments and see if any changes would be beneficial.

“Small course corrections over your lifetime can have huge long-term benefits,” Davenport said. “If you haven’t already rebalanced your accounts to your desired asset mix, it’s time to do so.”