As we approach the end of 2020 (a year I am sure that most of us will be glad to be done with), now is great time to review your financial plan. So, before the hustle and bustle of the holidays consumes all of your time, consider these year-end strategies and plan for the year ahead.
First off, review your goals. If you have a spouse or significant other, review them together. Did you save and invest what you wanted this year? How much do you want to do next year? Did you pay down or off any loans, and how much will you pay down next year? Did you stick to your budget? How much were you over or under? Have your retirement goals changed, and what do you need to do differently to achieve those?
Next, here are some common items to check on during this discussion:
If you are enrolled in a Flexible Spending Account (FSA) through your employer and still have funds in the plan, check to see if your plan has a “use it or lose it” rule. If it does, you’ll want to spend those funds before the end of the year.
If you’re eligible to contribute to a Health Savings Account (HSA) make plans to contribute as much as you can before year-end. This year’s limit is $3,550 if you’re the only one covered under your qualified high-deductible health insurance plan; $7,100 if you have at least one other family member covered on the plan with you. Also, if you are age 55 or older, you can contribute an additional $1,000. Unlike the FSA, funds in HSAs don’t need to be spent by any pre-determined time deadline.
Likewise, check your various retirement plans to make sure you’ll contribute the maximum amount that you can before their tax deadlines. Contributions to 401(k)s, 403(b)s, and SIMPLE IRAs need to be made by year-end. Traditional and Roth IRA contributions must be contributed by April 15, 2021 to have them count for 2020. If you’re age 50 or older, all of these plans will allow you to contribute an additional amount above the normal limit.
Roth IRA and Roth 401(k) accounts are important to consider for providing yourself with tax-free withdrawals in the future. However, you’re giving up the immediate tax deduction by not contributing to the traditional, pre-tax version of these. Deciding whether or not Roth-type accounts will benefit you is not always an easy decision. There are several factors one must consider, including the current versus the future tax rates.
Contributing to the Ohio based college savings plan, called CollegeAdvantage, can offer you a state of Ohio income tax deduction, up to $4,000 contributed for each account beneficiary. You don’t need to be the owner of the account. The need to be made by year-end to be counted for a 2020 deduction.
Review your taxable investment accounts to see where you’re at with any realized capital gains and losses. “Tax-loss harvesting” is a fancy term describing the act of selling off some losing positions to create realized losses if you need to offset some realized gains that have been taken through the year. Be aware of the IRS wash sale rule and wait at least 31 days before buying back a holding that you sold for a loss. Also, if you invest in mutual funds in your taxable accounts, you may want to hold off until 2021 before investing new money to avoid potential capital gains distributions on brand new investments.
While you’re looking at your investment and retirement accounts, reassess your own risk-tolerance, and the risk-scores of your portfolio. Earlier this year in February and March our risk-tolerance certainly got a “gut-check”. Should you make any changes now or in the near future?
Lastly, if you’re still looking for a tax-deduction, review all of your itemized deductions that you may be able to claim on your 2020 tax return. If your itemized deductions will end up being higher than the standard deduction, then any qualified charitable donations you make before the end of the year will result in a tax-deduction. If you don’t have a charity in mind now, then maybe consider making a donation to a “donor-advised fund” where you can get the tax-deduction now but postpone making the actual donation to the charity until a time that you’re ready.
Please understand that this is not meant to be tax advice, and these strategies are not always appropriate for all people. Please consult your CPA or financial advisor so that you can make the best decisions based on your own situation.