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Personal Year-End Financial Planning Checklist

As 2020 comes to a close, it is an important time to revisit your financials to maximize savings, ensure you start the new year strong and to stay on track to accomplish your goals. From tax managing your investments to executing your charitable gifting strategy, here are some checklist financial planning items you might want to consider as you get ready for 2021:

Tax Manage your Investments

  • Tax loss and tax gain harvesting. Generally we advocate selling losing investment positions near the end of the year to offset capital gains. With the prospect of higher taxes in 2021, it may make sense to wait to sell losing positions in 2021 in many situations. Be aware of the wash sale rules.

  • Coordinate tax-aware rebalancing of your portfolio. With the markets up substantially over the last several years, you’ll probably want to bring your asset allocation to their target weights, but you might want to be thoughtful about when to take those large gains given likely tax changes in 2021. Typically, you might want to push that sale into 2021 to defer the taxes, but it may make sense to take that gain in 2020 under a potentially lower tax regime.

  • Optimize income and expenses. In most years, we would advocate delaying the receipt of end of year bonuses into 2021 and accelerate expenses into 2020 to potentially lower your 2020 tax bill. However, with changes in Washington possibly leading to higher 2021 taxes, it may make sense to accelerate income in 2020 and defer expenses into 2021. For example, those with company stock options like ISOs (Incentive Stock Options) will want to carefully plan the tax implications of executing their options taking into account potentially very different tax brackets in 2020 versus 2021. Some people may want to defer property tax payments until 2021 to get the benefit of a potential removal of the $10,000 SALT deduction limitation, but on the other hand there might be new rules in 2021 planning limits on itemized deductions.

  • Watch out for mutual fund distributions. Mutual funds distribute capital gains distributions toward the end of the year. If you are buying into a fund late in the year, check to see if they have already made the distribution. You do not want to essentially buy someone else’s large capital gains distributions.

  • Max out contributions. If possible, ensure that you max out contributions to 401Ks, IRAs (not due until April 15th), SEPs (due April 15th or extension deadline), Simple IRAs (April 15th deadline) or other qualified accounts.

  • Consider a Roth conversion. With a Roth conversion (December 31st deadline), you will convert pre-tax IRA money into nontaxable Roth IRA money. You will be taxed on the conversion amount as ordinary income, but all future gains and distributions within the limitations won’t be taxed. This makes the most sense to do if you’ve had a down year income wise, which many people have had due to the impact of COVID-19, and you have the cash on hand to pay the taxes. Roth conversions also make a lot of sense if you believe your current tax rate is lower than when you are distributing your assets in retirement.

  • Reevaluate your marginal rate for municipal bonds. Many people have been in lower brackets for a few years in a post TCJA environment, which means that the after-tax benefit of municipal bonds has been lower relative to the after-tax benefit of other bond alternatives for many people. With potentially higher tax rates in 2021, discuss your expected marginal tax rate with your tax preparer and adjust your portfolio going forward. Also, the muni market may get a boast if there’s a favorable stimulus plan for issuers.

  • Evaluate the pros and cons of a COVID-19  related distributions (CRD). It may make sense to use the CARES Act provision for some people to take a distribution from their IRA o 401(k) without a 10% penalty. You can pay the taxes in tax year 2020 or spread the taxes out over three years. For high earners that had a very large dip in income in 2020, it may make sense to take a distribution in 2020 and then repay it back later to get a deduction in a higher bracket year.

Review the Basics and Tidy Up your Accounts

  • Review Health Savings Accounts (HSA) Contributions. You have until the April tax deadline to make an HSA contribution. If you don’t have an HSA, we’d strongly encourage you to explore if you’re eligible, given the account’s triple tax benefits.

  • Spend Flexible Savings Account (FSA) remaining balances. If you don’t use the money in the account by December 31st, you lose out on the opportunity to spend that money.    

  • Update your beneficiaries on your retirement accounts and insurance policies. Failing to update beneficiaries can be one of the biggest financial and estate planning blunders one can make. If there’s been a change in your circumstances, it’s important to address this. For wealthy families, it also make sense to begin thinking about your estate planning and the best way to transition your assets to the next generation during this time of year.

  • Make annual gifts to reduce the size of your estate. The annual gift tax exclusion is $15,000 for 2020. Also, given that the higher than normal exclusion for estate, gift, and generation-skipping taxes is set to expire in 2026, those with large estates might want to revisit their estate planning tax strategy with their estate attorney, CPA and financial planner. Moreover, estate planning and financial planning will change drastically if proposals to eliminate step up in basis at death are implemented. There are many wealth management techniques that families might consider like Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trust (SLAT), Charitable Lead Trusts (CLTs) and Intra-Family Loans that wealthy families should consider in 2020 that can be executed ahead of potential estate tax changes in 2021.

  • Check your tax withholding. As the year comes to a close, you might want to check with your CPA or the IRS Online Withholding Estimator to see if you’re on track with your payroll withholding. If you didn’t withhold enough throughout the year from your paycheck, you could be subject to an underpayment penalty.


Execute your Charitable Gifting Strategy

  • Donate to a Donor Advised Fund (DAF). If you oscillate between taking the standard deduction and itemizing in most years, you may want to consider donating to a donor-advised fund (DAF) in 2020 the next several years of expected charitable contributions. The DAF will let you make the contributions to the charity over time, but you can take the deduction immediately.

  • Choose how you fund charitable gifts wisely. If you’re making a charitable contribution, it’s preferable tax-wise to donate low basis stock to a charity or donor-advised fund as opposed to selling positions and giving cash. For those with significant charitable intention, the CARES Act allows contributions of up to 100% of cash contributions to charity up to adjusted gross income (AGI) in 2020. Planning the timing of contributions between 2020 and 2021 is tricky though given tax uncertainty. It might make sense to delay contributions in some cases to 2021 to maximize the deduction under likely higher tax rates, while it may make sense to accelerate contributions given draft proposals to limit itemized deduction in 2021.

  • Consider a Qualified Charitable Distribution (QCD). Another way to minimize your tax burden for those that may not be able to itemize anymore and are over 70.5, is to take a QCD, which is a direct distribution under $100,000 from an IRA to a charity. The QCD counts toward the RMD if you are over 72 and reduces the tax burden of your distribution. Moreover, the QCD can lower the impact of how much your Social Security benefit is taxed.

Be Mindful of Age Milestones

  • Over 50:  You are now eligible to take a “catch-up contribution” to your IRAs and some qualified plans (401K, etc.).

  • Over 55:  You are now eligible to take certain types of distributions from your old 401Ks without penalty.

  • Over 59.5:  You are now eligible to take an IRA distribution without a 10% penalty.

  • Over 65: You are now eligible for Medicare. If you sign up late, you could face a 10% penalty.

  • Over 72:  Required minimum distributions (RMDs) on your IRA accounts are waived in 2020 due to the CARES Act. Although, you may still want to take an RMD to lower your IRA balance, which will lower RMDs going forward. In future years, there’s a massive 50% penalty if you fail to take the RMD.

Open New Accounts for your Children or Grandchildren to Maximize Savings

  • Open Roth IRA or traditional IRA accounts for children or grandchildren who have had earned income. Child IRA assets are non-assessable in the FAFSA for student aid eligibility. You don’t necessarily have to put the money they’ve earned into the Roth IRA or IRA, you can let them spend the money they’ve made and then redirect other money that’s going toward college savings into a Roth IRA.

  • Consider 529 contributions for your children, grandchildren or yourself. If you already have children, opening a 529 is simply a must to begin saving for those college years. People without children can also open 529s for themselves and change the beneficiary once they have children. This maximizes the amount of time of tax-free compounding in the accounts. 529 accounts under the TCJA can now also be used for secondary school expenses, which makes them even more valuable for parents with kids in private school.

Year-end tax planning in 2020 is a huge opportunity to take advantage of any of the above strategies that match your current financial situation. If one of the above strategies applies and you fail to implement you could be leaving thousands of dollars on the table that you will never get back. You may have noticed that although the strategies above are generally easy to understand if they apply to your situation, they may not be simple to implement on your own. Be sure to work closely with your financial planner or CPA to avoid making a planning mistake.

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