By Brad Sanders, CFP®, CRPC®
Mike Tyson famously said, “Everyone has a plan ‘till they get punched in the mouth.” I’ll speak for everyone when I say that 2020 has packed quite a punch to life as we know it. We have seen significant disruptions to our daily lives, so the idea of planning ahead might seem like a futile exercise.
As a financial planner, I strenuously object to that notion and would like to offer some suggestions to consider before the end of the year as we look forward to 2021. Keep in mind that you should consult your tax and legal advisors as you implement updates to your financial plan.
- Decide to Itemize (or Not to Itemize)
The standard deduction is now up to $12,400 for single filers and $24,800 for married filers, so it makes sense to check with your tax professional to see if it may make sense to itemize your deductions and plan accordingly before the end of the year.
- Review Your Asset Location
Where you own investments can have a big impact on your after-tax returns. Generally speaking, it makes sense to own equities for longer-term growth in Roth and taxable accounts due to the long-term growth potential and tax-advantaged income equities offer. You can also consider owning taxable bonds in tax-deferred accounts so you can shelter the income they pay that would otherwise be taxed at ordinary income rates.
It may make sense to own mutual funds that pay capital gain distributions in deferred accounts and more tax-efficient vehicles, like stocks and ETFs in taxable accounts.
- Consider Tax Loss Harvesting
Has the volatile market given you any opportunities to realize losses in your portfolio prior to the end of the year? This strategy can be useful to help offset capital gains and realign your investment strategy going into the new year.
- Think About Gifting
Depending on your tax situation, does it make sense to donate appreciated securities or cash before the end of the year to a qualified charity? Since the standard deduction is relatively high, you can consider making additional gifts this tax year and plan to use the standard deduction in future years where you don’t itemize.
- Look Into Relief for RMDs
In 2020, the CARES Act allowed for a reprieve from Required Minimum Distributions from retirement accounts for those who are 72 and older. Going forward, keep in mind that you can make Qualified Charitable Distributions if you are over 70½, and that amount can count toward your annual RMD. Look ahead to see if it makes sense to donate to charity from your IRA, and plan accordingly for additional funds that you may receive as income from your RMD in 2021.
- Think About Upping Retirement Plan Contributions
Remember, individuals can contribute up to $19,500 to 401(k) plans (plus an additional $6,500 for participants age 50 and older). The IRS recently confirmed that the same contribution limits apply for 2021, so you can begin planning ahead to maximize your retirement contributions for next year. Similarly, the Traditional IRA and Roth IRA contribution limits will remain the same in 2021 ($6,000 with an additional $1,000 for taxpayers 50 and older).
- Go Over Your Health Savings Account (HSA) Funding
If you are eligible, have you funded your HSA for 2020? Individuals can contribute up to $3,550, and families can contribute $7,100 for 2020. Participants 55 and older can contribute an additional $1,000. Keep in mind that these accounts can be a great asset for a retirement plan as they offer tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualifying expenses.
They also allow individuals to reimburse themselves tax-free in the future for qualifying medical expenses they pay out of pocket. Save those receipts!
Take the aforementioned steps as food for thought. There is no substitute for sitting down with your advisor and developing a comprehensive financial plan. Having a solid plan in place will help you roll with the punches for years to come!
Each individual’s situation is unique. The information is presented for educational purposes. Consult a financial professional before taking action.
Brad Sanders has been a lifelong resident of Central PA. He began in the financial services industry in 2007. Prior to that, he attended St. Vincent College in Latrobe, PA where he was also a member of the baseball team. He earned his Certified Financial Planner™ certification in 2012 and his Chartered Retirement Planning Counselor℠ designation in 2013.