What will be your New Year’s resolution?
Did you resolve to save more money in 2021? Almost half of all Americans did. Collectively we’re on track to save more this year than in any year in decades, except for 2020. Considering that less than 10% of New Year’s resolutions are successful, we shouldn’t be disappointed about saving less this year. We’ve actually saved hundreds of billions of stimulus dollars and that money must be spent to drive our economic recovery.
Maybe you’re wondering why I’m talking about New Year’s resolutions when you feel like you just finished Thanksgiving dinner. As a financial coach I’ve learned that how we end the year is actually more important than how we start the year. It’s the actions we take in November and December that often set us up for financial success in January and beyond. Check out some of the items you can start checking off your list as we head into 2022 below:
Talk to your financial advisor
If you missed National Financial Planning month in October, it’s not too late to consider your financial goals and speak with your financial advisor about how to address them in the coming year. Are you on track for retirement? Is your emergency fund adequate? How are your cash flow and budget? How will you address any shortfalls next year?
There are a surprising number of year-end deadlines that must be addressed this time of year. I’m talking about savings, contributions, spending, distributions, conversions, and charitable giving deadlines. We should also consider and reconsider our goals, savings rates, withholding rates, investment mix, budget, and estate planning. Resolve to finish the year financially strong so you can choose a really “fun” 2022 resolution, like learning the science of Mycology.
See your tax advisor
Do you have a tax advisor? If not, consider hiring one because they can often justify their fee in tax savings. A tax preparer is not necessarily a tax advisor, because a tax advisor should provide tax planning. If you haven’t had a tax-planning session with your tax advisor, it’s not too late. It’s a meeting best scheduled around September every year so you have time to make needed adjustments before New Year. Still, see one before year-end if you haven’t yet.
Your tax advisor can help you determine IRA contribution amounts and deductibility eligibility. They can also recommend W-4 tax withholding amounts. They should let you know if you’re a candidate to itemize deductions and how to organize your deduction documentation. Even though most tax filers take the standard deduction since the Tax Cuts and Jobs Act took effect in 2018, a tax advisor can make sure you’re getting all the above-the-line deductions and credits you’re entitled to take. Because tax policy varies among the states, your tax advisor can make sure you’re taking full advantage of your state’s tax benefits as well. A tax advisor should be considered essential for self-employed tax filers.
Are you enrolled in the most efficient health plan for your family? Has your family situation changed in the last year? Are your beneficiaries up to date? Think about what next year may bring for you and your family. Start researching early and be familiar with your benefits offering. Your employer likely has tools to help you determine the best plan for you. Track your family’s medical expenses every year because it will help you choose the plan best for you.
Does your employer offer a Health Savings Account (HSA)? If you’re healthy with minimal medical expenses, an HSA paired with the High-Deductible Health Plan offers exceptional tax advantages that you won’t find elsewhere. Consider a Flexible Savings Account (FSA) for qualified health care or dependent care expenses. Just remember that FSA balances do not roll over from one year to the next so be sure to use your benefits before the deadline.
Year-end deadlines are only a month away.
Mark these deadlines on your calendar and don’t let the year slip away with your last chance to check the box on 2021 financial goals.
Are you or your family saving for college? The last day to contribute to a 529 savings account is Dec 31. Talk to your financial advisor about how this account might be right for your college savings. Check your state tax code because some states even provide a tax break on contributions.
Does it make sense to convert some pre-tax money to Roth? It could if you expect to be in a higher income tax bracket in retirement. Qualified Roth money is tax-free in retirement. The Roth conversion deadline is Dec 31.
Have you hit your contribution goal for your employer’s 401(k)? If you’re hoping to max out 2021 contributions, the limit is $19,500 for workers under 50 years of age and $26,000 for those 50 and older. Maxing out those contributions will also help you make the most of your employer’s matching contributions. It may not be too late to increase your 401(k) payroll deduction for your last paycheck and year-end bonus, but remember to switch back to your regular contribution for the new year.
There is an added bonus tax savings for those with lower to moderate income. The Retirement Savings Contribution Credit — the “Saver’s Credit” for short — is a tax credit worth up to $1,000 ($2,000 if married filing jointly) for mid- and low-income taxpayers who contribute to a retirement account. Check with your tax advisor to see if you might qualify for this tax credit.
Are you giving to charity in 2021? Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions. The law now permits these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. Nearly 9 in 10 taxpayers now take the standard deduction and could potentially qualify to claim a limited deduction for cash contributions.
These individuals, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.
Have you taken your Required Minimum Distribution (RMD) from your IRA or 401(k)?
If you’re 72 or older this year, you must take an RMD from most qualified retirement accounts. The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules likewise apply to Roth 401(k) accounts, so consider rolling a Roth 401(k) over to a Roth IRA to avoid the RMD requirement – the RMD rules do not apply to Roth IRAs while the owner is alive.
Investors who are charitably inclined and don’t need their RMD money may donate up to $100,000 of their IRA RMD through a Qualified Charitable Distribution (QCD) to avoid the income tax. These RMDs and QCDs also have a Dec 31 deadline.
Did you sell some brokerage investments for a profit in 2021? If so, you have capital gains and may be subject to capital gains tax. Check with your tax advisor about potential capital gains taxes due and the opportunity to sell some losing investments at a loss to offset some gains. This tax-loss harvesting may save you some taxes, but assets must be sold in 2021.
I hope you didn’t forget about your student loans. While not a 2021 deadline, the U.S. Department of Education announced that the suspension of student loan payments ends January 31, 2022. This means payments will resume in February. Also note that three federal student loan servicers have exited the business, meaning many borrowers will have a new provider.
As you can see, there are plenty of financial items to consider as we near the end of 2021. An experienced financial coach, acting in a fiduciary capacity, will help you be sure to finish the year with your future in mind. This will start you off on the right foot in 2022 so you keep moving towards your financial goals.
Jonathan Vander Werff, CFP®