Financial Planning, Tax Planning

Year-End Financial Planning: Things to Consider Prior to the End of 2020

December 10, 2020

Things to Consider Prior to the End of 2020

As we approach the end of the year, it's a great time to do a financial check-up and review your investment portfolio while there is still time to make adjustments, if needed.

It is important that you have strategies in place to plan for your investments, retirement and tax impact to avoid any tax bill surprises, penalties or liabilities. Now is a great time to evaluate your own financial situation to see if there are adjustments you can make to improve your financial standing.

  • Harvest tax losses. If you have losing stock positions, consider selling them to offset gains and reduce taxable income (to the extent permissible). Or, on the flip side, if you have some losses due to trading earlier in 2020, it may be a good time to not only lock in some gains to offset those losses, but to use this opportunity to rebalance an entire portfolio from a risk perspective.
  • Finalize charitable giving. This year may not be a good one for a qualified charitable distribution from your IRA (because Required Minimum Distributions, commonly called “RMDs,” are waived due to the CARES Act). However, you can prepay/bundle charitable gifts to exceed the tax deduction threshold. For 2020 only, the CARES Act allows itemizers to deduct contributions up to 100% of their Adjusted Gross Income, or “AGI.” Thus, for example, if your AGI is $100,000, you may deduct $100,000 in charitable contributions and wipe out your income tax liability entirely.
  • Use up the annual gift exemption. The annual gift exemption is $15k per person, per year. The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 every year to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A married couple can each make $15,000 gifts, doubling the impact to $30,000.
  • Max out 401(k), 403(b), 457 plans and IRA contributions. Hitting the maximum annual deferral amount for 401(k), 403(b) and most 457 plans, which is $19,500, and is $6,000 for an IRA, allows you to take advantage of both tax deductions and employer matching contributions. For those over age 50, do not forget to include your additional catch-up contributions, worth $6,500 for a 401(k), 403(b) or most 457 plans, totaling $26,000 or $1,000 for an IRA, totaling $7,000 for the year.
  • Consider a Roth conversion. This is when you convert your pre-tax income funded 401(k) account or Traditional IRA account to an after-tax ROTH IRA account, which requires a tax payment to the government (not allowed from the retirement account in question) at the time of the conversion. Both a traditional conversion, depending on your tax brackets and the account’s level of unrealized gains, and a “back door conversion” (if you don’t qualify for direct Roth IRA contributions) can be good planning options. Consult with your tax professional.
  • Update your financial planning documents and double-check your beneficiaries. Ensure that your financial plans fit your current financial goals and circumstances. It is very important to update your financial planning documents and to double-check your beneficiaries every few years, or earlier if a major life event happens, such as: retirement, loss of a loved one, marriage, divorce, or new additions to the family. Documents would include your will, trusts, power of attorney, health care power of attorney, retirement accounts and insurance policies. It’s all too common to leave an ex-spouse, for example, listed as a beneficiary who then accidentally receives benefits.

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