5 financial movements to make before December 31

At the end of the calendar year, it’s a good time to check out the steps you can take to improve your 2021 financial results.

The end of the year is a good time to consider what your tax liability will be for 2021. “Take a look at your tax situation, what your tax situation looks like for the year,” says Roger Young, senior director of analysis of retirement at T. Rowe Price. What is your probable taxable income?

Even if you’ve done some planning throughout the year, there are still ways to save money on your 2021 taxes. Still, in some cases, you need to act before December 31st.

“The end of the year is a good time to take stock,” says Rob Williams, general manager of financial planning and retirement income, Schwab Center for Financial Research. What you decide to do “will vary a bit if you are still employed.”

Here are some steps to take before December 31st.

If you’re still working, maximize your contributions to an employer-sponsored 401 (k) plan. The 401 (k) contribution limit is $ 19,500 for 2021. If you are 50 years of age or older, you can also make an annual catch-up contribution of up to $ 6,500 by December 31st. Some employers allow you to put some or all of a year-end or vacation bonus into your 401 (k), so ask your company’s benefits manager if that’s allowed, says Greg McBride, vice – senior president, chief financial analyst, for Bankrate.com, a personal financial website.

Take your Minimum Required Distribution (RMD). If you turned 70 and a half in 2020 or later, you must take your first RMD by April 1 of the year after you turn 72, according to the Internal Revenue Service. Typically, you should start withdrawing funds from your Traditional IRA, SEP IRA, SINGLE IRA, or your retirement plan. Otherwise, RMDs start at age 70 and a half. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the age from 70 and a half to 72. You can plan or make withdrawals before the end of 2021. The penalty for not having taken your RMD on time is high: 50% of the amount not withdrawn on time.

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Consider a Roth conversion. The conversion from a Traditional IRA to a Roth IRA must be completed by December 31. “You can’t reverse it after the conversion is complete,” says Williams of Schwab. If you aren’t taking an RMD yet, consider converting a Traditional IRA to a Roth. “A Roth conversion is more beneficial if you expect your retirement distribution requirements (RMD) to be in a higher tax bracket than your current bracket,” says economist Wade Pfau, author of “Retirement Planning Guidebook: Navigating the Important Decisions for Successful Retirement. “RMD can put you in a higher tax bracket. The Roth conversion may reduce the amount of RMD in the top bracket later, says Pfau.

In general, if you are in a relatively low tax bracket this year because you are in phased retirement or work part-time and have not yet claimed your Social Security retirement benefits, it may be time to consider converting to a traditional IRA. to a Roth IRA too.

Read: Did you apply for social security and then go back to work? You might face the “income test”

Check your capital gains (and losses) for 2021. “In a year like this, when the markets have done really well,” you might not have losses, says Young of T. Rowe Price. “You might have wins, and it might be harder to find those losses. Harvesting tax losses could be difficult to do, ”he said. Still, now might be the time to sell securities for a profit. “If you haven’t taken out your social insurance by December 31, 2021, look at what your (income) tax bracket is or could be” for 2021, Schwab’s Williams says. Ask yourself, “How much room do I have before I hit the next tax bracket?” “

If your earned income is less than it might be in the future, this can be a “great opportunity to take some of that income,” Williams says. “People don’t like paying taxes before they have to, but sometimes it pays off. If you have lower taxable income, pay taxes now to give yourself the flexibility of not paying (tax) or paying more taxes later.

For long-term capital gains, you will generally be in a 0%, 15% or 20% tax bracket, depending on your earned income. For a single filer earning $ 40,400 or less or for married spousal filers earning $ 80,800 or less, you will be in the 0% tax bracket for long-term capital gains. (Long-term capital gains are investments that you have held for more than a year.)

Speak to a tax advisor before December 31st. “Be aware of the tax,” says Williams. “We can’t predict the markets, but we have some control over tax planning. Don’t wait until the end of the year to speak to a tax advisor. You must make these sales before the end of the year. If you sell stocks in a retirement account and leave the funds in the account, it’s not a “taxable event,” he says. However, within a brokerage account, if you want to reduce your concentration of a particular stock and sell a stock such as Tesla or Amazon, you may need to pay capital gains tax on profits. It will depend on your level of earned income. “If you’re in a lower tax bracket than you might be later, you might sell and pay tax on it,” Williams says. “Don’t let paying taxes stop you from doing it. You can reinvest the money. If you have losses, you can do what is called tax loss harvesting. You can sell one stock at a loss and another for a gain to make up for the loss to reduce your tax liability. You can use the loss to reduce your capital gains. Also, if your capital losses are greater than your capital gains, you can sometimes offset up to $ 3,000 in ordinary income. Check with your tax advisor. See also IRS topic n ° 409.

Harriet Edleson is the author of “12 Ways to Retire with Less: Planning for an Affordable Future” (Rowman & Littlefield). Former writer / editor / producer for AARP, she writes for the Real Estate section of the Washington Post.


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Julio V. Miller