Three Financial Steps to Take Before Year End

The year will soon be over, but there is still time to accomplish a few important financial tasks. I apologize for adding to your overcrowded to-do list, but let’s cover three topics that deserve your attention.

1.? Review Your Homeowner’s Insurance Policy

The recent floods in western North Carolina (triggered by Hurricane Helene on 9/24/2024) were horrific. I visited Asheville, North Carolina, with friends in early September and was amazed at the beauty of the Blue Ridge Parkway and the Appalachian Mountains. I fell in love with a small stationery store in Biltmore Village called Origami Ink. It had beautiful, affordable pens, blank books, and sketch books. The young man who owned the store was wonderful. Sadly, the store was totally destroyed by the flood.

Asheville sits near two rivers and both flooded, sending a 20-foot wall of water into many homes and businesses. As of 10/15/2024, the death toll from the storm (in six states) stands at over 230, with 95 deaths in North Carolina. An additional 92 people are still missing in North Carolina.

People in the Florida panhandle were expecting the wrath of the hurricane. People in inland areas, such as western North Carolina, were not expecting the massive destruction that resulted from the severe flooding. They will be dealing with the devastation for months and years.

One of the results of storms like this is learning that most people are not properly insured. Reviewing your homeowner’s policy would never be considered a fun task. But in light of recent hurricanes and floods, reviewing your homeowner’s insurance policy is essential.

Standard homeowner’s policies do NOT cover flooding.

To have flood insurance, a separate policy must be purchased. It is estimated that only about 1 percent of homeowners have a flood insurance policy. You do not need to be in a designated flood zone to buy a flood insurance policy.

A flood insurance policy (for the few who have one) from the National Flood Insurance Program is capped at $250,000 for the structure of your home and $100,000 for contents. That may not be enough in a major flood. Private insurance companies offer higher limits.

A major concern involves how a disaster will be categorized by the insurance company. If the cause of the damage near Asheville is categorized as a flood, most people will not have any insurance coverage. If the damage is categorized as occurring from a tree landing on a home or from high winds, the standard homeowner’s policy may provide coverage.

Insurance companies have changed the terms on homeowner policies in recent years. According to Jean Eaglesham of the Wall Street Journal, “policies in hurricane-prone areas are now more likely to have higher deductibles for wind damage, reduced payouts for older roofs, limits on interior water damage and exclusions for damage from wind-driven rain, according to insurance agents.”

Many insurance companies have raised deductibles for policyholders from a set amount, such as $1,000 - $5,000, to as high as 5%. For a $500,000 home, a 5% deductible requires the homeowner to pay the first $25,000 of damage. For a $1 million home, they would be required to pay the first $50,000.

Many homeowners are underinsured due to high inflation in building materials and labor in recent years. Even with an annual inflation factor, their policy may cover far less than the cost of rebuilding. Some policies provide replacement-cost coverage, with an extra 20 or 25% of the insured amount if needed.

The bottom line? It is imperative that you review your coverage with your insurance agent and know exactly how much insurance you have. You may want to increase your coverage and buy a separate flood insurance policy. If you have expensive artwork or jewelry, it should be on a separate rider policy.

2.? Stop Procrastinating—Do That Roth Conversion Now!

I predict that in five years many investors will regret not converting portions of their traditional IRAs to Roth IRAs in 2024.

Current tax laws strongly favor Roth IRAs, especially for folks who want to leave their IRAs to children or grandchildren after they die (this is termed a “legacy” goal).

If you have money in after-tax accounts to pay the taxes on the 2024 conversion—and you don’t plan to need the RMDs (Required Minimum Distributions) for living expenses—consider doing a Roth conversion now (before 12/31/2024).

If you’re on the fence. but you’re considering converting $50,000, then convert $25,000 now. At least you’ll be getting started and you’ll get off the fence. Roth IRAs for 2024 must be completed by year-end. However, keep in mind that whatever amount you convert will be considered as taxable income for 2024, so you will need to pay taxes on that amount.

To learn more about the pros and cons of Roth IRAs, consider reading my previous articles about Roth IRAs (from 3/19/2024, 10/10/2023, and 2/10/2023) which be found on my website at www.donnaskeelscygan.com/articles/. (The 10/10/23 article lays out a list of reasons you may NOT want to convert). Or search “Roth IRA Conversion” online, and you will find hundreds of articles. Most brokerage firms also provide articles and guidance.

We can’t predict future tax rates, but if Congress cannot agree on changes, the 2017 tax rules will return on 1/1/2026. The tax reductions passed in late 2017 (called the Tax Cuts and Job Act) are set to expire on 12/31/25. This will likely result in higher taxes and lower standard deductions.

3.? Check the Rates You Are Receiving on Your Cash Reserves

If you keep an emergency fund (hopefully enough to cover up to six months of expenses) in a bank, credit union, or brokerage account, research the current yield your cash is earning. It is common that cash accounts (often called sweepaccounts) are paying almost nothing, but money-market funds are paying 4-5% in interest. If you keep a balance of $25,000 in cash, this equates to over $1,000 in interest per year you may be passing up. If you discover you are earning a paltry return on your cash, ask your bank, credit union, or brokerage firm what other options they have that will earn a higher yield.

We are heading into the holidays, with Thanksgiving coming in late November. Give thanks for everything that enriches your life—such as family and friends, your home, and even your finances. Consider making generous charitable gifts this month. In addition to benefiting those less fortunate, giving to charity will also warm your heart.

I invite you to sign up for my digital newsletter “Becoming Enriched.” The newsletter is free to all subscribers, and you can unsubscribe at any time. It does not contain ads, and I do not share email addresses with anyone. When you sign up, you will receive the “Master Financial and Estate Planning Binder” document, which simplifies estate management for your loved ones in the event or your death or disability. To sign up, please go to my website at donnaskeelscygan.com and provide your email address. Or, email me directly at [email protected].

Donna Skeels Cygan, CFP?, MBA is the author of The Joy of Financial Security, and her upcoming book Becoming Enriched. She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at [email protected].