Year-End Financial Planning Tips
With the bulk of 2021 in the rearview mirror, now is a great time to assess your financial landscape. Here are some areas that might deserve your attention.
Consider Your Risk Tolerance
Rare is the investor who minds “upside volatility” in their portfolio. It’s nice to see regular portfolio growth. However, periods like The Great Recession of 2008 to 2009 or The Covid Crash in March of 2020 remind us that investing involves downside risk too. Are you psychologically prepared for the next downturn? Is your portfolio aligned with your goals?
Remember that downside numbers hurt you the most. If you have a $2,000,000 portfolio and the next bear market takes 50%, a subsequent 50% recovery only brings you back to $1,500,000. You need 100% upside returns to recover from a 50% drop. Are you ready for that? Do you need to rebalance?
Examine Gains and Losses
If you are making some year-end portfolio moves, be aware of your gains and losses for the year. Profits in taxable accounts are subject to capital gains taxes. Selling securities in which you have a loss can offset your gains and mitigate your tax liability. Choosing how to unload your portfolio’s winners and losers wisely today can reduce your tax burden next April. Some of the IRS rules can get complicated. Ask for help if you’re unsure what to do.
Maximize Retirement Contributions
Are you on track to max out your employer’s retirement plan for 2021? Are you maximizing all available matching contributions? Use the last few paychecks of 2021 to hit your limits if your budget can handle it.
Required Minimum Distributions (RMD)
The CARES Act of 2020 gave IRA owners a break from required distributions in 2020. But if you were born any time before January 1, 1950, and you own a Traditional IRA, you’ll need to take a distribution before December 31, 2021. Don’t forget. The Internal Revenue Service levies a harsh penalty (50% of the amount of the RMD not withdrawn) on those who do. Your IRA custodian should have the calculated amount you need to withdraw.
Charitable Giving
Having investable assets at all puts you among the world’s fortunate. This is a good time of year to count your blessings and think about ways you might share them. Many civic and religious institutions encourage charitable gifts— including the IRS.
If you itemize on your tax returns, you can deduct financial gifts to the charities you support.
If you donate shares of appreciated securities, you can also avoid paying capital gains taxes. If this strategy becomes a regular habit, you may want to consider a donor-advised fund. A donor-advised fund is a great charitable tool. It’s almost like having your own charitable foundation.
A Qualified Charitable Distribution (QCD) is one of my favorite ways to satisfy your Required Minimum Distribution. If you don’t need or want the taxable IRA distribution, you can perform a QCD. This essentially means you give all or some (up to $100,000 per year) of your RMD to charity. A QCD is not subject to income tax, unlike a normal RMD.
Review Beneficiaries
This is a great exercise to perform regularly. Who gets your Roth IRA if you die? Who would see the proceeds of your life insurance policy? If you’ve had major changes in your life, you may want to take a look. Many people forget to remove ex-spouses from their list of beneficiaries. Did you know that you can list a charity as a beneficiary? It can be a significant way to leave an impact after you’re gone.
As we enter the holiday season, take a moment to give thanks and spend some time reviewing these topics. If I can be a resource, feel free to reach out.
