Keep clients on track with this year-end planning checklist

November 17, 2020 | Vanguard Perspective

Keep clients on track with this year-end planning checklist

As the year draws to a close, it’s a good time to meet with clients to evaluate how the previous several months have gone. Just as important, the year’s end presents a chance for clients to shore up possibly depleted accounts, plan for tax-advantaged contribution deadlines, and tend to health care tasks that have a significant financial component.

This article provides a partial checklist of items to review with clients in assessing the year that’s concluding and preparing for the one that lies ahead.

Perhaps first and foremost is recognizing the atypical nature of the current period. We remain in a health crisis that’s likely to persist well into 2021, and the postelection political landscape suggests that significant policy shifts could lie ahead. These are factors you might consider in the course of your planning.

If we revisit the three A’s (assess, address, audit) framework of financial advisor action, the most relevant step to year-end planning is the audit phase. In this step, you evaluate the results of actions taken during the year and discuss them with clients—demonstrating your value in the process. It’s also an opportunity to examine your own processes and weigh adjustments for next year:

  • Candidly evaluate the value you added.
  • Assess your process efficacy.
  • Examine what could work better next time.

Again, it could be beneficial to keep in mind the special circumstances of 2020—and consider how you might further adjust your actions in 2021 if these conditions were to persist, worsen, or improve.

From there, you can go down a list of planning tasks and considerations, implementing them as applicable for individual clients.

Administrative tasks

Portfolio cleanup. Are there opportunities to make client portfolios more efficient through addressing asset allocation, tax efficiency (via asset location), or both?

Chart listing cleanup topics for advisors to review with clients. The steps for optimizing client portfolios fall into two main categories, asset allocation and tax efficiency. Potential tasks to clean up asset allocation include rebalancing, reevaluating risk tolerance, reviewing active versus passive holdings, reviewing high-cost versus low-cost holdings, and addressing concentrated equity positions. Tasks under tax efficiency include reviewing funds for tax efficiency, reviewing accounts with the possibility of restoring them (and future distributions) to their original asset location and evaluating the merits of a Roth conversion.

Rebalancing. Are allocations in line with targets established to reach client goals? Even if you automate rebalancing, it can be beneficial to let clients know when rebalancing occurs and explain how this event helps to keep them on track to reach their investment goals.

Updating insurance and beneficiaries. Make sure coverages are still appropriate and that clients’ listed beneficiaries for policies and financial accounts are accurate.

Emergency savings. For many individuals, the coronavirus pandemic and resulting economic fallout brought job losses, loss of income from their businesses, or steep plunges in real estate rental income, among other impacts. It was a sobering reminder of the importance of having quickly accessible emergency savings. Depending on clients’ circumstances, now could be a good time to talk to them about rebuilding savings they may have used during the pandemic or exploring options to take early distributions from retirement accounts as permitted under the CARES (Coronavirus Aid, Relief, and Economic Security) Act (more on the act below).

Health care planning

Health Savings Account (HSA). Are clients enrolled in an HSA as part of an eligible high-deductible health plan taking advantage of the potential triple tax benefit by investing their contributions? Are they properly prioritizing their contributions among their HSA and other investing accounts?

Medicare. Are clients near the eligibility age of 65 for receiving Medicare insurance benefits? If so, you should ask them about their plans for enrolling before their 65th birthday—lifelong premium penalties may apply if they sign up after turning 65.

If clients already participate in Medicare, are their current coverage elections—including those for prescription drugs—still adequate and appropriate? (Each year, Medicare’s October 15-December 7 open enrollment period for current enrollees offers a chance to make changes.) Vanguard provides a “prioritize, evaluate, choose” framework to help you and your clients streamline the potentially confusing process of selecting a Medicare plan.

Graphic of three triangles, with each triangle representing a component of Vanguard’s Medicare coverage-election framework: Prioritize what features matter the most, evaluate the different coverage types to compare their relative strengths and weaknesses, and choose a policy (making sure to enroll on time). The final and recurring step is to revisit the process annually.

Prioritize

Ask a client: What do you want out of your coverage?

Consider the trade-offs between affordability, flexibility, cost certainty, and worst-case protection.

Evaluate

Clients should map the features they find most important to the strengths and weaknesses of different coverage types.

Choose

Research specific policies. Ensure that clients enroll on time to avoid penalties and coverage gaps.

Charitable giving

Under the Tax Cuts and Jobs Act of 2017, the standard deduction available to taxpayers increased substantially. Meanwhile, other deductions that total less than $12,400 (for persons filing individually) or $24,800 (for persons who are married and filing jointly) in 2020 were eliminated or rendered moot.

Accelerated giving. One work-around is for taxpayers to accelerate their charitable giving—taxpayers can roll several years' worth of contributions into one, in order to exceed the higher standard deductions brought into force by the 2017 Tax Act.

For instance, a donor-advised fund (DAF)—such as the options offered by Vanguard Charitable1—allows a donor to make a large, tax-deductible gift in one year and then regulate its disbursement over ensuing years. Meanwhile, the dollars have the potential to grow tax-exempt in the account.

CARES Act deductions. Under the CARES Act, which was made law in March, new deductions are available—up to $300 per taxpayer ($600 for a married couple) in annual charitable contributions. This is available only to people who take the standard deduction (for taxpayers who do not itemize their deductions). As an “above the line” adjustment to income, it will reduce a donor’s adjusted gross income (AGI), and thereby reduce taxable income. A donation to a DAF does not qualify for this new deduction.

New charitable deduction limits—as part of the law, individuals and corporations that itemize can deduct much greater amounts of their contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI (up from 60% previously). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. The new deduction is for gifts that go to a public charity. The old deduction rules apply to gifts to private foundations. The higher deduction does not apply to donations directly to a DAF (more on the CARES Act below).

Qualified charitable donations (QCDs). QCDs allow individuals aged 70½ and older to give traditional IRA funds to charity rather than taking them as IRS-mandated required minimum distributions (RMDs). In so doing, up to $100,000 of the traditional IRA funds may be exempt from taxes. It's worth noting that donor-advised funds, however, currently cannot accept QCDs.

Other contributions

Retirement accounts. You can remind clients that the IRS deadline for making 2020 contributions to 401(k) accounts is December 31 (the deadline for contributing to IRAs for the 2020 tax year is April 15, 2021).

529 plans. Most states set December 31 as the deadline—for state tax benefit purposes—for contributions to 529 education accounts, although six states (Georgia, Iowa, Mississippi, Oklahoma, South Carolina, and Wisconsin) set deadlines in April 15 of the following year.

Important rules changes

RMDs. Starting in 2020, clients are no longer required to take RMDs on qualified retirement accounts at age 70½. For account holders who turn 70½ after December 31, 2019, RMDs don’t become mandatory until they reach age 72. The CARES Act affects RMDs this year even further (see below).

The CARES Act. In addition to its charitable giving features mentioned above, the CARES Act features several provisions with potential planning implications:

  • Waiver of the early withdrawal penalty on eligible retirement accounts—to put money in the pockets of individuals affected by the pandemic, the act suspends the10% penalty for early withdrawals of coronavirus-related distributions up to $100,000 made between January 1 and December 31, 2020. Individuals can spread the tax on these distributions over three years, and they have three years to return the money to their accounts.
  • Temporary waiver for RMDs—this temporary waiver applies to both 2020 RMDs and RMDs of those who turned 70½ in 2019 with RMDs that ordinarily would have come due in April 2020.
  • For small business employers and the self-employed, the act permits a deferral of payroll taxes and provides a refundable payroll tax credit for 50% of wages for businesses affected by COVID-19.

Remember the people behind the portfolios

By any measure, 2020 has proved to be a challenging year on multiple fronts. Your year-end check-in with clients serves as a valuable touchpoint. Clients want to know that you’re helping to efficiently grow their wealth. But it’s especially important to hear out other concerns clients may express:

  • They may feel exhausted after the contentious, drawn-out presidential election campaign.
  • They might have been affected by or have ongoing fears regarding the coronavirus pandemic.
  • Their financial situations could be less stable, given the economic upheaval of 2020.

It’s times like these when your role as a listener first, and emotional circuit breaker second, can deliver tremendous value and build trust. The Vanguard Advisor’s Alpha® framework is built around providing you with the tools to help unlock your value to clients, communicate that value to them, and strengthen client relationships.

1 Founded by Vanguard in 1997 as an independent 501(c)(3) organization, Vanguard Charitable strongly aligns with Vanguard's principled investment philosophy and believes in the importance of long-term, strategic charitable planning through a donor-advised fund.

Notes:

  • All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
  • The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about his/her individual situation before investing in any fund or ETF.