As we head toward the end of 2021, but before we try to murmur through the lyrics of Auld Lang Syne now is the time to wrap up your finances and begin thinking about the year ahead.
Here are six simple things to think about while you sip egg nog and try to muster up the courage to return that “As Seen on TV” gift from your Uncle Ed.
- Finish making contributions to your retirement accounts. Technically, you have until tax time to make any contributions to your IRA, but December 31 is the deadline for contributions to your 401(k). You can contribute up to $6,000 to a traditional IRA or a Roth, and that annual contribution increases to $7,000 if you are over 50.
- To Roth or not to Roth? Is now the time to convert to a Roth? If you have a traditional IRA and it is a lower tax year, it might be time to consider a Roth conversion. At the end of the day, a traditional IRA is taxable and money in a Roth IRA is tax-free when you withdraw funds later down the road. Converting from a traditional IRA to a Roth IRA leaves room for potential future tax-free growth.
- Feeling charitable? The end of the year is a great time to feel philanthropic. Charitable gifts up to 30 percent of adjusted growth income are tax deductible if you donate appreciated stock. This includes direct gifts to charities or additional funds moved into a donor-advised fund.
- Tax-loss harvesting. The end of the year is a great time to think about any market losses you may have faced this year. In terms of taxes, you can offset your losses with gains, use the losses for a deduction on your taxes (up to $3,000.) or carry the losses forward to the next year.
- Capital gains? December is a great time to review your capital gains. For example, if you’ve sold $50,000 of stock with a gain of $25,000, how can you offset that for tax purposes? It’s smart to begin gathering that information now so that your CPA and other advisors can begin thinking about solutions. It is also a great idea to set capital gain goals for the next year. Your CPA and advisor can help you find a number you are comfortable with.
- Evaluate and establish your goals. At the beginning of 2021, you probably had some goals around saving. How did you do? What new expenses could impact your 2022 budget? Now is a great time to evaluate how you did and begin thinking about what you want to accomplish – both long-term and short-term – in 2022.
If you are feeling a little scattered or overwhelmed by your finances, you aren’t alone. There are a lot of last-minute moments at this time of year, and we wish we had a team in our corner to help. Good news: I’m here to help. Let’s find some time to chat so that you can end 2021 and begin 2022 on the right foot.
Now if you’ll excuse me, I have to go fill up my cup of kindness with some more nog.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.