2020 Financial Planning Tips, Year-End and Beyond

2020 Financial Planning Tips, Year-End and Beyond

2020 has been a very challenging year, to say the least. We are in the midst of a global pandemic, we just went through one of the most contentious presidential elections in recent memory, and there has been tremendous economic and stock market uncertainty all year. While so many of these events are beyond our control, there are critical things in our lives that we can control. One of these things is our personal finances. Large-scale, global events like the pandemic can cause us to reexamine what is important to us. As we head into 2021, take some time to review your financial planning 2020 goals and retirement planning. Make sure your goals are still in alignment with your core values, and if they are not, make changes accordingly.

Cash Management

Be smart about the debt you carry. Try to pay off high interest debt as quickly as you can and only use credit cards to earn rewards, with the intent of paying the balance off every month. Once that priority is met, make sure you have between 6 and 9 months of living needs in emergency savings. If something unexpected comes up, it is much better to have liquid cash available to pay for it rather than having to resort to using a credit card or selling investments that are intended for retirement while the market might be down.

With interest rates at historic lows, it may be a good time to refinance your mortgage. Reducing your interest rate by 1 or 2 percent can have a dramatic impact on your monthly budget. Refinancing your loan may also provide you an opportunity to switch to a more favorable 15-year fixed rate from a higher 30-year loan rate.

Manage your Investments

Do your investments need fine-tuning? The stock market has endured a lot of volatility in 2020, so it is a good time to look at your current account balances and make adjustments if needed. Invest your assets with specific targets allocated to stocks and bonds–60% stocks / 40% bonds, for example. After a period of market growth or decline, your portfolio will drift out of balance. Take advantage of this by selling the assets that have done well and are up, and buying the ones that are down. Doing this over long periods of time ensures that you are buying investments at relative lows and selling at relative highs. Also, mutual fund companies tend to make their required annual earnings distributions in December. It is a good idea to invest the excess cash from the fund distributions rather than letting the cash sit idle not working for you.

Minimize your taxes

Fund your tax-deferred retirement accounts to the greatest extent possible. This will not only provide you more financial security in retirement but has the added bonus of reducing your taxable income for the year. If you have a health savings account, consider maxing out contributions to that as well (currently $3,550 for individuals, $7,100 for families, and an additional $1,000 for individuals age 55+), as these contributions are also tax-deductible.

Did you get a raise or receive a bonus this year? Rather than spending it now, consider increasing your retirement savings instead. Delayed consumption may not seem as fun, but you will be grateful when you reach retirement and you have more money to spend then. Did you turn 50 this year? If so, consider taking advantage of the catch-up provision. Employees aged 50 and over can defer an additional $6,500 to their 401(k), 403(b) or 457 plan in 2020, above the $19,500 limit. IRA contributors aged 50 and over can save an additional $1,000 above the $6,000 limit.

If you have a retirement account that normally requires you to distribute a minimum annual amount (IRA and you are 72 or older or Inherited IRA, for example), you are exempt from this requirement in 2020, as a result of The CARES Act passed by Congress in April. Avoiding this distribution will reduce your taxable income for 2020.

Make sure your investment portfolio is tax efficient. To the extent possible, hold your bonds and REITs in tax-deferred retirement accounts. These two asset classes generate more income than other asset classes. Income generated in tax-deferred accounts is not taxed until withdrawal, and you may be in a lower tax bracket then. Also, if you need cash from your investments, review the amount of taxable income you expect to receive this year. If you expect to receive less income next year, consider delaying the sale of investments and deferring recognition of capital gains until early 2021.

Look for tax-loss harvesting opportunities. If any of your mutual funds have significant unrealized losses, consider selling the fund and using the proceeds to replace it with a very similar fund. This does not have any adverse effects on your portfolio but allows you to book the capital loss and use it later to offset future capital gains.

Other Things to Consider

According to a caring.com survey, 6 out of 10 American adults do not have a will. While it may not seem like a pressing matter now, your heirs will be very grateful to you for making your wishes clear in advance. This applies not only to your assets and possessions but also to your medical directives in the event you become incapacitated. Coping with the loss of a loved one is hard enough, without the added challenge of trying to settle an estate without a will. Make revisions if your life circumstances have changed since the original will was drafted. Also, look at your IRAs, 401(k)s, and insurance policies and make sure your designated beneficiaries are up to date.

If you have a 529 account, remember that 529 distributions must be made in the same year that the qualified education expenses are incurred. Families should pay attention to spring semester tuition bills. Spring semester typically begins in January, but colleges might send the bill in December (of the previous tax year). If a family receives a spring semester tuition bill in December, they may take a qualified 529 plan distribution in December to pay the tuition bill. If they wait until January (the next tax year) to pay the tuition, they should wait until January to withdraw funds from their 529 plan. Also, if you used 529 funds to pay for room and board or tuition in 2020, and received a Covid-related refund for these expenses, the IRS requires that you put the money back.

Check your credit report. With the ongoing threat of identity theft, it is critical to review your credit at least every 12 months to make sure nobody has stolen your personal information and used it to open a credit card or take out a loan.

Now that you have reviewed your finances for 2020, start thinking about next year! Now is not only a good time to address the above topics, but also to set your goals for 2021. While circumstances can always change, it is much better to be proactive now and revise an existing plan if necessary, than to come up with a plan at the last minute. We are always here to help you with these topics and any other financial planning 2020 questions that you and your family may have.

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About Author

Scott Adair, CFP®

Your wealth management goals are in good hands. Scott Adair hones in on your investment strategies and comes up with a plan that works for you. Scott is an Investment Advisor Representative and Certified Financial Planner (CFP®). His advice is tailored to each individual client.

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