Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
2021 Year-End Financial Checklist
1. Required
Minimum Distributions (RMDs): RMDs are the amount of money
that must be withdrawn from a retirement account beginning April 1 following
the year the account holder reaches age 72. They may also apply to those 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 resumed as usual in 2021, and
failure to take them out may result in a penalty.
Planning Tip: Be
sure to discuss with your advisors if you’d like your RMD check to be sent to
you for spending or if you would like to reinvest the proceeds in your taxable
account.
Planning Tip: Review
your cash flow needs and your philanthropic goals. If you don’t need the cash
and would like to tax efficiently support causes that are important to you,
then 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) into a Roth account. Since a Traditional IRA is
tax-deferred, while a Roth is tax-exempt, the deferred income taxes due will
need to be paid on the funds at the time of conversion. There is no early
withdrawal penalty.
This strategy may make sense if a saver believes that the postponed tax
liability in the traditional account will be more onerous as retirement
approaches. In that case, it may be better to pay those taxes now rather than
later.
With the new tax bill working
its way through congress, taxes may go up and this may be an advantageous
strategy. However, keep in mind that if paying the tax bill now is too
burdensome, then this may not be a good option for you.
4. Beneficiary
Updates: Did a family member who was a beneficiary on your
account pass away this year? Did you want to change beneficiaries because your
family dynamics have changed? Be sure to reach out to your advisor/insurance
professional to update them on your situation and discuss best practices.
Planning Tip: If
a family member did pass away this year, you may also want to reach out to your
estate planning attorney to review and update your planning/documents such as a
will, Power of Attorney, Health Care Proxy, and other estate planning
documents.
5. 529
Contributions: You may have an opportunity for immediate
tax savings if you live in one of the 20 states or more offering a full (or
partial) deduction for your contributions to the home-state 529 plan. This
assumes you want to invest in your home state’s 529 plan, as most states
require you use the in-state plan to receive the deduction for your
contributions. There are several states that are considered tax parity
states, where you can use any state’s 529 plan to receive the deduction.
Consider making use of your Annual Gift Tax Exclusion if
you haven’t already used it. You can give up to $15,000 a year gift tax free
per person. The annual exclusion recycles on January 1, so if you don’t use
your 2021 gift allowance by year-end you lose it.
Planning Tip: Make
the best use of “superfunding” your 529 Plan. You can spread a tax-free gift to
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 the election, not run into gift tax problems.
6. Tax Loss
Harvesting: Tax-loss harvesting is strategy of selling
securities at a loss to offset a capital gains tax liability. This strategy is
often used to limit the recognition of short-term capital gains, which are
generally taxed at a higher federal income tax rate than long-term capital
gains.
Planning Tip: Remember,
it’s generally a poor decision to sell an investment, even one with a loss,
solely for tax reasons. There must be an investment strategy behind the sale as
well. As I tell my clients, “Don’t let the tax tail waive the investment dog.”
7. Employer
Retirement Plan: If you have a corporate retirement plan
at work, be sure to review how much money you contributed to the plan this
year. If you have a 401(k), you may be able to put $19,500 before any company
match or $26,000 if you are 50 or older. Make sure you are maxing out your
401(k) if you are financially able to do so. Looking ahead to next year, you
should review your investment lineup and portfolio, and also decide if it’s sensible
to utilize your Traditional or Roth 401(k) option (if available) based on your
tax situation. Determine with your advisor if it makes sense to make any
changes. This is especially applicable if your firm switched 401(k) providers
recently.
Be mindful that for 2022, the 401(k)/Roth and 403(b)
contribution limit increased to $20,500. Catch-up contributions will remain at
$6,500, so those 50 and over can put away up to $27,000. Be sure to make the
required tweaks within your plan to ensure you are making the maximum
contribution next year.
Planning Tip: Do
you have old retirement accounts still held at a previous employer? If
appropriate, now may be a great time to get them consolidated to an IRA to keep
your assets organized.
8. Budget Expense
Goals: It’s especially important for retirees to reflect
on their expenses and plan ahead for next year. Be sure to evaluate how much
cash is expected to be needed in the year ahead and work with your financial
advisor to ensure you can meet these cash flow needs.
Planning Tip: Make
sure you have adequate cash in your rainy-day fund. Typically, having 3 to 6
months’ worth of expense money on hand is a good rule of thumb for those who
are working. For retirees, this number should be sufficient to mitigate
sequence of returns risk.
9. Year-end
Investment Moves: Two important investment moves 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 are looking to accomplish. Discuss with your
advisor if your situation has changed as it may impact your portfolio.
Additionally, since the market went up significantly in
2021 (as of this writing) you may have a meaningful allocation to stocks. It
may make sense to rebalance your portfolio over the next several months to
ensure your allocation is brought back to its appropriate risk tolerance.
That’s also a great way to lock in some profits.
Planning Tip: Do
you have too much cash sitting on the sidelines? Did you come into a large sum
of money? Do you have a big expense on the horizon that will cause you to
withdraw funds? Be sure to discuss any of these scenarios with your advisors to
craft an appropriate investment strategy for the coming year.
It’s important to note that the above checklist is just a
sample of some items that may apply to your family. The key is to set up a time
to meet with your advisors before year end to work through this checklist and
discuss any other issues on your mind. Going through this process will help
prepare you financially for the coming year.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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