If it’s not too early for stores to put out Christmas decorations, it’s not too early to think about year-end financial planning. While 2020 maybe a year we are all looking forward to being over, there’s still time to start some beneficial retirement, tax and investment planning before the year’s end. Here are five things you can still do to make the most of your financial life in what has otherwise been a challenging year.
- Maximize Retirement Savings Contributions
Now is the time to see if you are on pace to max out your retirement contributions for the year. Making sure you are making the maximum contribution to your retirement plan is always on top of the list. Once the calendar flips to the new year, you won’t be able to go back and add contributions to your 401(k). The contribution limit for employees who participate in 401(k), 403(b), and most employer sponsored retirement savings plans for 2020 increased from $19,000 last year to $19,500. The “catch-up” contribution limit for employees aged 50 and over who participate in these plans increased from $6,000 to $6,500 (so if you are over 50 with a 401k you could max out with a $26,000 contribution). If you are not on track to saving the most you are allowed, consider changing how much you contribute to your retirement savings account. Consider putting most or all of any bonus you receive into the plan. Do the same for IRA and Roth IRA contributions as well. The IRA contribution limit for 2020 is $6,000 unless you’re 50 or older, then it’s $7,000. You may also want to consider converting some of your traditional IRA funds to a Roth IRA. 2020 is an unprecedented opportunity for a Roth IRA conversion. The 2020 CARES Act allows retirees 72 or older to skip their Required Minimum Distribution (RMD) this year. So, with the required withdrawal waived, a retiree over 72 should consider converting their RMD to a Roth IRA. While you pay taxes on the amount you convert, all future gains and withdrawals are tax-free.
- Tax Strategies
There are many tax planning strategies that you can consider approaching year’s end. As mentioned above, most retirement account contributions are tax favored. Beyond that, another is tax harvesting. This common strategy involves selling investments at a gain or loss to balance out your tax liability. Losses can be deducted against ordinary income up to $3,000, but they can also be used to offset gains up to any number. If you don’t have gains, the loss can be carried forward to next year. The losses are applied against gains before they are applied to $3,000 of ordinary income. If you want to repurchase that same investment, you need to wait 30 days to avoid “Wash Sale” rules. There is one certain way to avoid owing tax on capital gains: defer. That means don’t sell any investments with gains until next year. By just waiting until January to take gains, you postpone taxes for a year. As I note below, certain charitable gifting and estate planning techniques before year-end will save you 2020 tax payments.
- Re-balance Investments
Over the course of the year, the investments within your portfolio will perform differently, resulting in a weighting change (representing more or less than at purchase). Rebalancing is the process of buying and selling portions of your portfolio in order to reset the weighting of each asset class back to its original desired amount. Also, if your investment strategy or tolerance for risk has changed, you should rebalance to readjust the weightings to be better aligned with your plan. Portfolio rebalancing is like a tune-up for your car: it helps keep your investments aligned and in sync with your risk tolerance, income needs and growth goals.
- Charitable Contributions
Now is a great time to consider making charitable contributions. The tax deduction may pale in comparison to the feeling you get from helping an organization fund its cause. However, the tax benefits may be substantial. You may be able to not only avoid capital gains taxes, but also get a deduction by making a charitable donation of securities that have risen in value. Another 2020 charitable giving benefit comes uniquely from the CARES Act. As part of the bill, individuals and corporations that itemize can deduct much greater amounts of their contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI (up from 60% previously). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. The new deduction is for gifts that go to a public charity. Also, your IRA is a great tax-advantaged source of gifting before this year’s end. Again, thanks to the CARES Act, you can make a qualified charitable distribution (QCD) this year which allows you direct up to $100,000 from your IRA to charities in a tax efficient manner.
- Estate Planning
Following the idea of charitable giving, consider making gifts to family members to help reduce the size of your estate. The IRS allows every taxpayer to gift up to $15,000 to an individual recipient in one year. So, you and your spouse could give $30,000 to each child every year, for example. There is no limit to the number of recipients you can give a gift to, but there is currently a lifetime exemption of $11.58 million.
Hope you found these do-before-December 31 tips helpful.
Have questions? Need professional wealth management or investment advice? Call me, I am happy to help. I’m at 888-985-PLAN.
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