Year-End Planning Tips
Take one more look at your finances before welcoming 2004.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information

As 2003 draws to a close, it’s time to review your financial situation and make necessary changes and updates. The following are a few areas that deserve special attention before 2004.

Review your investment portfolio. Most major stock averages rebounded strongly in 2003, but many investors have significant accumulated losses from 2000, 2001, and 2002 in their taxable accounts. Consider using losses from previous years to protect gains from any stock or stock mutual fund you sell before the end of the year. And remember, you can carry forward up to $3,000 in capital loss against ordinary income per year.

Also, consider the type of account in which you hold each asset type. With the new qualified stock dividend and capital gains tax rates capped at 15 percent, savvy investors are holding stocks and stock mutual funds in taxable accounts and holding bonds, bond mutual funds, and other fixed-income investments in tax-deferred accounts, such as 401(k) accounts and IRAs. But if you or your financial advisor uses an “active” trading strategy with stocks or stock mutual funds, creating significant short-term gains, those assets are better held in tax-deferred accounts. You also should be aware that dividends, such as those paid by mutual insurance companies, do not qualify for this special tax treatment.

Take your IRA required minimum distribution (RMD). If you already are taking distributions from an IRA and haven’t taken your 2003 distribution, try to do so by Dec. 24. There typically is a big rush at brokerage firms and mutual funds houses during the last week in December, increasing the chance for lost paperwork. If you turned 701/2 in 2003, you are required to take your first RMD by April 1, 2004.

Although you might be tempted to defer taking your first RMD in 2004, doing so would force you to take two distributions in 2004—one before April 1 and another before Dec. 31. These dual distributions might force you into a higher tax bracket. Contact the custodian of your IRA for help calculating your RMD.

Take another look at your estate plan. Are your estate-planning documents more than 5 years old? Are the people you chose as your personal representative, executor, or trustee still living? Is your executor still able to perform his or her duties? Ask yourself these questions, and make sure to update your estate plan accordingly.

Every estate plan should include:

• a current will,
• a living will and health care power of attorney (often referred to collectively as advanced health care directives), and
• a durable power of attorney.

If you have substantial assets (more than $1 million, including the face value of all your life insurance policies), out-of-state real property, children with special needs, or a spouse who is not a U.S. citizen, you might need to create one or more trusts.

Update your beneficiary designations. This includes the beneficiary designations on life insurance policies, commercial annuities, IRAs, and other qualified retirement plans. This is particularly important if there has been a change in your family situation, such as a divorce or death. Few things are more devastating to a second spouse than to discover the beneficiary of their deceased loved one’s life insurance policy or retirement plan is a former spouse.

Also, designate a primary and secondary beneficiary on each account. It usually is best to name individuals as beneficiaries, though a trust can be named in some circumstances.