Okay, the leftover turkey has been dealt with and there are still 31 days until the end of the year. So, maybe it’s a good time to think about end-of-year financial planning. Here are a few of the more common things you might want to consider.
Withholding. Ideally, the taxes withheld from your paychecks add up to something close to your final tax liability. Withhold too little and you may owe an underpayment penalty. Withhold too much and the government gets an interest-free loan that won’t be repaid until after you file next year’s return. You control the amount withheld through the W-4 form that you completed with your employer. The IRS rules say that you can avoid a penalty by setting your withholding at either 90% of the taxes you expect to owe this year or 100% of the taxes paid in the previous year. (110% for incomes above $150,000.)
Credit Reports. There are three main credit reporting agencies: TransUnion, Equifax, and Experian. Upon request, they’ll send you a free report once a year and they’re worth looking over. You may spot errors, fraudulent activity or other things that require your attention. While you’re at it, you might consider locking your credit reports. This prevents unauthorized parties from accessing your credit reports. You can turn the lock on and off easily. It’s free from TransUnion and Equifax. Experian does charge $24.99 per month for a kind of deluxe version of credit locking. Now, that’s about $300/year, so you might opt to lock the free reports and monitor Experian.
Estate Plans. Naturally estate planning is important to everyone, even if you’re far from retirement age. They specify how to distribute your assets when you die. What does your partner get? How about your children and grandchildren? Maybe you want to make some charitable contributions. Your will takes care of these matters. Estates should also include medical and financial power of attorney documents so that others can help you if you’re unable to act on your own behalf prior to death. Once these are in place, it’s a good practice to review them from time to time. Maybe your family grew. Maybe you got divorced. Whenever you have a major life event, it’s important to review your estate plans.
Beneficiaries. Did you know that some assets pass outside of your estate? IRAs, 401(k)/403(b) plans and life insurance are examples of such assets. Last month I wrote an article on beneficiaries (and the companion topic of asset titling). This should help you think about properly handling these out-of-estate assets.
Savings. A well thought-out savings plan is essential to your financial health. I wrote an article on this (and on investments) earlier this year. It would be good to check this out. A great thing to try and do at the end of the year is to increase your level of saving. If you do so by some smaller percentage, you may not even notice the decrease in cash flow.
401(k) Plan. If you participate in a 401(k) plan, it’s a good idea to see if you’re on track to maximize your savings. If your employer has matching funds, that should be your minimum goal for the year. Contribute enough to rake in every free dollar that your employer is willing to give you. If your budget allows, it’s a great idea to contribute the maximum amount allowed by law to your plan. In 2021 that’s $19,500.
Capital Gains. If you have realized capital gains this year, the associated taxation can be reduced by up to $3,000 by selling some of your losses. (There’s also a carry-forward provision that lets you deduct up to a $9,000 loss at $3,000 annually over three years.)
RMDs. Have you taken your Required Minimum Distributions for the year? If you’re 70½ or older, you must make these withdrawals by the end of the year or face a 50% tax on the amount you failed to withdraw. If you’re younger, but have an inherited IRA (also called a stretch IRA), you’re also subject to these rules.
Charitable Donations. If you itemize your deductions, charitable contributions are a wonderful way to reduce your tax bill. If you’re subject to an RMD, we suggest that you directly transfer money from your IRAs to get the deduction and to avoid capital gains on the transfer!
HSAs. If you have a Health Savings Account, try and fund it to the allowed maximum. In 2021, this is $3,600 for an individual and $7,200 for a family. If you’re 55 or older, you’re eligible for a HSA catch-up contribution which adds an additional $1,000 for an individual and $2,000 for a family. HSAs can carry over from year to year, so fully funding them each year makes sense. It may be that your employer contributes to your HAS fund, so be sure to check on that. Finally, if your health insurance does not qualify for an HSA, be sure to consider an FSA (Flexible Savings Account).
529 Plan. If you’re using a 529 plan to save for a family member’s college expenses, don’t forget to make your desired contribution in order to benefit from in-state tax deductions. (For grandkids, don’t forget that you can gift up to $15,000 per year tax free.)
IRA. If you’re still working, try to contribute as much as possible to an IRA. 2021 contribution limits are $6,000 if you’re under 50 and $7,000 if you’re 50 or older. Generally it’s advisable to make a contribution to a traditional IRA if your income level allows your contribution to be made using pre-tax dollars. If you’re earning too much for that, you can still contribute to a traditional IRA using after-tax dollars and then convert it to a Roth IRA for future tax-free distributions.
You can see that there are quite a few things to consider before the end of the year. Some of them involve IRS rules that must be strictly followed. If you’d like some help applying these ideas to your personal situation, we’d be happy to help you think this through. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.