Year-End Planning for Executives

By Aria Krumwiede, Hope Carlson, Michael S. Brown on October 7, 2020

As we approach the end of the calendar year, you only have a few months left to take advantage of planning opportunities that may be especially relevant in 2020.  If you are a corporate executive, some topics are particularly salient for you.

Here are some categories we recommend reviewing as part of your year-end planning:

1. Coordinate Income Tax Planning With Your Financial and Tax Advisors

With unprecedented government spending in response to the global COVID-19 pandemic and potential political changes, many anticipate a future with higher income taxes.  That makes 2020 an especially critical year for tax planning.

Update Your Income Projections to Reassess Your Estimated Taxes and/or Tax Withholdings and Strategize Around Your Incentive Stock Options

If you are an executive and have started selling your company shares through a 10b5-1 plan, updated income projections are critical to ensuring you’re paying enough in estimated taxes and/or tax withholdings.

Further, if you have had restricted stock units (RSUs) vest or have exercised and sold non-qualified stock options (NQSOs) during the year, perhaps through a 10b5-1 plan, there could be opportunities to think strategically about your incentive stock options (ISOs).  In this case, your ordinary income may exceed your Alternative Minimum Tax (AMT) income, which could allow for an opportunity to exercise and hold your ISOs, with favorable tax treatment (assuming special rules and holding requirements are satisfied).  Make sure to coordinate with your financial and tax advisors on this specific issue.

Identify Potential Roth Conversion Opportunities

Updated income projections can also help identify other opportunities, such as Roth conversion strategies.  Chances are your investment income may be lower this year, especially since bond yields have dropped.  If you are in a lower tax bracket than anticipated, it may be a good year for a Roth conversion, which would convert pre-tax retirement funds to a Roth IRA.  You pay the taxes now on the conversion amount, but the funds will grow tax-free inside your Roth IRA and can be withdrawn tax-free, assuming you make qualified withdrawals.

Harvest Your Capital Losses

If you own securities that have dropped in value, you have an unrealized capital loss..  For our clients, we practice tax-loss harvesting as asset prices move throughout the year.  We sell securities with losses (realize the capital losses) and buy something comparable to maintain market exposure, diversification, and portfolio balance.  Capital losses not only help offset taxable gains this year, but unused losses can also be carried forward to offset future gains.  In addition to offsetting gains, you can deduct $3,000 of net capital losses against ordinary income each year.  Consult with your financial and tax advisors to be sure that you avoid wash sales and comply with other IRS rules which could otherwise disallow the loss.

2. Optimize Your Retirement Plan Contributions

401(k)s:  Meet Your Match

How much have you contributed to your 401(k) plan this year?  The limit for employee contributions is $19,500 plus an additional $6,500 if you’re over age 50.  If your company offers a match, be sure to contribute at least enough to receive the full match.

Employers can also contribute to 401(k)s through a match or via profit sharing contributions.  The 2020 IRS limit for total employer plus employee contributions is $57,000 if under age 50 or $63,500 if over age 50.

Mega Backdoor Roth:  A Way to Tax Protect More Retirement Savings

Many companies now allow for Mega Backdoor Roth Conversion strategies as part of their retirement plans.  This strategy allows you to contribute your full employee contribution ($19,500 if you’re under age 50, or $26,000 if you’re over 50) on a pre-tax basis.  After you receive any employer contributions, your retirement plan may allow for a Mega Backdoor Roth Conversion strategy in which you contribute after-tax money up to the combined IRS limit of $57,000 if under age 50 or $63,500 if over age 50.  The after-tax contributions are then converted to a Roth account, either within the plan or outside, which grows tax-free and can be withdrawn tax-free in retirement or under other circumstances.

For example, let’s say you are 45 years old, earn $200,000/year, have an employer match of 4% of your gross salary, and your company’s retirement plan allows for after-tax contributions with Roth conversions.  If you wanted to maximize your contributions, you would contribute $19,500 on a pre-tax basis, get the $8,000 match, and then contribute another $29,500 of after-tax money to meet the overall IRS limit of $57,000.  Depending on the plan provisions, you would convert the $29,500 after-tax contribution to a Roth account either inside the plan (called an “in-plan conversion”) or roll the after-tax dollars to a Roth IRA account outside of the plan.  You’d then enjoy tax-free growth on the converted balance going forward.

There are special rules on how long you need to wait before withdrawing the funds free of penalties, so be sure to talk with your financial and tax advisors about your specific situation.

Don’t Forget IRAs

IRAs, or Individual Retirement Accounts, can be funded separately from your 401(k) and other employer retirement plans.  While your income may exceed the limits to contribute to a Roth IRA directly, you may still make after-tax contributions to a traditional IRA and then convert the funds to a Roth IRA, known as a “backdoor Roth contribution.”  Roth accounts are especially valuable as they have the potential to enjoy tax free growth for very long periods of time.  The Tax Cuts and Jobs Act officially noted that backdoor Roth IRA contributions are allowed for high income earners with no waiting period required between the traditional IRA and Roth conversion.

In 2020, you can contribute up to $6,000 if you are under age 50 or $7,000 if over 50 to all your IRAs combined.  It is important to note that, if you already have pre-tax funds in your traditional IRA, anything you convert to a Roth IRA will be taxed pro rata based on the percentage of pre-tax and after-tax funds you have in your traditional IRA.  Also, as with the Mega Backdoor Roth, there are special rules for how long you need to wait before withdrawing funds so as not to incur fees or penalties.  Talk to your financial and tax advisors for more details.

3. Plan Your Philanthropy

Give Cash

2020 presents a unique year for gifts of cash.  The CARES Act has made cash gifts deductible up to 100% of your adjusted gross income (AGI).  In other words, if your AGI is $250,000 and you donate $250,000 to a 501(c)(3) charity, you will have $0 in taxable income for the year.

Note that this 100% limit does not apply to cash donations to Donor Advised Funds (DAFs).  Whatever you cannot deduct this year can be carried forward up to five years.

Give Appreciated Stock

A wonderful way to diversify your portfolio, especially if you have concentrated positions, is to donate appreciated stock (which comes with a quadruple benefit):

  • You get a tax deduction for the fair market value of the stock.
  • You avoid paying capital gains tax.
  • You can rebalance your portfolio or diversify a concentrated position.
  • You make a difference with your charitable giving.

You do need to have held the stock for more than a year, and your deduction is limited to 30% of your AGI, assuming you are donating to a public 501(c)(3) charity.  Any unused deduction can be carried forward for five years.

Create a Donor Advised Fund (DAF)

If you are unsure which charities you’d like to support but know you’d like to make a charitable gift this year, a Donor Advised Fund (DAF) is a good option.  You receive a tax deduction in the year you contribute the funds to your DAF, but you can make grants over an indefinite number of years from the DAF to charities.

DAFs can help offset your tax burden in high income years while funding your philanthropic efforts for years to come.  Many of our clients believe their DAFs have additional benefits besides tax management, including making it easier to give and involving the next generation in their philanthropy.

Make Qualified Charitable Distributions (QCDs)

For people age 70-½ or older with traditional IRAs, a Qualified Charitable Distribution is generally a tax-advantageous way to give.  QCDs are checks made directly from your IRA to charities.  Not only do they fulfill your Required Minimum Distributions (RMDs), but they also are excluded from your gross income.  There are many potential tax benefits as a result.

An IRA owner can give up to $100,000 per year in QCDs.  Note that QCDs cannot be made to a Donor Advised Fund.

Depending on your specific situation, QCDs may be less attractive than giving cash or appreciated stock this year since Required Minimum Distributions (RMDs) are suspended in 2020 via the CARES Act.  Your financial and tax advisors can help you determine how best to optimize your charitable giving.

4. Review Your Gifting and Estate Plans

Ensure Your Estate Planning Documents Are Current

It’s good practice to review your estate planning documents, including your will, trusts, powers of attorney, and advance medical directives, at least annually.  Are they still in accordance with your wishes and your current family situation?  Do you have new children or grandchildren?  Do your beneficiary designations match your current objectives?

Remember that the SECURE Act passed in 2019 changed the distribution requirements for IRAs and 401(k)s.  Now, most non-spouse beneficiaries who inherit one of these accounts will be required to withdraw the funds within 10 years.  Based on the potential tax burden for your heirs, you may decide to prioritize Roth conversions or do additional income tax planning.  There are also strategies that can help you “preserve the stretch” for your IRA distributions.

Make Gifts to Your Family or Others

Because of what’s known as the Annual Exclusion, you can gift up to $15,000 this year per person without utilizing any of your lifetime gift or estate tax exemptions.  If you are likely to have a taxable estate, this is a valuable way to transfer wealth over many years.  If you are married, you and your spouse can each gift $15,000 per person per year, meaning each child, grandchild, or other individuals could receive $30,000 per year in gifts in this manner.

If you are concerned about creditor protection or control over the assets, talk with your estate planning attorney about whether a Crummey Trust makes sense for you.

You can also superfund a 529 account for up to five years of Annual Exclusion gifts per account beneficiary.  In other words, if you are married, you and your spouse could jointly contribute up to $150,000 per child’s or grandchild’s 529 plan this year.

Finally, don’t forget that you can pay unlimited qualified educational and medical expenses on behalf of others without incurring any gift tax as long as you write the checks directly to the educational or medical institutions and not to individuals.

Make Gifts to Use the Current Estate Tax Exemption

The current estate tax exemption is $11.58 million per person in 2020.  It is scheduled to sunset at the end of 2025, reverting to half this level.  Depending on the political situation, the exemption may be reduced even earlier.

The IRS has said that it will not “claw back” gifts made under the current exemption amount.  That means you could gift funds directly or via irrevocable trusts up to the $11.58 million limit, and even if there is a reduction in the future exemption amount, you will not owe estate tax on those gifts.

In addition to outright gifts, several estate planning techniques are available to freeze your estate value or pass along assets utilizing minimal amounts of your lifetime gift and estate tax exemptions.  Consult your financial advisor, tax advisor, and estate planning attorney to determine the strategies that will allow you to meet your financial, tax, and estate planning objectives.


The opportunities for year-end planning are many and varied, and each brings its own set of complexity depending on your circumstances.  Be sure to engage your financial, tax, and legal advisors to determine what strategies are best for you.

At Dowling & Yahnke Wealth Advisors, we place a high value on being proactive and planning ahead, especially for corporate executives and other high income earners.  Please don’t hesitate to contact us if we can help you in any way.



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