22 Oct 2020 7 Important Year-End Planning Opportunities
At Beacon, we believe that when it comes to planning and investing, you should spend all your effort focusing on things you can control. That seems like such an obvious strategy but it’s amazing how easy it is to let the things we can’t control grab our attention. Especially in a year like 2020! With that in mind, here’s a quick list of seven important financial planning opportunities that may be within your sphere of influence before 2020 draws to a close.
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 2020, 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 2020. The IRS will announce the limits for 2021 soon – we’ll keep you posted.
2. No Required Minimum Distributions (RMDs) for 2020: You can add no RMDs to the list of things that made 2020 a unique year. In normal years, if you’re 72 or older (or earlier if you reached the age of 70 1/2 before 2020) and own a traditional IRA , 401(k) or 403(b), or if you’re the beneficiary of an inherited IRA, you’d need to withdraw a specified amount from your account by year end and pay taxes on it. But in 2020, the Coronovirus Aid, Relief and Economic Security (CARES) Act waived that requirement. There are, however, circumstances where you might need, or even want, to withdraw money from a retirement account this year anyway. Click here to find out why.
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. 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. 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.
Donate your Required Minimum Distribution (RMD) from a retirement account directly to charity: I know I just mentioned that RMDs aren’t required this year, however, that doesn’t mean you can’t do a Qualified Charitable Distribution or QDC. If you’re 70 ½ or older you may be able to transfer up to $100k from your IRA directly to charity instead of writing a regular check. 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. That way 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! And, 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. Even with RMDs being waived, QCDs are still allowed and could potentially be a smart move. 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: The CARES Act created a new deduction of up to $300 for donors who give cash (not securities or other non-cash items) and choose to take the standard deduction. It’s a small amount but it’s interesting because it offers a tax deduction to donors that might not otherwise be eligible since they don’t itemize. And, it’s an above the line deduction so it has the potential to decrease your adjusted gross income like the QCD option I mentioned above. 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 that has experienced a loss. By realizing, or “harvesting” a 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. Conversely, 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%!
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 2020. 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 2020, these limits are $3,550 for an individual and $7,100 for a family; id 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, HSA’s 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.
I don’t think I’ve seen anyone use all 7 of these opportunities in one year but it’s not impossible. How many make sense for you?
If you’re a Beacon client, rest assured we’re looking out for you, 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.