Year-end is a great time to take stock of where you are financially and where you’d like to be next year. It’s not too late to knock out the following financial tips to better position you for the years ahead.
- Consider a Roth Conversion: If you’ve had a year where your income is lower than normal, it may be a good time to move money from a Traditional IRA to a Roth. When performing a Roth conversion, you pay taxes on the converted amount now but your funds grow tax-free and your later withdrawals are not subject to income tax.
- Look for Tax-Loss Harvesting Opportunities: Tax-loss harvesting involves selling investments that have decreased in value, replacing them with similar investments, and offsetting realized investment gains with those losses. This means that less of your money goes to taxes and more may stay invested and working for you.
- Use Your FSA: If you have a Flexible Spending Account (FSA), you should use your FSA funds on eligible expenses before they expire on December 31st. Some employers have adopted rules allowing you to carry over FSA contributions into next year, but if this is the case for you, you should verify whether it reduces the amount you can contribute next year.
- Maximize Retirement Account Contributions: The maximum contribution to a company-sponsored 401(k) plan is $19,500 for 2021, plus an additional $6,500 for savers who are age 50 or older. If your company matches a percentage of your 401(k) contributions and you don’t contribute the maximum amount allowed, you’re leaving money on the table. While you should prioritize saving in your company retirement accounts before the end of the year, note that IRAs allow for contributions up until the tax filing deadline (usually mid-April of the following year).
- Donate Your RMD to Charity: If you’re retired and need to take required minimum distributions (RMDs) from your retirement account, you should know that they can potentially push you into a higher tax bracket depending on their size and your income level. If this is the case for you and you don’t need the income, consider donating your RMD to charity. A Qualified Charitable Distribution (QCD) can count toward your RMD for the year, excludes the amount donated from your taxable income, and don’t require that you itemize.
If you have any questions about any of the tips above or other tax and investment related topics, please let us know. We’d love to hear from you.