6.0 MIN READ
As we approach the end of the year, there is still time to take a few well-placed end-of-year actions to improve your financial condition.
Perhaps because we’re working against a deadline, a lot of year-end planning options seem tax-related. However, tax measures should be done with your overall long-term financial and investment planning context in mind. It is therefore essential to find out more from your financial and tax advisor.
Here are seven key steps to focus on that will help you get the most of the rest of your fiscal year.
1) Collect your tax losses in your taxable accounts
As of October 22nd, the Dow Jones is up 16.57% and the S&P500 is up only 21% for the year. Unfortunately, there are still stocks and mutual funds that are declining for the year. As a result, you likely have some positions in your portfolio that appear in red when you check the “Unrealized Gains and Losses” column on your brokerage statement.
You can still make lemonade out of these lemons by harvesting your losses for tax purposes. However, the IRS individual capital loss deduction is capped at a maximum of $ 3,000 for 2018. So if all you were to sell off your losers, you could get tax loss carryforward, that is, tax losses that you will have to use in the future years. This is not an ideal scenario!
You can also offset your losses against profits. For example, let’s say you were selling some losers and hypothetically accumulating $ 10,000 in losses. In that case, you could sell some winners as well. Then, when the profits of your winners sold add up to $ 10,000, you have offset your profits against losses and you owe no capital gains taxes on this joint trade!
This could be a great tool to realign your portfolio with low tax implications. Note, however, that you have to wait 30 days before buying back the sold positions to avoid the wash sale rule.
2) Rethink your investment planning
Obtaining tax losses is a great tactic for gaining short term benefits. However, as a major side benefit, you can focus on more basic topics. Why did you buy those stocks that you just sold? They probably played an important role in your investment strategy. And now that you’ve accumulated cash, it’s important to reinvest wisely.
You might be tempted to stay on the sidelines for a while and watch the market rebound. While we may have been indulged in complacency after the Great Recession, the last month has reminded us that volatility is happening.
Nobody knows when the next bear market will happen if it has not already started. Therefore, it is high time to wonder if you and your portfolio are ready for a significant potential downturn.
Take the opportunity to review your goals, ensure that your portfolio risk is in line with your goals and that your asset allocation is in line with your risk target. Then talk to your asset strategist about this.
3) Check your retirement savings
It’s not too late to replenish your retirement account! In 2021, depending on the terms of your plan, you can choose to pay a maximum of $ 19,500 of your salary, including employer matching, into a 401 (k), TSP, 403 (b), or 457 retirement plan. Additionally, people 50 years or older can contribute an additional $ 6,500 for the year.
If you’ve contributed less than the limit to your plan, there may be time! You have until December 31st to maximize contributions for 2021, reduce your taxable income in 2021 (if you’re contributing to a traditional plan) and improve your retirement savings.
As an alternative to deferring part of your salary to your employer’s traditional pre-tax plan, you may be able to fund a Roth account if that is a plan option for your employer. As with a Roth IRA, contributions are made to the Roth 401 (k) are manufactured after taxes, while retirement distributions are tax-free.
Many employers have added the Roth function to their employee benefit plans. If this is not the case for you, speak to your HR department!
Although the media has advertised the Roth Account as being tax free, it should be kept in mind that it is not. Roth accounts are just taxed differently. Check with your Certified Financial Planner practitioner to see if moving part of your pre-tax salary or to a Roth after-tax account is more appropriate for your situation.
4) Roth conversions
The current tax environment is particularly favorable for Roth transformations. According to current law, income tax rates are to be raised again in 2026; therefore Roth conversions could be suitable for more people by then. And of course it is possible for Congress to vote on an increase in tax rates before the end of the year.
With a Roth conversion, you withdraw money from a traditional retirement account, in which the assets grow at a tax-deductible rate, pay income tax on the payout and roll the assets into a Roth account. The credit on a Roth account can grow and be withdrawn tax-free, provided certain requirements are met. If you believe your future tax bracket will be higher than it is today, you could be a good candidate for a Roth conversion.
Read more about the new tax law and Roth conversions
5) Choose your health plan carefully
It’s re-enrollment season for the health insurance companies! The annual ritual of choosing health insurance is up to us. This could be one of your most important financial decisions in the short term. Health insurance is not only expensive, it is getting more and more expensive.
First you have to decide whether you want to take out a classic tariff with a “low” deductible or a high deductible. The disadvantage is that the high deductible option has a cheaper premium. However, if you have a lot of health issues, you may end up spending more. High deductible plans are combined with Health Savings Accounts (HSA).
The HSA is a unique tool. This allows you to save money before taxes and pay qualified health care expenses tax-free. In addition, unlike Flexible Spending Accounts (FSAs), balances in HSAs can be transferred and invested for future years to enable potential profit growth. The latter is very exciting for asset managers: in the right situation, clients can ultimately save a lot of money.
If you choose a high deductible plan, make sure your HSA is funded to the maximum. Often, employers will also help make sure that you choose this option. If you choose a low-deductible plan, make sure you deposit the appropriate amount into your flexible-spending account. FSAs are used to pay medical expenses on a pre-tax basis. Unlike an HSA, you cannot carry over unspent amounts to future years.
6) If you are over 70, plan your RMDs
If you are over 70, make sure you are receiving your Required Minimum Distributions (RMDs) each year. The 50% penalty for not accepting the RMD is steep. You must withdraw your first minimum payout by April 1st of the year following the year in which you turn 70½ and then by December 31st for each year thereafter.
Maybe you don’t need the RMD? Instead, you may want to redirect the money to another purpose. For example, you might want to fund a grandchild’s 529 education account. 529 accounts are tax-privileged education accounts. Although contributions are paid after tax, growth and distributions are tax free when used for educational purposes.
Or you may be planning a qualified charity distribution from the IRA. Distribution must be made directly from the IRA to the charity. It is excluded from taxable income and, under certain conditions, can be offset against your RMD.
7) Schedule your charitable giving
Speaking of charitable donations, they can also reduce taxable income and provide financial planning benefits. However, due to the Tax Cut and Jobs Act of 2017 (TCJA), it can be more complicated than previous years. A key difference in the TCJA is that the standard deductions are $ 12,550 for individuals and $ 25,100 for joint applicants. In effect, that means you will have to accumulate $ 12,550 or $ 25,100 in deductions before you can feel the tax savings.
In other words, if a married couple who have combined $ 8,000 in real estate tax and $ 5,000 in state income tax for a total of $ 13,000 in deductions are filing, it is better to take the standard $ 24,000 deduction. They would need to donate $ 7,000 before they could feel the tax benefits of their donation. One way to deal with this is to bundle your gifts in a specific year instead of spreading them out over many years. Or, within certain limits, directly from your IRA.
For example, if you plan to donate in 2021 and 2022 as well, you should consider pooling your donations and donating only in 2021. In this way, you are more likely to exceed the usual deduction limit.
If your thinking is running after reading this article, check with your financial strategist or financial planner: Maybe there are other things you could or should do before the end of the year!
About the author
Chris Chen, CFP CDFA is the CEO and Wealth Strategist at Insight Financial Strategists LLC in the greater Boston area. He specializes in retirement planning and divorce financial planning
Did you know that XYPN consultants offer virtual services? You can work with clients in any state! View Chris’ Find an Advisor Profile.