The lights are strung, presents have been bought and plans are set for holiday entertainment. For many people it’s time to leave work behind and enjoy the last few days of the year.
However, if you can find a few minutes to spare before turning out the lights on 2021, it may be worthwhile to review your finances and make some last-minute moves. Here are five possible actions that won’t take much time and may end up saving you plenty down the road.
Maximize 401(k) Retirement Plan Contributions
Many professionals still have one paycheck left in the year. If you haven’t contributed the maximum amount to a company-sponsored 401(k) retirement plan, see if you can make up any lost ground. For example, if you typically contributed $500 per paycheck, you may want to bump the last contribution up to $1,000.
For those 50 years old or older, you can make a catch-up contribution as well – the maximum limit in 2021 for the catch-up is $6,500. If you turned 50 during 2021 and didn’t adjust your election, make sure you maximize this contribution as much as possible in your last paycheck.
Next, review your contributions for 2022. The contribution limit will go up next year – from $19,500 to $20,500. The catch-up contribution will stay the same, so if you will turn 50 next year, make sure you take advantage.
Recent changes in the federal tax laws provide a higher hurdle for some taxpayers to itemize donations, so many no longer can take a deduction for their charitable gifts.
One of the most well-known tools to reach the itemized deduction threshold with charitable gifts is a Donor Advised Fund (DAF). This vehicle allows one to contribute cash, stock or other appreciated assets, receive a tax deduction at the time of the gift and make generous donations to charitable organizations over time when they choose to do so.
My firm works with families who contribute significant dollars annually to various nonprofit organizations. One client recently had an unusually high income after cashing in stock options and receiving other compensation at retirement. Needing a tax deduction to offset these gains, he set up a DAF with a $200,000 tax-deductible contribution.
While the tax deduction helped offset his high income, he used money from the fund to make $20,000 in annual contributions to his favorite charities for the next 10 years. Now that he is retired and his taxable income is significantly lower, he will simply take the generous new standard deduction going forward.
Corporate executives and managers also need to review their projected taxes due in April and begin setting aside cash now. For example, if you had a large restricted stock grant vest in 2021, your higher taxable income may cause extra taxes due when you file your tax return.
Others may want to consider purchasing tax credits to offset state income taxes. To promote jobs in the film and television industry, my home state of Georgia, for example, enables individuals to purchase tax credits that can lower state income taxes. Speak with a financial adviser or accountant to learn more.
Maximize Insurance Benefits
Most people with flexible spending accounts need to use money in those accounts by Dec. 31 (although for 2021, some employers are extending that deadline), so don’t let those go to waste. For those with a health savings account (HSA), make sure to maximize your contributions. At the same time, try to pay any medical expenses with cash since these accounts grow tax-free and can be used as a retirement asset. For 2021, the maximum contribution is $3,600 for individuals and $7,200 for families, plus a $1,000 catch-up contribution for those 55 and older.
Many people invested in the stock market have likely seen a significant increase in their net worth. Some people may be worth more today than ever before. If you are one of these people, it may make sense to review your umbrella liability insurance coverage to determine if you have enough. For example, if your net worth has increased by $1 million in the past few years, you may need to buy an additional $1 million in insurance to cover potential liability claims should there be a lawsuit against you in the future.
Update Your Investment Allocations
The rising stock market means the allocation of investments in stocks and bonds may be out of line for many investors. If you started the year with 70% invested in stocks and 30% in bonds, your stock allocation may be significantly higher now. It is likely you’ll need to make changes to bring your portfolio back into balance.
For those looking to lower their upcoming tax bill, consider implementing a tax loss harvesting strategy. By selling a security that is currently at a loss to offset a capital gain in another security, you can reduce your capital gains tax while cutting loose securities you don’t want to keep.
Finally, take a look at how much cash you have sitting in the bank. While a cash reserve looks different for everyone, typically three to six months’ worth of expenses is a prudent amount to keep in cash while they are working. Once holiday spending is over, put extra cash to work in investments, especially with rising inflation eating into purchasing power.
Getting Ready for 2022
Once the ham has been eaten and the guests have gone home, an individual or couple should review the 2021 performance of their savings and investments and set top financial priorities for the coming year. One possible example is updating your will, especially if your current will is several years old.
It also may make sense to consider how the impact of any upcoming changes in your career or family may affect your finances and plan accordingly. These changes may include a possible job and salary promotion, moving to a new state, or paying for a child’s college education. Any of these events will usually hike your income or expenses. Begin now to prepare for these changes by setting financial goals, documenting your plans and holding yourself accountable.
Wealth Planner, Brightworth
Nathaniel Maiwald is a Wealth Planner at Brightworth, an Atlanta-based investment company that provides custom wealth management solutions to individuals, families and corporations. He advises corporate professionals and executives on their personal finances and investments. He is currently pursuing his CERTIFIED FINANCIAL PLANNER ™ certification. He lives in Midtown Atlanta and enjoys reading and hiking in his free time.