2021 Year-End Financial Checklist

Mutual Funds

As 2021 comes to an end, now is a wonderful time to review some year-end planning strategies. Some of these ideas may apply to you, while others will not. However, it’s worth scanning the below checklist to see if there are any opportunities you’d like to discuss with your financial advisor, accountant, or attorney before we enter 2022.

1.   Required Minimum Distributions (RMDs): RMDs are the amount of money that must be withdrawn from a retirement account beginning April 1 following the year the account holder reaches age 72. They may also apply to those who have a beneficiary IRA. A distribution is required each subsequent year, with the amount based on the current RMD calculation. In 2020, RMDs were not required due to the COVID-19 pandemic. They resumed as usual in 2021, and failure to take them out may result in a penalty.

Planning Tip: Be sure to discuss with your advisors if you’d like your RMD check to be sent to you for spending or if you would like to reinvest the proceeds in your taxable account.

2.   Charitable Giving: Individuals who are 70½ or older can donate all, or a portion of, their RMD directly to charity. It’s called a Qualified Charitable Distribution, or QCD. QCDs are limited to $100,000 maximum annually per taxpayer. No matter the amount of your RMD for the year, you can give up to $100,000 to charities from your IRA as QCDs.

Planning Tip: Review your cash flow needs and your philanthropic goals. If you don’t need the cash and would like to tax efficiently support causes that are important to you, then QCDs are worth considering.

3.   Roth IRA Conversions: A Roth IRA conversion is the process of transferring retirement funds from a traditional IRA, SEP, or 401(k) into a Roth account. Since a Traditional IRA is tax-deferred, while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the funds at the time of conversion. There is no early withdrawal penalty.

This strategy may make sense if a saver believes that the postponed tax liability in the traditional account will be more onerous as retirement approaches. In that case, it may be better to pay those taxes now rather than later.

Planning Tip: With the new tax bill working its way through congress, taxes may go up and this may be an advantageous strategy. However, keep in mind that if paying the tax bill now is too burdensome, then this may not be a good option for you. 

4.   Beneficiary Updates: Did a family member who was a beneficiary on your account pass away this year? Did you want to change beneficiaries because your family dynamics have changed? Be sure to reach out to your advisor/insurance professional to update them on your situation and discuss best practices.

Planning Tip: If a family member did pass away this year, you may also want to reach out to your estate planning attorney to review and update your planning/documents such as a will, Power of Attorney, Health Care Proxy, and other estate planning documents.

5.   529 Contributions: You may have an opportunity for immediate tax savings if you live in one of the 20 states or more offering a full (or partial) deduction for your contributions to the home-state 529 plan. This assumes you want to invest in your home state’s 529 plan, as most states require you use the in-state plan to receive the deduction for your contributions. There are several states that are considered tax parity states, where you can use any state’s 529 plan to receive the deduction.

Consider making use of your Annual Gift Tax Exclusion if you haven’t already used it. You can give up to $15,000 a year gift tax free per person. The annual exclusion recycles on January 1, so if you don’t use your 2021 gift allowance by year-end you lose it.

Planning Tip: Make the best use of “superfunding” your 529 Plan. You can spread a tax-free gift to a 529 account over five years for gift tax purposes. This is known as “superfunding.” A married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $150,000 to a 529 plan for each child and, with the election, not run into gift tax problems.

6.   Tax Loss Harvesting: Tax-loss harvesting is strategy of selling securities at a loss to offset a capital gains tax liability. This strategy is often used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains.

Planning Tip: Remember, it’s generally a poor decision to sell an investment, even one with a loss, solely for tax reasons. There must be an investment strategy behind the sale as well. As I tell my clients, “Don’t let the tax tail waive the investment dog.”

7.   Employer Retirement Plan: If you have a corporate retirement plan at work, be sure to review how much money you contributed to the plan this year. If you have a 401(k), you may be able to put $19,500 before any company match or $26,000 if you are 50 or older. Make sure you are maxing out your 401(k) if you are financially able to do so. Looking ahead to next year, you should review your investment lineup and portfolio, and also decide if it’s sensible to utilize your Traditional or Roth 401(k) option (if available) based on your tax situation. Determine with your advisor if it makes sense to make any changes. This is especially applicable if your firm switched 401(k) providers recently.

Be mindful that for 2022, the 401(k)/Roth and 403(b) contribution limit increased to $20,500. Catch-up contributions will remain at $6,500, so those 50 and over can put away up to $27,000. Be sure to make the required tweaks within your plan to ensure you are making the maximum contribution next year.

Planning Tip: Do you have old retirement accounts still held at a previous employer? If appropriate, now may be a great time to get them consolidated to an IRA to keep your assets organized.

8.   Budget Expense Goals: It’s especially important for retirees to reflect on their expenses and plan ahead for next year. Be sure to evaluate how much cash is expected to be needed in the year ahead and work with your financial advisor to ensure you can meet these cash flow needs.

Planning Tip: Make sure you have adequate cash in your rainy-day fund. Typically, having 3 to 6 months’ worth of expense money on hand is a good rule of thumb for those who are working. For retirees, this number should be sufficient to mitigate sequence of returns risk. 

9.   Year-end Investment Moves: Two important investment moves to consider are your overall portfolio allocation and rebalancing.    

In terms of your asset allocation, review your investment mix of stocks, bonds, alternative investments, and cash to determine if it still makes sense for what you are looking to accomplish. Discuss with your advisor if your situation has changed as it may impact your portfolio.

Additionally, since the market went up significantly in 2021 (as of this writing) you may have a meaningful allocation to stocks. It may make sense to rebalance your portfolio over the next several months to ensure your allocation is brought back to its appropriate risk tolerance. That’s also a great way to lock in some profits.

Planning Tip: Do you have too much cash sitting on the sidelines? Did you come into a large sum of money? Do you have a big expense on the horizon that will cause you to withdraw funds? Be sure to discuss any of these scenarios with your advisors to craft an appropriate investment strategy for the coming year.

It’s important to note that the above checklist is just a sample of some items that may apply to your family. The key is to set up a time to meet with your advisors before year end to work through this checklist and discuss any other issues on your mind. Going through this process will help prepare you financially for the coming year. 

Disclaimer: This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice. AdTrax #: 3932746

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