Below are some end-of-the-year planning steps you may wish to consider to keep your financial plan on track and be prepared for 2022. Everyone’s financial situation is unique, and this is not a comprehensive list of all financial planning and tax planning strategies. Please consult your tax advisor and your financial advisor for guidance concerning your specific circumstances.
1. Make Retirement Contributions: Contribute to tax-advantaged retirement accounts, including catch-up contributions, before the end of the year to maximize tax savings. Note that you have until tax day of the following year to establish and/or contribute to an IRA for the prior tax year, but contributions to 401ks and other qualified plans must be made by December 31st. If you are self-employed, consider establishing a solo 401(k) before December 31st, and fund any existing solo 401(k) or SEP IRA prior to filing your tax return.
2. Review Your Budget: Now is a good time to review your spending patterns over the past year. If money was tight or if you had a surplus, your financial advisor can help you identify and make any adjustments that might be needed.
3. Take your Required Minimum Distribution (RMD): RMDs were waived in 2020, however, they are back in 2021. The IRS requires individuals to take their RMD by April 1 of the year following the calendar year in which you reach age 72 (70½ if you turned 70½ before Jan 1, 2020) and by December 31 each subsequent year.
4. Consider a Qualified Charitable Distribution (QCD): If you are over age 72, consider giving to charity directly from your IRA. A QCD can reduce your taxable income. Each IRA owner may contribute up to $100,000 directly to charity from their IRA each year. If you would like to make a distribution from your IRA at Probity Advisors, Inc., please let us know as soon as possible. Many of the rules for RMDs apply to inherited accounts so you should contact your tax advisor and financial advisor regarding your specific situation.
5. Make Annual Gifts: If you choose to make charitable contributions, you may wish to consider gifting stock rather than cash. When you decide to gift long-term appreciated shares directly to a charity — rather than sell securities and gift the cash — you potentially get to take a reduction for the full fair market value of shares and avoid tax on any long-term capital gain. This is often an underutilized gifting mechanism that many of our clients have found to be an excellent strategy for fulfilling philanthropic desires while simultaneously providing a tax benefit.
Another opportunity for gifting is to utilize the annual gift tax exclusion. Every individual may make tax-free, annual exclusion gifts of up to $15,000 in 2021 without counting toward the lifetime exemption from federal estate and gift tax. This is a “use it or lose it” exclusion, so be sure to send gifts for receipt prior to December 31st. This is a per-person limit, so you can make gifts to as many people as you like. Also, remember that assets gifted to individuals during your lifetime retain their original cost basis. Assets inherited at death receive a “step-up” in basis at death under current legislation, but this could change. Consult your advisors to determine the best gifting strategy for you.
6. Consider a Roth Conversion: Whether a Roth conversion is right for your particular situation involves consideration of a number of complex factors. A Roth conversion occurs when you move assets from certain types of pre-tax retirement accounts to a Roth IRA. The benefits include tax-free withdrawals in retirement, no required minimum distributions, and the option to leave an income-tax-free legacy to the next generation. However, there may be tax ramifications, and your tax advisor and your financial advisor can help you weigh the potential benefits and disadvantages.
7. Spend Flexible Spending Account (FSA) Dollars: Unused funds in FSAs are typically forfeited at year end, so be sure to use the funds for eligible health and medical expenses by December 31st. Some plans my not follow the calendar year, so check with your plan to confirm deadlines.
8. Check Tax Withholdings: If you changed jobs in 2021, check your tax withholding to help avoid having too little tax withheld which could result in an unexpected tax bill or penalty at tax time next year.
9. Review Your Insurance Policies: Review your home, automobile, and life insurance policies to determine if you have enough coverage or if deductibles need to be adjusted.
10. Update Mailing Address (if needed): If you’ve had a change of address in 2021, please notify our office and any other financial advisors and institutions you may work with.