By Steve Tepper, CFP®, MBA
It’s our 13th annual year-end financial checklist! Here are some important things to think about as the calendar year draws to a close:
Employer-sponsored retirement accounts: To take a deduction for contributions to an employer-sponsored plan, such as a 401(k) or a SIMPLE IRA, you must make your contribution through payroll deduction by the end of the year.
Your primary goal should be to save at least enough to earn any company match offered. Contribution limits for 2021 if you are under 50 are $13,500 for a SIMPLE IRA and $19,500 for a 401(k), 403(b), or 457(b) plan. If you are over 50, the limits are $16,500 for the SIMPLE and $26,000 for the 401(k), 403(b) or 457(b).
Charitable giving: Make your contributions (either of cash or donated goods) by the end of the year, and get a receipt from the charity.
Gifting: You can contribute up to $15,000 per recipient per year ($30,000 if married and filing jointly) to as many recipients as you like. This includes contributing to your child’s or grandchild’s 529 college savings plan. Note: Gifting is not tax-deductible, but if you gift in excess of limits, you will need to file a gift tax return and pay gift tax.
Required minimum distribution: After last year’s suspension of RMDs, they are back in 2021, but the start age has been raised from 70 ½ to 72. If you are past RMD age, you need to withdraw from your IRA at least the calculated amount (and pay taxes on it) or be subject to a 50% penalty (plus taxes). You do not have to take an RMD from a Roth IRA and may not have to take one from a 401(k) plan if you are still working for the employer sponsoring the plan.
Set up a home business retirement plan: One thing you can do to take a big bite out of taxable income is contribute to a company-sponsored plan. If you have a home business, you might still be able to do that. If you don’t have one set up, you need to get it done by year-end. Depending on the type of plan, you might be able to delay funding until the tax-filing deadline next year, but the plan must be established now.
Maximize health savings account (HSA) contributions: Another way to lower taxable income is through the money you contribute to an HSA qualified health insurance plan, if you have one. The annual contribution limits are $3,600 for individual coverage, $7,200 for family, and an additional $1,000 catch-up contribution if you are 55 or older. You can make HSA contributions through payroll deduction or directly to your account. If you don’t spend all the money in your account on qualified medical expenses, you can roll the balance forward, and continue to do so year after year, even if you leave the employer offering the HSA qualified plan.
Spend all your flexible spending account (FSA) dollars: Though they are not common these days, some people have flexible spending accounts to cover routine medical expenses such as prescriptions and doctor co-pays. But unlike HSAs, money left over each year does not roll over—it is forfeited. So, if there’s still money in that account, get all your prescriptions refilled or get an extra pair of glasses.
Harvest investment losses: Even though many stocks and asset classes are at record highs these days, you might find that some of your holdings are still down. Tax loss harvesting is a means of capturing losses on your investments that can be used to offset taxable gains. Maybe you’re holding some hotel or cruise line stocks that are still in the tank. Think about selling them and buying a similar but not identical stock. In that way, your portfolio will be virtually the same, but you will now have a loss available to lower taxes on other gains.
When I say “similar but not identical,” that is because of specific language in the tax code that prohibits selling and buying of “substantially identical” investments if you want to harvest tax losses. Selling a cruise line’s Class A stock and buying their Class B stock would violate the substantially identical rule, but buying a different cruise line’s stock would not.
Maximize IRA contributions: If you aren’t participating in an employer-sponsored retirement plan and want to lower taxable income, you can contribute up to $6,000 to an individual IRA, and an extra $1,000 if you are over age 50. Alternatively, you can contribute up to the same limits to a Roth IRA (but you can’t do both in the same tax year). You have until next year’s tax filing deadline to max out your contributions.
Review beneficiary designations: The beneficiaries you selected years ago, particularly for your retirement accounts, may not make sense due to 2019’s SECURE Act. That legislation eliminated the “stretch IRA,” which allowed non-spouse beneficiaries of your IRA to take the money out over their lifetime rather than over just a few years. A beneficiary review will help you determine if you are leaving the right types of assets to the right heirs to reduce the possible tax burden on them.
Have a risk review: As much as you may not want to relive it, take a few moments to reflect back on March and April of 2020, when much of the global economy was shutting down and we experienced the most rapid bear market in history. There was a lot to deal with: concern about the health and safety of loved ones, job and business concerns. Were you also a little freaked out about your investment portfolio? Or were you way more than a little freaked out?
This is a useful exercise because now that markets are calmer (at least that is the case as I am writing this and, I hope, as you are reading it), you can think about whether the amount of risk your portfolio is exposed to is the proper amount. We can only hope we do not see a return of volatility like we had last year ever in our lifetimes, but it would be folly to pin the same hopes on seeing no large market declines at all. They will happen. If your experience these past couple of years caused you worry and cost you sleep, this could be an opportunity to re-evaluate and move to a less risky investment strategy.
See the doctor: Most medical and dental plans offer free annual or biannual wellness visits. Of course, nothing is free—you are paying for those appointments through those astronomical monthly insurance premiums. Or you may have already maxed out your out-of-pocket health care costs for the year. In either case, take advantage and go to see your doctor and dentist for a checkup.
Check your credit report: You can get a free credit report from each of the major credit agencies (Experian, Equifax, and TransUnion) once a year. Go right to their website to order it.
Talk to your financial advisor: If you haven’t talked to us this year, let’s get together in person, via Zoom, or just catch up on the phone. It is important that we touch base with you occasionally to check our strategy and plan, especially if you have had important life-changing events this past year or anticipate big changes in 2022.
On behalf of the Northstar staff, I wish you and your family a safe and happy holiday season and new year, and a great 2022.