Year-end investment and financial planning - Roshani Pandey

8 money moves to make before year-end

The year-end is a time for us to look back and to plan for what comes next. On every front, 2020 has been an unusual year, to say the least. As we get to its end, here are 8 planning considerations to make. Many of these are time-sensitive but can really benefit your bottom line if executed properly.

Investment issues

Do you have unrealized investment losses?

If you have paper losses in your portfolio, consider turning them into actual losses. This process is called tax-loss harvesting, whereby you sell stocks that are currently under-water. You then buy a similar (but not the same) stock or ETF. Then 31 days later, after the Wash Sale period is over, you buy back the stock. This creates a tax loss for you that you can offset against other gains in your portfolio to reduce your capital gains taxes. If you have losses but not enough capital gains to offset, you can also use up to $3,000 of the losses to reduce any income. For more information on tax-loss harvesting, read our article here.

Beware of mutual fund year-end distributions in taxable accounts

Many mutual funds distribute your share of capital gains and other taxes towards year-end. These distributions can be large for active mutual funds where the fund managers buy and sell often. In a year like 2020 where the markets have had a strong performance, you are likely to see big capital gains distributions. Once you get these distributions, you will be liable to pay taxes on any gains and income. Try to get an estimate of these distributions as early as possible and consider strategies to minimize tax liability, for example, by harvesting losses as we discussed above.

Cashflow issues

Are you able to save more?

If you have a financial advisor, ask them to review your cashflows to see where the next dollar of your earnings should go – to a 401K, to an IRA, to a ROTH to an HSA or to a 529 plan. Your advisor should also do a tax analysis to point out to you when there are opportunities for a ROTH conversion. A Roth conversion is a process by which you can convert your tax-deferred accounts like a 401K or a traditional IRA into an after-tax account like a ROTH and grow it tax-free. To make a ROTH conversion successful, you have to do it in a year where your income is lower so that your tax bill is also lower as a result.  Typically, the year-end is a great time to evaluate a ROTH conversion because you will have a good sense of how much income you will end up with, in the year.

Here are some great savings vehicles and their limits:

If you have an employer-sponsored 401K plan, the maximum you can contribute to it is $19,500, plus a catch-up contribution of $6,500 if you are over the age of 50.

For business owners, you can contribute to a solo 401K or a SEP. A solo 401K needs to be started before year-end. Note that your contributions for yourself to all of these plans combined cannot exceed 25% of your net earnings and can only be up to $57,000.

If you have an HSA account, consider contributing to it. HSAs are triple tax-exempt and highly advantageous. You can contribute up to $3,550 for an individual and $7,100 for a family and an additional $1,000 if you are over the age of 55.

Do you want to contribute to a 529 plan?

You can contribute up to $15,000 per year to each child without having to file additional paperwork for a gift tax return. This means that a couple can contribute up to $30,000 to each child without having to file gift tax returns. You can also “super-fund” the 529 plan by contributing up to $75,000 and treating it as if the gift were made evenly over a 5-year period. This way, the 529 plan grows faster as the investment starts compounding earlier. Having said that, $75,000 is a sizable amount for many to cough up in a year. So, consider your cashflows and other goals such as your retirement as well as your lifestyle needs before superfunding the 529 plan.

Insurance planning issues

Flexible Spending Account (FSA)

FSA accounts let you set aside a certain amount of money to pay for medical expenses. These funds are tax-exempt but you must use them by year-end or risk losing them completely.

If you will have an FSA balance before year-end, consider the following options:

Some companies allow up to $550 of unused FSA funds to be rolled over into the following year.

Some companies offer a grace period up until March 15th to spend the unused FSA funds.

Many companies offer you 90 days to submit receipts from the previous year.

If you have a Dependent Care FSA, check the deadlines for unused funds as well.

Did you meet your health insurance plan’s annual deductible?

If so, consider incurring any additional medical expenses before the end of the year. If possible, you could also re-schedule any annual exams you may do like mammograms, ultrasounds, etc. and do it before year-end.

Do you have children in high school or younger who plan to attend college?

If so, consider financial aid planning strategies, such as reducing income in specific years to increase financial aid packages.

Estate planning issues

Have there been any changes to your family, heirs, or have you bought/sold any assets this year? If so, consider reviewing your estate plan.

Are there any gifts that still need to be made this year? If so, gifts up to the annual exclusion amount of $15,000 (per year, per donee) are gift tax-free.





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