Brandon Lovingier, Paraplanner

Financial Wellness Ideas for Your Year-End Checklist

Did you take full advantage of 2020?  We know that this year has certainly taken more from us than usual.  It has been a year full of ups and downs, but it has also yielded new opportunities.  Volatile markets from the pandemic have rebounded. The mass exodus from the office to the house has led many of us to realign our work/life balance.  Landmark legislation in the CARES Act has created new opportunities for tax savings as well.  Before we close the year, I find myself asking the question, “Did I get everything I could from 2020?”  Here are some things to think about before these windows of opportunity close at year’s end.  I hope this helps you turn the page to a very bright and prosperous 2021!

Making Additional Contributions to Tax-Advantaged Accounts

The end of the calendar year is almost here.  You might consider final contributions to your retirement accounts, college savings accounts, or charitable giving.  Optimizing the use of tax advantaged accounts such as IRAs/401ks is a powerful planning tool. Making additional contributions up to your allowable limit can be difficult. This could be due to an uneven income stream or an interruption, like a global pandemic.  Start by calculating how much you can contribute for the rest of the year.  Then you can make that final contribution to ensure you didn’t miss an opportunity for maximum tax deferral.  It feels good to know that you’re not paying Uncle Sam more than absolutely necessary.  For some this may be a good time to open an additional account such as a spousal IRA or 529 for children, grandchildren, or other family members.  You have until April 15^th of 2021 to make contributions to your IRA. However, making those contributions in the same year is generally best.  It keeps your records more organized and provides more time for your investments to grow.

Do Roth Conversions Make Sense This Year?

Since we’re talking about contributions, optimizing the location of your assets is important too – particularly when it comes to IRAs.  Does a Roth conversion make sense this year?  Maybe. Roth conversions make sense in many situations, though they are particularly valuable in years where your income is low like your early years of retirement.  This is a favorite strategy for getting around required minimum distributions and making tax planning more predictable in retirement.  Also, having your money in a Roth IRA could have significant benefits for your heirs.  If you’re converting to a Roth IRA, it’s important to pay the income tax obligation from outside the IRA account, as this allows you to keep as much money in the IRA as possible.

Charitable Contributions and The CARES Act

If charitable giving is one of your financial goals, then you can use those contributions to lower your income tax bill.  If you don’t have much income this year, you can create some via a Roth conversion!  Although tax savings might not be the driving force behind your charitable contributions, there’s no reason you should miss out on tax benefits either.  This is even more true in 2020.  The CARES Act temporarily suspended the limit on deductions for charitable cash contributions to qualified charities.  In 2020, taxpayers can make a cash contribution to charity and deduct up to 100% of their adjusted gross income (AGI). This means that, dollar for dollar, you can offset as much income as you want with a corresponding charitable contribution.  This AGI limitation is set to revert to 60% of AGI on January 1st, 2021. However, there’s still time to take advantage of this benefit. To qualify for this enhanced deduction, you must donate cash directly to a qualified charitable organization, not to a Donor Advised Fund or Foundation.  Normally, donating appreciated securities to charities is best. However, 2020 presents a unique opportunity to take advantage of enhanced deductions for cash donations.

Roth Conversion and Donating to Charity Example

 If you are charitably inclined and have the means, you could “frontload” charitable contributions into 2020 (by making several years of contributions at once), and subsequently convert this amount of Traditional IRA into a Roth IRA. The income that you would recognize as a result of the conversion could be completely offset by your charitable donation, since The CARES Act allows a charitable deduction up to 100% of AGI.  This potentially reduces your tax liability for the Roth conversion to zero, and allows you to lower or eliminate your RMDs all together. Note: December 31^st of 2020 is the last day to qualify for a 100% deduction.  Afterward, deductions for charitable contributions will be limited to 60% of AGI. So if you were to make a $100,000 charitable donation now, you could offset the taxes from a $100,000 conversion. On January 2, 2021, a similar donation would only offset $60,000 of the conversion, so you would owe taxes on $40,000 of “conversion” income.

Tax Loss Harvesting Can Reduce Your Tax Burden

Taking advantage of tax loss harvesting is especially helpful in reducing the amount of taxes you’re obligated to pay.  Direct Indexing and tax loss-harvesting are smart strategies to keep your investment portfolios as tax efficient as possible.  If you own any securities that have decreased in value from when you purchased them, consider selling them to capture a capital loss. You can use the losses to offset capital gains income elsewhere in your portfolio.  However, if you decide to harvest losses, make sure you don’t repurchase the same securities for at least 31 days, as the loss would be disallowed if you bought the same security back within this window (known as a “wash sale”).

Is Your Financial Life Optimized for Your Goals?

With so much change and uncertainty this year, there has been a lot to think about.  If your goals and plans have changed, now is a great time to think through your current and future goals.  This is a constant and iterative process to make sure you don’t veer too far off course.  Doing an annual review, money day meeting, dream session, or something similar every year can be really helpful.  For me, it’s one of my favorite times of the year.  For our “Money Day” I recalculate our net worth and look at goals from the previous year to see how we did.  Then my wife and I set new goals and priorities.  We go back through our spending plan (budget) and add or take away things as we see fit.  We also plan and talk through larger upcoming purchases.  This gives us a good understanding of how we’re doing financially.  Most importantly, it’s time for my wife and I to make sure we’re still on the same page.  Over the years many great things have come from these meetings such as starting my wife’s Roth IRA and my son’s 529 account to save for college.

The Year Isn’t Over, But Act Fast!

I hope this has been helpful or at least sparked some curiosity.  If there are challenges you haven’t conquered yet this year, don’t give up!  There’s still some time left on the clock.  If there’s anything you need help with or want more information on, make sure to contact your financial planner and tax professional for help.  I hope you have a wonderful holiday season and a great 2021!