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7 end-of-year wealth movements | Kiplinger

As we approach the end of the year, you still have time to improve your financial situation with a few well-placed year-end moves.

Perhaps because we are working against a deadline, many year-end planning opportunities seem to be tax related. However, tax action should be taken in the context of your overall long-term financial and investment plan. Therefore, be sure to check with your financial and tax advisers.

Here are seven important areas to focus your efforts on to help you get the most from the rest of your exercise.

1. Reap your tax losses

In early November, the S&P 500 was up 24% and the Dow Jones up 18% for the year. Unfortunately, some stocks and mutual funds still show a loss for the year. Therefore, it is likely that certain items in your portfolio will appear in red when you check the “Unrealized Gains and Losses” column in your brokerage statement.

You can still make lemonade from these lemons by harvesting your losses for tax purposes. It should be remembered that the individual IRS deduction for capital losses is limited to $ 3,000 for 2021. In other words, if you do not offset your losers with your winners, you could end up with a deferral. tax losses that could only be used in future years. This is not an ideal scenario.

You can also offset your losses with your winnings. For example, suppose you sell losers and rack up $ 10,000 in losses. You could then also sell winners. Then, if your winners’ winnings amount to $ 10,000, you would have offset your winnings with your losses, and you will not owe capital gains taxes on this combined trade!

Keep in mind that wealth strategy is not all about taxes. Harvesting tax losses could be a great opportunity to help rebalance your portfolio with reduced tax impact. Beware, however, of the no-effect sell rule: if you buy back your sold positions within 30 days, you will have canceled the profit.

2. Review your investment planning

Harvesting tax losses can be used effectively for short-term benefit. However, it also provides an opportunity to focus on more fundamental issues. First of all, why did you buy these titles that you just sold? At some point, they probably played an important role in your investment strategy. And now with the money from the sale, it is important to be careful when reinvesting.

You might be tempted to wait a bit to see how the market evolves. We may have been spoiled by the complacency with the running of the bulls that we have experienced since the Great Recession. However, we must not forget that volatility does exist.

It is almost impossible to accurately predict when the next bear market will begin. And after more than 18 months of solid gains, it’s time to reassess whether you and your portfolio are well positioned for a possible downturn.

You’ll want to make sure that your portfolio risk is aligned with your goals and that your asset allocation is aligned with your risk target. Contact your wealth management strategist for a review.

3. Review your retirement planning

There is still time to top up your retirement account! In 2021, you can contribute up to $ 19,500 of your salary, including the employer’s counterpart, to a standard defined contribution plan such as 401 (k), TSP, 403 (b) or 457, subject to of the terms and conditions of your plan. And if you’re 50 or older, you can contribute an additional $ 6,500 for that year.

If you have under-contributed to your plan, there may still be time. You have until December 31 to boost your retirement by completing your 2021 contributions. This will also have the advantage of reducing your taxable income for 2021, if you contribute pre-tax money to a traditional plan.

As an alternative, you can contribute to a Roth account if this plan option is offered by your employer.

Many employers offer a Roth in their employee retirement plans. If not, schedule a conversation with your HR department!

Many people think that the Roth account is tax free. However, you should keep in mind that although Roth accounts are commonly referred to as “tax free”, they are simply taxed differently, since you would be contributing after-tax funds. Check with a professional certified financial planner to determine if choosing to carry a portion of your salary on a before or after tax basis to a Roth account is better for you.

4. Roth conversions

The current tax environment is particularly favorable to Roth conversions. With the tax cuts and jobs law set to expire, income tax rates will rise again in 2026. As a result, Roth conversions could cost less in current taxes until then. Of course, Congress could vote to increase tax rates before the end of the year. It is even possible that Congress will remove the possibility of making a Roth conversion after 2021.

To make a Roth conversion, you withdraw money from a traditional tax-deferred retirement account, pay distribution taxes, and transfer the assets to a Roth account. Then the assets can grow and be distributed tax-free, provided certain other requirements are met. If you think your tax bracket will be higher in the future than it is now, you may benefit from a Roth conversion.

5. Choose your health plan

With the re-enrollment season for health insurance, the annual ritual of choosing a health insurance plan is with us. With health insurance becoming more expensive, this could be one of your most important short-term financial decisions.

Your first decision is whether to buy a high deductible option or stick with a traditional plan with a “low” deductible. The high deductible option will have a cheaper premium. However, if you have a lot of health issues, it can end up costing more. High deductible plans provide access to health savings accounts (HSA).

The HSA is a special instrument. With it, you can donate pre-tax money to pay for eligible health care expenses tax-free. Unlike Flexible Spending Accounts (FSA), HSA balances can be carried forward to subsequent years. They can also be invested to allow potential profit growth. This last feature is attractive to wealth managers, because in the right situation, clients could end up saving a lot of money.

If you choose a high deductible plan, you should plan to fund your HSA to the fullest. Many employers will also contribute to encourage their employees to choose this option. If you choose a low deductible plan instead, be sure to fund your flexible spending account. FSAs are used to pay for medical expenses on a pre-tax basis. Unspent amount cannot be carried forward to future years, unlike HSAs.

6. Plan your RMD

Remember to take your Minimum Required Distributions (RMD) if you are 72 or older. At 50%, the penalty for not taking your RMD is steep. You must withdraw your first minimum distribution no later than April 1 of the year following the year you turn 72, and then no later than December 31 of each year thereafter.

Maybe you don’t need the RMD? Then you may want to redirect the money to another cause. For example, you could fund a grandchild’s tax-advantaged education account 529. Contributions are after-tax, but growth and distributions are tax-free as long as they are used to pay for education.

You can also schedule a qualified IRA charity distribution. This distribution must go directly from the IRA to a charity. Unlike a normal RMD, it is excluded from taxable income and can be taken into account in your RMD under certain conditions.

7. Plan your charitable giving

Charitable donations can also help reduce taxable income and provide financial planning benefits. However, the Tax Cut and Jobs Act of 2017 (TCJA) made things more complicated. An important result of the TCJA is that the standard deductions for 2021 are $ 12,550 for individuals and $ 25,100 for joint filers. In practice, this means that the first $ 12,550 or $ 25,100 of deductible items receives no tax benefit.

For example, if a married couple filing jointly (MFJ) pays $ 8,000 in property taxes and $ 5,000 in state income taxes for a total of $ 13,000 in deductions, it is better that they take the standard deduction of $ 25,100. The first $ 12,100 they donate to charity would not provide a tax benefit. One way to get around this new situation is to consolidate your donations over a given year and not spread them out over several years. Or, within certain limits, to donate directly from an IRA.

For example, if you plan to donate in 2021 as well as 2022, bundling your donations and donating only in 2021 could result in a deduction and the accompanying tax reduction. This way, you are more likely to exceed the standard deduction limit.

If your thoughts are spinning after reading this article, check with your wealth strategist or financial planner – there may be other techniques you could or should use before the end of the year!

Founder, Insight Financial Strategists LLC

Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-based investment advisory firm in Newton, Mass. He specializes in retirement planning and financial divorce planning for professionals and business owners. Chris is a member of the National Association of Personal Financial Advisors (NAPFA). He is a member of the board of directors of the Massachusetts Council on Family Mediation.


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