2021 Year-End Financial Checklist

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As 2021 comes to an end, now is a great time to review some year-end planning strategies. Some of these ideas may apply to you, while others may not. However, before entering 2022, it is worth scanning the checklist below to see if there is an opportunity you would like to discuss with your financial advisor, accountant or attorney.

1. Required Minimum Distribution (RMD): RMD is the amount that must be withdrawn from the retirement account from 1st April after the account holder reaches the age of 72 years. They can also apply to people 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 resume as usual in 2021, and failing to take them out could result in fines.

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Planning Tip: Be sure to discuss with your advisors if you want your RMD check to be sent to you for spending or if you want to reinvest the proceeds into your taxable account.

2. charitable donation: Individuals 70½ or older can donate all, or a portion of, their RMDs directly to charity. This is called Qualified Charitable Distribution, or QCD. QCDs are limited to a maximum of $100,000 per taxpayer year. No matter the amount of your RMDs for the year, you can give up to $100,000 to charity from your IRA in the form of QCDs.

Planning Tip: Review your cash flow needs and your philanthropic goals. If you don’t need the cash and want to efficiently support causes that are important to you, 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) to a Roth account. Since a traditional IRA is tax-deferred, while a Roth is tax-exempt, deferred income tax due on the money must be paid at the time of conversion. There is no early withdrawal penalty.

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

Planning Tip: With new tax bills working through Congress, taxes could go up and that could be a beneficial strategy. However, keep in mind that if paying the tax bill right now is too cumbersome, this may not be a good option for you.

4. Beneficiary Update: Did any of your family member, who was a beneficiary in your account, passed away this year? Have you wanted to change beneficiaries because your family dynamics have changed? Be sure to contact your advisor/insurance professional to update them about your situation and to discuss best practices.

Planning Tip: If a family member has passed away this year, you may want to reach out to your estate planning attorney to review and update your planning/documents such as wills, power of attorney, health care proxies, and other estate planning documents.

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

Consider using your annual gift tax exclusion if you haven’t already used it. You can give up to $15,000 per year as gifts tax-free. The annual exclusion recycles on January 1, so you lose it if you don’t use your 2021 gift allowance by the end of the year.

Planning Tip: Make the best use of “superfunding” your 529 plan. You can spread the gift tax-free in 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 electives, cannot run into gift tax problems.

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

Planning Tip: Remember, it is generally a bad decision to sell an investment, even with a loss, only for tax reasons. There should also be an investment strategy behind the sale. As I tell my clients, “don’t let the investment dog forgive the tax tail.”

7. Employer Retirement Plan: If you have a corporate retirement plan at work, be sure to review how much money you’ve put into the plan this year. If you have a 401(k), you can put in $19,500 before any company matches, or $26,000 if you’re 50 or older. Make sure you’re maxing out your 401(k) if you’re financially able to do so. Looking to the next year, you should review your investment lineup and portfolio, and decide whether it makes sense to use your traditional or Roth 401(k) option (if available) based on your tax situation. Is. Determine with your advisor whether it makes sense to make any changes. This especially applies if your firm has recently switched 401(k) providers.

Keep in mind that for 2022, the 401(k)/Roth and 403(b) contribution limits increase to $20,500. The catch-up contribution will remain at $6,500, so contributions 50 and older can withdraw up to $27,000. Be sure to make the necessary changes to your plan to ensure that you are making the maximum contribution next year.

Planning Tip: Do you still have old retirement accounts with your previous employer? If appropriate, now may be a good time to consolidate your assets into an IRA to keep them organized.

8. Budget Expenditure Target: It is especially important for retirees to consider their expenses and plan ahead for the next year. Be sure to evaluate how much cash you need in the coming year and work with your financial advisor to make sure you can meet these cash flow needs.

Planning Tip: Make sure you have enough cash in your rainy day fund. Generally, it is a good rule of thumb to have 3 to 6 months’ expenses on hand for those who are working. For retirees, this number should be sufficient to reduce the sequence of return risk.

9. Year-end investment tricks: Two important investment steps 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 want to achieve. Discuss with your advisor if your position has changed as it could affect your portfolio.

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

Planning Tip: Do you have a lot of cash sitting on the side? Have you come in big bucks? Do you have a big expense on the horizon that will require you to withdraw money? Make sure to discuss any of these scenarios with your advisors to devise a suitable investment strategy for the coming year.

It’s important to note that the above checklist is only a sampling of some of the items that may apply to your family. It’s important to schedule an appointment with your advisors before the end of the year to work through this checklist and discuss any other issues on your mind. Going through this process will help you prepare financially for the year ahead.

Disclaimer: This article is written by Jonathan Schenkman, a financial advisor at Oppenheimer & Company Inc. The information provided here is taken from sources believed to be reliable and is not a complete analysis of the market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Company Inc. does not provide legal or tax advice. The opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and to be investment advice. AdTrax #: 3932746


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