Planning Ahead for a Secure Financial Future

Take the path to a better financial future. (Photo by noblige/iStock by Getty Images.)

As the lazy, hazy, crazy days of summer^[i] give way to a brisker fall, there is nothing like a long Labor Day weekend to get your house in order. In between a sunny walk and the last cookout of the summer, we reckon folks’ to-do lists should include financial planning items they might have wanted to attend to but haven’t. Here are a few things you might contemplate as the fall foliage turns: taking your required minimum distribution (RMD) if you are age 70½ or higher; adjusting your W-4 withholding if you are still in the rat race; and squirreling away some acorns for the young’uns so they can go through the same (satisfying!) financial rituals when they are older.

RMD Read Me

People over 70½ with a tax-deferred retirement plan like a traditional IRA or 401(k) must take their RMD before year end. While there are still four months to go, no time like the present to start thinking about it—before the holiday season yields more distractions. As the name implies, your “Required Minimum Distribution” is the amount you must withdraw every year from your retirement account, which is then subject to income tax. This is calculated by taking your account value at the end of the prior year (e.g., 12/31/2017) and dividing it by an IRS estimate of your life expectancy. The IRS requires you to withdraw these funds so Uncle Sam finally gets a cut of the money you contributed before tax and grew tax-deferred. Failing to do so on time can result in the IRS levying a penalty equal to 50% of your RMD amount. You don’t want that.

You needn’t calculate your RMD yourself! The IRS provides a handy worksheet. Or you can ask your financial professional to tabulate it. Some firms even list RMD amounts on monthly statements! If you have more than one IRA, you will have an RMD associated with each one. Once you have done so, you can withdraw from each one or sum them and take from one account.

One caveat: If you turned 70½ this year, you have until April 1 next year to take this year’s RMD, which is nice, we guess. But you must take your 2019 RMD before December 31, 2019, which means two withdrawals in one tax year. Make sure you weigh that. Also, note: If you don’t need the money and are feeling charitable, you can gift stock from your IRA tax-free if the amount is less than $100,000.

Wherefore Art Thou W-4?

If you are working and aren’t feeling the tax cut this year, it may be because your employer is withholding more of your paycheck than is necessary.^[ii] As we detailed in April (and if you haven’t done so already), check your W-4 form, which specifies how much you automatically send to the IRS each pay period. With big tax changes going into effect this year, amounts that made sense last year may no longer hold.

To avoid a big tax bill or a ginormous refund—meaning the IRS earned compound interest on your money instead of you—grab last year’s tax return, your last couple paystubs and fire up the IRS’s Withholding Calculator. You will need to estimate your medical expenses, interest payments and what you plan on giving to charity this year, but the rest is relatively straightforward. Knowing what you should owe and what to take out reduces surprise—and potential headaches—later.

Think of the Children

Alongside Labor Day comes the new school year! If you have kids or grandkids, what better time to think about their financial future and maybe contribute to it? Not only can you help provide them an extra leg up in life, but you can also give them a hands-on personal finance education to last a lifetime. Toddlers may be too little to grasp financial concepts, but we think tweens and teens are ripe to learn about the magic of saving and compound growth.

Consider setting up a custodial Roth IRA for your child (or grandchild) under 18, where they can invest their hard-earned money from a summer job, which you can match—up to $5,500 a year. In a Roth account, capital gains, interest and dividends are tax-free. Over decades of contributions and compounding, this can really add up. The sooner you (or your progeny) start, the better! Eventual withdrawals are tax-free, too. Instilling youth with good saving and investment habits early can make quite an impression—and nest egg. Consider setting up a 529 college savings plan—state-sponsored, tax-advantaged investment vehicles—to help them on their way, too. See here for more details.

Whether a student, working or retired, take a moment to consider your or loved ones’ finances. A bit of forethought and planning can go a long way!