10 Year-End Financial Things to Do - Aspiriant Wealth Management

10 Year-End Financial Things to Do

Where did 2021 go? We started the year with high hopes the worst of COVID-19 was behind us, but it continued to rage on in many communities as we slowly started to return to the office or school and do the things we love with others. Now, we’re already at the end of another dynamic year. What’s changed for you?

Think about that and what new life events you could be facing in 2022, then consider taking the following steps, if they apply to you, to get your financial house in order for the New Year.

1. Manage income tax brackets

The earned income tax rates didn’t change this year, but the brackets went up slightly. If you believe you’re on the cusp of jumping a bracket, then talk to your wealth manager about strategies to reduce your income. They can include deferring compensation, taking advantage of tax loss harvesting in your investments, accelerating charitable giving and more. Some methods are detailed below.

2021 Tax Rates

2021 Tax RateFor Single FilersFor Married Individuals Filing Joint ReturnsFor Heads of Households
10%Up to $9,950Up to $19,900Up to $14,200

Source: Internal Revenue Service

2. Fund retirement accounts

Be sure to maximize contributions to your traditional and Roth retirement accounts. You have until April 15, 2022, to make contributions toward the 2021 tax year.

Also, be cognizant of income limitations that phase out the amount you can contribute to traditional and Roth IRAs. If your household income is growing, these limits can creep up on you, and you’ll have to remove the excess or pay a penalty.

2021 Retirement Account Contribution Limits

Regular contributionCatch-up contribution1AGI phaseout range (married/single)
Traditional IRA$6,000$1,000$105,000-$125,000 / $66,000-$76,000
Roth IRA$6,000$1,000$198,000-$208,000 / $125,000-$140,000
401(k), 403(b)$19,500$6,500
SIMPLE IRA$13,500$3,000
SEP plan$58,000n/a$290,0002
Total defined contribution plans$58,000$6,500

Source: IRS. 1For people age 50 or older in 2021. 2Including head of household. Maximum SEP IRA contribution is the lesser of 25% of compensation or $58,000. The maximum compensation amount to determine the contribution limitation is $290,000.

3. Take retirement account distributions

Last year, because of COVID-19 and the CARES Act, you didn’t have to take required minimum distributions (RMDs) from certain types of retirement accounts. But this year you do.

If you turn 72 this year, you have until April 1, 2022, to take your first RMD. If you’re already over 72, then you need to take your distribution by December 31. The amount you’re required to take depends on your age.

Minimum distributions are required for the following accounts:

  • Traditional IRAs
  • SEP IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit-sharing plans
  • Other defined contribution plans

If you don’t really need the cash, you can further your philanthropic goals by electing a qualified charitable distribution (QCD) of up to $100,000 from IRAs. This move allows you to exclude the donation from your income, which can help lower your taxes. Contact your custodian or wealth manager soon for deadlines.

4. Review benefit elections for Social Security and Medicare

If you’re a senior, you have until December 7 to make annual Medicare benefit changes. You may change your Medicare Advantage or Part D plan, or switch from original Medicare to Medicare Advantage, or vice versa.

Also decide if you want to start taking Social Security benefits. You can begin receiving them at age 62. However, your benefit increases 8% each year you wait, up to age 70. There’s no advantage to waiting past age 70, so if you became a septuagenarian this year, consider filing.

5. Make annual exclusion gifts

The giving season is a perfect time to think about making annual tax-exclusion gifts, especially if you might have a taxable estate. For 2021, an individual can give up to $15,000 to another person while avoiding gift tax. During the individual’s lifetime, under current law, they can exclude up to $11.7 million of gifts from their estate to avoid estate taxes. This doubles for married couples, who each get the individual exclusions.

You can give gifts to people in your life in many ways: direct cash or stock; to trusts or by helping with a down payment on a home. Or you can check off another thing to do by funding a child or grandchild’s 529 college savings plan.

6. Fund 529 plans

Contributing to a 529 plan is great way to give to a child, grandchild or another family member to help them save for college expenses. As long as the money is used for allowable educational expenses, they will not have to pay income tax on the growth.

And if you aim to transfer money out of a taxable estate, you can front-load five years’ worth of the $15,000 gift-tax-free amount, so up $75,000 for an individual or $150,000 for a married couple, to one recipient. If you choose to superfund an account, you’ll need to file a gift tax return for this year and elect to spread the gift over the five-year period. Read more about this strategy and other ways to transfer wealth to children on fathom.

7. Fund charitable giving with appreciated stock

Giving stock shares you’ve owned for more than 12 months that have greatly appreciated is a win-win for you and the charitable organization. You not only get to write off the value of the shares from your income taxes (if you itemize), you also avoid paying capital gains tax on the appreciation. It also reduces the risk of having concentrated wealth in a particular company, which is a common dilemma for executives. And, of course, you’re supporting a cause that’s important to you.

You can give stocks directly to a charity, to your donor advised fund or a private foundation. Note that gifts of stock are limited to 30% of your adjusted gross income when given directly to charities and DAFs, and only 20% when donated to private foundations. Be sure to contact your custodian or wealth manager soon, as deadlines for giving securities are fast approaching.

8. Consider Roth conversion

Transferring funds from a traditional IRA or 401(k) to its Roth counterpart may save you money on income taxes in the long run, but you will have to pay taxes on the prorated earnings today. It’s most beneficial when you’re in a lower income tax bracket. Also, RMDs are not required for Roth accounts.

If you’re already maximizing contributions to your employer’s 401(k) plan ($19,500 or $26,000 for those age 50 and older), and you have more money available to contribute, consider a mega backdoor Roth conversion. But you may need to move fast as recent legislation passed by the House of Representatives eliminates this technique after December 31, 2021.

If your employer offers a Roth 401(k), the backdoor method involves making additional after-tax contributions of up to $38,500 to the traditional 401(k) plan, and then converting that amount to a Roth 401(k) where the money will grow tax-free.

9. Rebalance portfolios

Like rebalancing your tires, think of rebalancing as routine maintenance to keep your investments running smoothly. The idea is Investing 101 — sell when security prices are high and buy when they are low. A good Registered Investment Adviser should also be looking for opportunities to sell for tax loss harvesting, allowing you to offset other capital gains. In the end, your portfolio should maintain its desired allocations across asset classes to align with your risk tolerance and help you meet the goals you’ve established with your wealth manager.

10. Hold a family money meeting

The end of the year is a good time to get together with your family to talk about money matters and plan for next year. We often find that when families are honest about money and openly convey values and beliefs, they are more educated and confident with their financial choices. The discussions should be tailored to your family situation, for example:

  • If the children are younger, you can simply talk about the values of saving and giving this time of year, discussing differences and answering their questions about why some people appear to have so much money while others struggle financially or are homeless.
  • If you already have or are thinking about starting a philanthropic giving program, talk to your family about your values and mission statement and identify suitable charities and donation amounts as a team.
  • If you’re getting on in your years, talk to your children or a trusted family member about your finances. Share accounts and online passwords in case you become incapacitated, as well as essential estate planning documents. Discuss your intentions of how you’d like your estate to be distributed and shared.

These should be fun, not heavy, conversations. You could plan a family dinner or outing to get everyone more excited and comfortable talking about it. Here are a few ideas to get the conversation started.