As we approach year-end, there are a few things you need to tend to financially before you launch into full holiday season mode. Before we say goodbye to 2021 it’s time to assess the year and outline what you want 2022 to look like. Here’s our top 5 areas to review before year end to make sure you are on track.
Now if your investments are held inside a retirement account, you can ignore this topic all together as your retirement withdrawals will be taxed as ordinary income down the road when you withdraw, except for Roth IRAs and Roth 401(k)s, which are withdrawn tax-free.
Year End Checklist
- If you’re 70 or older, your required distribution: you must take a prescribed amount out of your tax-sheltered retirement accounts — IRAs, 401(k)s, 403(b)s and other specialty retirement plans. Do that now — before year-end. It might be easy to forget because in 2020, there was no RMD. But now you must take an RMD for 2021.
You can take the money from one or several of your accounts, but the total required is based on the value of ALL your retirement accounts as of last year-end (2020). The amount of your RMD can be easily calculated by any one of your plan custodians if you give them the total value of ALL your accounts.
- Year-end profits: If you own stocks or other assets outside of your retirement accounts, you might want to sell and take profits. It’s still uncertain whether Congress will increase capital gains tax rates in the next legislative session. Current tax rates are near modern historic lows. Long-term capital gains rates apply to investments held longer than one year. Gains on stocks held less than a year before sale are taxed as ordinary income.
Now is the time to decide if you want to take some gains — and to minimize the taxes by selling any losers you might have. You can offset capital gains and losses, both short term and long term, to save on taxes. But you can only deduct $3,000 of capital losses against ordinary income. **Don’t think you can take a loss for tax purposes and then buy the stock back right away, or even a few days later in the new year. You’ll be caught in the “wash sale” rule if you repurchase that stock within 31 days. And your loss will be disallowed.
- Organize year-end statements: If you are scrambling for year-end balances from last year in order to calculate your RMD for this year, now is the time to set up a paper filing system to collect the year-end statements that will arrive in January. And if you’ve gone paperless, just make a list of year-end online balances in all your retirement accounts to make it easier next year at this time.
- Reconsider your debt: According to CreditCards.com, the average interest rate on credit cards is 16.4%. And many people are paying 21% or higher — especially if they are trapped with big balances. Can you stop yourself from charging more now and then pay double the minimum every month? That would considerably shorten the 30-plus-year time period it will take to pay off the balance using only the minimum — and save a fortune in interest.
- Contributions: Consider making a charitable contribution right now. The higher standard deduction of $12,550 in 2021, along with limited deductions for state and local taxes, means most people aren’t searching for tax deductions. But charities still need your help. Check out good causes at CharityNavigator.com, and help those who worry more about food and shelter than tax deduction and retirement distributions.
It’s the best way to show gratitude for your good fortune.
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Source: Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.”