7 Important Year-End Money Moves

Last week on my walk into work, I noticed that some of my neighbors had already put out their Halloween decorations. I’m all for being prepared but mid-September seems a bit early to roll out the fake spider webs and half-buried skeletons. To each their own. In fact, according to a poll done by Better Homes and Gardens, 16% of of respondents said it was okay to put Halloween decorations out between Labor Day and September 30 and 5% said it was acceptable to put them up before Labor Day!

Whatever your preference, the fall season is upon us and that means it’s time to get a jump on any year-end personal finance items that may need to be addressed prior to the end of the year. With that in mind, here’s our list of seven important, year-end money moves for 2021…

1. Check your 401(k) contributions: Now is a great time to ensure that you’re on track to contribute your planned amount to your 401(k), 403(b) or other retirement plan.  At a minimum, that should be up to the amount your employer matches. The current annual limit for 401(k)s and 403(b)s, effective through the end of 2021, is $19,500 for anyone under 50. If you’re over age 50 and participate in one of the above retirement plans you can take advantage of the $6,500 catch-up provision that raises your annual contribution limit to $26,000 for 2021.  The IRS will announce the limits for 2022 soon – we’ll keep you posted.

2. Take your annual Required Minimum Distribution (RMD): If you’re 72 or older and own a traditional IRA , 401(k) or 403(b), or if you’re any age and you’re the beneficiary of an inherited IRA, there’s a very good chance that you’ll need to take a Required Minimum Distribution from your account by year end. The penalty for failing to do so is a 50 percent tax on what should have been withdrawn so pay attention. The rules around this are pretty complex so when in doubt, ask. We’re here to help.

3. Review your charitable giving strategy: If you’re charitably inclined and usually give cash directly to your charitable organization of choice it may make sense to consider one of the following options:

Donate appreciated shares of stock instead of cash: If you donate stock that has increased in value since you bought it more than a year ago – and if you itemize deductions — you can take a charitable deduction for the stock’s fair market value on the day you give it away. And your favorite charity or donor advised fund can turn around and sell those shares immediately and tax free and use the proceeds to carry out their mission.  You can even give shares of a stock away and immediately use the cash you would have given to charity to buy back the same number of shares in the same stock!  Doing so means you’d potentially reduce the tax bill due when you sell your shares in the future. This can be a great strategy if you own a stock that has appreciated in value and you’re ready to sell it or even just want to reduce your exposure but don’t want to pay taxes on the appreciation.

Donate your Required Minimum Distribution (RMD) from a retirement account directly to charity: Did you know that if you’re 70 ½ or older you may be able to transfer up to $100k from your traditional IRA directly to charity. It’s called a Qualified Charitable Distribution or QCD. Why would you want to do this? Gifts given via QCD go directly from your IRA to your charity and are not included in your adjusted gross income. And since QCDs count can count towards your annual RMD, your gift could give you a tax break even if you don’t itemize your deductions -which has become more common with the recent tax law changes!  Plus, by lowering your adjusted gross income, you could potentially lower the taxable portion of your Social Security and increase the amount of medical expense deductions you can take just to name a few benefits. There are some very specific rules that need to be followed so check with your CPA or one of us at Beacon first.

Also of note: Last year, the CARES Act created a new charitable deduction of up to $300 for donors who gave cash (not securities or other non-cash items) and chose to take the standard deduction. It was a small amount but it was interesting because it offered a tax deduction to donors that might not otherwise be eligible since they didn’t itemize. The deduction is available again this year and the amount is now per person. So, if you’re married and filing a joint return, you can deduct a total of $600 on your 2021 tax return even if you don’t plan to itemize. The deduction won’t reduce your 2021 adjusted gross income like last year, though. And, to qualify, gifts must go to “qualified” charities and not a donor advised fund.

4. Harvest some losses (or gains): Tax loss harvesting is the practice of selling a security in a taxable (non-retirement) account at a loss exclusively for tax purposes. By realizing, or “harvesting” the loss, you’re able to offset taxes on both realized taxable gains and ordinary income (up to $3,000.)  The sold security is replaced by a similar one, maintaining your optimal asset allocation and expected returns.

Due to the recent bull market in most types of investments, there probably aren’t very many losses in your brokerage account to harvest. However, if you find yourself in an unusually low tax bracket this year, it could make sense to “harvest” some of the long-term gains on appreciated securities that you may own in a taxable account.  This strategy could allow you to realize some of your capital gains at a rate of 0%! This get’s complex quickly so check with your CPA or one of us at Beacon first.

5. Make a contribution to a traditional, Roth or SEP IRA: Contributing to one of these can be a great and easy way to save for the future and improve your tax situation. Knowing which one is best for you, how much to contribute and how it might impact your tax bill is complex but definitely worth having a conversation about if you or your spouse have earned income (W2 or 1099) in 2021.  It sometimes makes sense to contribute to one even if you feel like you don’t have the cash flow this year.  You can contribute using money invested in a savings account or taxable brokerage account assuming that money is otherwise invested for the long haul.

6. Spend the dollars in your Flexible Spending Account (FSA): If you still have money set aside in a flexible spending account for health care expenses, see if you can order new glasses or schedule that dental work you’ve been putting off. Some companies offer a grace period into the spring or a $500 FSA carry-over from one year to the next but this isn’t very common. If your employer doesn’t offer these provisions, then you’ll lose any unused funds once we ring in the new year.

7. Contribute to your Health Savings Account (HSA): If you are enrolled in a high-deductible health insurance plan (HDHP), you may qualify for an HSA. HSA stands for Health Savings Account, and it’s a handy way to save for medical expenses and reduce your taxable income. That’s because the accounts get a triple tax benefit: The money you contribute reduces your taxable income. It grows tax-free. And withdrawals are tax-free as well, as long as the money is used for qualified health expenses. Each year, you decide how much to contribute to your HSA account, though you cannot exceed government-mandated maximums. In 2021, these limits are $3,600 for an individual and $7,200 for a family; if you’re over age 55 you can add up to $1,000 more.  Because of their tax advantages and because any unused dollars roll over to the next year, HSAs can also be a great place to save for medical expenses that might occur during your retirement.  Click here to read more about the many benefits HSAs offer.

Perhaps a good goal would be to tackle any items on this list that apply to you before you decorate for Christmas? 50% of respondents to another BH&G poll say that would be by the end of November!

If you’re a Beacon client, know that we’ll be addressing the items on this list in your upcoming fall review.  And that we’ll be watching the tax law changes that may come with the American Families Plan that Ryan wrote about last week. But do let us know if you have questions.

Not yet a client? Click here if you’d like someone to help vet these opportunities for you.

Geoff Hall, CFP®
[email protected]

My wife, Crystal, and I have been married for nine years and have two kids, Cooper (7) and Rhodes (5.) When I’m not spending time with them you might find me downtown serving at our church, pushing my limits during a mountain bike ride or having coffee with a friend in the Five Points area. I've been practicing wealth management for 25 years and I'm thankful for the privilege of shepherding my family of clients through the ups and down of the markets and of life for that matter.