Some end-of-year housekeeping and planning strategies to close out the year on a good note:
Review your portfolio:
- with upcoming transitions in mind. Are allocation changes needed to begin preparing for an upcoming milestone (i.e. retirement) or transition (i.e. job change, relocation etc.)?
- for (in)appropriate risk. Has your risk tolerance or risk capacity (i.e. how much risk you can take without interrupting other goals/priorities) changed? Can you now take on more/less risk?
- for rebalancing opportunities. Is your portfolio properly allocated based on a target model? Or has your overall allocation drifted due to outsized gains/losses?
- for gain/loss harvesting. If you invest in a taxable brokerage account, and depending on your tax bracket, there may be opportunities to realize additional capital gains (while in a lower tax) bracket or offset capital gains with losses.
Required Minimum Distributions (RMD)
- What they are: The minimum amount that must be withdrawn from pre-tax retirement accounts annually once reaching age 72. This does not apply to post-tax Roth IRAs.
- Inherited IRAs: Have their own rules.
- Deadline: All RMDs must be taken by December 31st.
Contribute to a Roth or Traditional IRA
- Roth IRAs: Contributions grow tax-free and qualified distributions come out tax free. Income limitations apply.
- Traditional IRA: Contributions may be fully, partially, or non-deductible, depending on your income and circumstances.
- Annual contribution limit (per person): For 2020, 2021, and 2022 is $6,000, or $7,000 if you’re age 50 or older. This limit applies to all IRAs. Example: An individual could fund a Roth IRA with $6k, or fund a traditional IRA with $6k, or fund each with $3k. You (or your spouse) must have taxable income in order to make a contribution.
- Deadline: You can make 2021 IRA contributions until April 15, 2022.
- Backdoor Roth: Depending on your circumstances, and for those who exceed the contribution/deduction income limits, you may be eligible to make a “backdoor” Roth contribution. Read more about it here and be sure to do it under the guidance of your financial planner and/or tax advisor.
- Roth Conversions: If you are currently in a low tax bracket and expect your tax bracket to increase in future years, you may consider converting some pre-tax funds to your post-tax Roth. Essentially, paying taxes now so that your retirement funds can grow tax-free into the future. Deadline: 12/31/2021.
Charitable Donations
- Deadline: All 2021 cash/non-cash donations must be completed by December 31st.
- Deduction: Those that do not itemize their taxes can still deduct donations: up to $300 for single filers and $600 for joint filers.
- Donor Advised Funds: Gifting appreciated stock to a Donor Advised Fund avoids recognizing capital gains and potentially pre-funds future year gifting.
- QCDs: If over age 70.5, you can avoid recognizing IRA RMD income by directing some/all of your distribution to go directly to charity via a Qualified Charitable Distribution.
All advice listed here is for informational purposes. Please consult your financial planner or tax advisor before implementing.
