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Financial Planning

End of the Year Money Moves

By
Kastle Waserman

Why It Matters:

  • The end of the year is coming — don’t forget your finances.
  • Save on the amount of taxes you pay this year.
  • Meet requirements to avoid penalties and losing money.
     

The end of the year is hurtling towards us, and while it may be easy to become preoccupied with seasonal delights and holiday festivities, don’t neglect your finances. Be ready to make some smart money moves to reduce your tax load, save and invest more, and have an updated strategy to reach your goals in the new year.

Take Inventory

Take a look at where you are financially. Are there expenses you could be cutting, more you could put towards paying off debt or contributing to a retirement account? Do you have the recommended three to six months of emergency savings in place? What are your goals for next year? Are there some big-ticket items coming up such as home repairs, a new car, college education, a wedding, or a new baby? Get your budget updated to cover your current needs. A financial professional can help you strategize and find where you can fill in gaps you may be missing.

Wrangle All Those Taxes

Nobody is a big fan of the taxman, but some careful strategizing can help you give him less and keep more of what you earned this year. Income, capital gains, property sales, and early withdrawals can all have an impact on what you’ll need to pay in taxes. And, it’s hard to know how to calculate it all, especially when the rules change frequently. A good CPA can help review your paystubs and investments to see where you stand and suggest any moves you can make to keep more of your hard-earned cash in your pocket.

Maximize That Retirement Account

Saving for your retirement is important, and you may not be putting away as much as you should. Take this time between now and the end of the year to boost your 401(k) contributions and take advantage of the tax savings. The more you contribute, the lower your annual taxable income will be.

Maintain a Healthy Health Savings Account (HSA)

In the same way contributions to your 401(k) lower your annual taxable income, contributions to your HSA will do the same, whether they are contributed pre-tax through your employer or as a tax deduction for an individual account. This money is never taxed as long as it’s used for qualified health expenses, and it rolls over each year, so it’s yours to keep. You never know what medical bills you’ll need to cover down the road.

Flex Your Spending Muscle

If you’re enrolled in a flexible spending account (FSA) with your employer for health or dependent care expenses not covered by insurance, now’s the time to use that money. If you don’t, you’ll lose it. So do some spending on your self-care. Need to restock your contact lenses? Have some dental work you’ve been putting off? Haven’t done your preventative checkup this year? Do it now while you have a little time on the calendar to get those appointments made.

Harvest for Tax Losses

Think of the fall season as a time for harvesting … which includes reviewing your investments for those bum securities that decreased in value. But if you do, you can sell them and write off the loss against any capital gains or income to reduce your tax bill. You can then buy a similar security that’s performing better to keep your asset allocation well balanced. If you’re not sure how to do this, talk to your CPA or financial professional.

Take Required Minimum Distributions (RMDs)

In 2020, the age for withdrawing from retirement accounts changed. You must begin withdrawing from a retirement account by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old). The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.1


For traditional IRA account holders, the RMD calculation involves three steps:

  1. Write down the account’s balance as of Dec. 31 of the previous year.
  2. Find the distribution factor listed on the calculation tables that corresponds to your age on your birthday of the current year. For most people, this factor number ranges from 27.4 all the way down to 1.9. As a person gets older, the factor number goes down.
  3. Divide the account balance by the factor number to find the RMD.1

You’re free to spend or reinvest your RMDs, just don’t forget to pay taxes on them at your income tax rate.2

Note the Changes for Charitable Giving

While charitable giving used to be a recommended move to make at the end of the year, those little donations to organizations you’re passionate about and that closet cleanout you donated to Goodwill may no longer help you in the tax deduction department. The tax law changed when President Trump signed the Tax Cuts and Jobs Act in 2017.

The new law made major changes around charitable giving, including individual income tax rates, which reduced the value of all tax deductions. It also increased the standard deduction to $12,000 for singles and $24,000 for couples, capped the state and local tax deduction at $10,000, and eliminated other itemized deductions.3

However, some savvy strategists did come up with a clever way to hit this threshold by “bunching” or “bundling,” where you hold off giving one year then donate a large amount the following year that meets the minimum requirement.4 If you’re not in the position to make donations of these amounts, you can still contribute your favorite charities, but it will be purely altruistic.


Things to Consider:

  • Review your overall financial strategy and make updates.
  • Charitable giving may no longer be a tax deduction for you.
  • Smart tax-saving moves can leave you with more to invest.


1 "Required Minimum Distribution (RMD)," Investopedia, November 2021

2 "The Basics of Required Minimum Distributions: 12 Things You Must Know About RMDs," Kiplinger, November 2021

3 "Key Elements of the U.S. Tax System," Tax Policy Center, accessed January 2022

4 "What You Need to Know About Making Charitable Gifts in 2021," Bloomberg Tax, November 2021

 

Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.