5 financial moves to make by December 31
As the calendar year comes to an end, it’s a good time to examine the steps you can take to improve your 2021 financial results.
Year-end is a time to consider what your tax obligations are likely to be for 2021. “Consider your tax situation, what your tax picture looks like for the year,” said Roger Young, Retired senior manager at T Price Rowe. What is your taxable income?
Even if you’ve done some planning throughout the year, there are ways to save money on your 2021 taxes. However, in some cases, you must act by December 31.
“The end of the year is a good opportunity to buy stocks,” said Rob Williams, executive director of retirement income and financial planning at the Schwab Center for Financial Research. What you decide to do “will change slightly if you are still employed.”
Here are some steps to take by December 31.
If you’re still working, contribute up to an employer-sponsored 401(k) plan. The 401(k) contribution limit is $19,500 for 2021. If you’re age 50 or older, you can also make an annual contribution of up to $6,500 by December 31. Some employers The app allows you to close some or all of a year, says Greg McBride, senior vice president and director of financial analysis at Bankrate.com, a personal finance website – deposit bonuses or periodic bonuses leave on your 401(k), so ask your company benefits manager if that’s allowed.
Take your required minimum distribution (RMD). If you’ve reached age 70 in 2020 or later, you must get your first RMD by April 1 of the year after you turn 72, according to the Internal Revenue Service. Generally, you must initiate withdrawals from your IRA, SEP IRA, SIMPLE IRA, or traditional retirement plan account. Otherwise, RMD begins at age 70 ½. The Setting Every Communities to Raise Retirement Age Act of 2019 (SECURE Act) changed the age from 70½ to 72. You can plan or withdraw before the end of 2021. Penalties for failure to use your RMD in a timely manner is very high: 50% of the funds are not made on time.
Consider a Roth conversion. The conversion of a Traditional IRA to a Roth IRA must be completed by December 31, said Schwab’s Williams. “You can’t reverse it when you do the conversion. If you’re not already using an RMD, consider converting a Traditional IRA to a Roth. Economist Wade Pfau, author of The Retirement Planning Guide: Navigating the Critical Decisions for Retirement Success. “The RMD could put you in a higher tax bracket.” Roth conversion can reduce the number of RMDs in higher frames later on, says Pfau.
In general, if you’re in a relatively low tax bracket this year because you’re in phased retirement or have a part-time job and haven’t claimed your Social Security retirement benefits, you may have It’s time to consider converting a Traditional IRA to a Roth IRA as well.
Read: Did you claim Social Security and then go back to work? You may face an ‘income test’
Check your capital gains (and losses) for 2021. “In a year like this when the market is doing so well,” says T. Rowe Price’s Young, you may not lose money. “You might have some gains, and it might be harder to find those losses. “The tax-loss harvest can be difficult to do,” he said. However, this may be the time to sell securities for a profit. Schwab’s Williams says: “If you haven’t used Social Security, by December 31, 2021, see what your tax bracket is” for 2021. Ask yourself, “What do I have left to do?” how many seats before hitting the next tax bracket?”
If your earned income is lower than it might be in the future, this could be “a prime opportunity to grab some of that income,” says Williams. “People don’t like to pay taxes before they have to, but sometimes that helps. If you have a lower taxable income, file your taxes now to give yourself the flexibility to not pay any (tax) or pay more later.”
For long-term capital gains, you’ll typically be in the 0%, 15%, or 20% tax bracket, depending on your earned income. For a single filer earning $40,400 or less, or for married joint filers making $80,800 or less, you’ll be in the 0% tax bracket for long-term capital gains. term. (Long-term capital gains are investments you’ve held for more than a year.)
Talk to a tax advisor by December 31st. “Be aware of taxes,” says Williams. “We cannot predict the market, but we do have some control over tax planning. Don’t wait until the end of the year to talk to a tax advisor. You have to make these sales before the school year ends.” If you sell stocks in a retirement account and leave the money in the account, it’s not a “taxable event,” he said. However, in a brokerage account, if you want to reduce your focus on a particular stock and sell a stock like Tesla or Amazon, you may have to pay capital gains tax on the income. It will depend on your earned income level. “If you’re in a lower tax bracket than you might have later, you could sell and pay some tax on it,” says Williams. “Don’t let paying taxes stop you from doing it.” You can reinvest the money. If you have some losses, you can do what is known as tax-loss harvesting. You can sell one stock with a loss and another with a gain to cover the loss as a way to reduce your tax liability. You can use the loss to reduce your capital gains. Plus, if your capital loss is greater than your capital gain, you can sometimes offset up to $3,000 in ordinary income. Check with your tax advisor. Also, see IRS Subject No. 409.
Harriet Edleson is the author of the book, “12 Ways to Retire Less: Plan for an Affordable Future(Rowman & Littlefield). Former editor/editor/producer of AARP, she writes for The Washington Post’s Real Estate section.
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