2021 Financial Planning Tips, Year-End and Beyond

2021 Financial Planning Tips, Year-End and Beyond

While 2021 was certainly a challenging year for many of us, we currently find ourselves in a better environment than a year ago, at least in terms of the pandemic. Hopefully, we can all look forward to a more normal, festive holiday season together with our families and friends. As we approach the end of 2021, be sure to take time to review your financial goals and make sure you are on track to meet them. While we cannot personally control things like inflation or the stock market or other current events, it is important that we remind ourselves to focus on what we can control financially.

Cash Management

Be intentional 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 off the balance every month. Once that priority is met, make sure you have between 6 to 9 months of living needs in emergency savings. If something unexpected comes up, it is much better to have liquid cash available to cover it rather than having to sell investments while the market may be down, or having to use a high-interest credit card.

Speaking of interest rates, they are still at historic lows (for now), so it may be a good time to refinance your mortgage. Reducing your mortgage 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 Investment Portfolio

The stock market is at an all-time high. Do your investments need attention? It is a good idea to invest your assets with specific targets allocated to stocks and bonds–70% stocks / 30% bonds, for example. After a period of market growth or declines, your portfolio can 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. Try to invest the cash from the fund distributions and put your money to work, so you can enjoy any potential market gains.

Tax Planning Strategies

You may have read about possible significant tax legislation working its way through Congress. Although an in-depth analysis is beyond the scope of this article, we will continue to monitor pending legislation and will post articles on our website as tax law changes become more clear. It seems likely that many of the changes will affect high-income folks (income > $400,000), so if this applies to you, talk to your financial advisor or CPA about any potential planning opportunities. There has also been a discussion of lowering the current estate tax exemption amount. The amount is currently $11.7M per person, and will automatically be cut approximately in half on 1/1/2026 if relevant legislation does not pass before then. It is never too late to start having a conversation about estate planning, so try not to put that off, especially if having a wealth transfer strategy is a high priority for you.

If you are considering buying an electric vehicle, you may want to consider pushing that into next year if possible. The electric vehicle tax credit might get bumped up from $7,500 to $12,500 as part of larger tax legislation, so you may get more bang for your buck buying an electric vehicle in 2022.

Contribute to your tax-deferred retirement accounts as much as you can. This will not only provide you with 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 (HSA), consider maxing out contributions to that too (starting in 2022, $3,650 for individuals, $7,300 for families, and an additional $1,000 for individuals age 55+), as these contributions are also tax-deductible. Once you turn age 65 and are on Medicare, you can also treat your HSA like a traditional IRA, and use the money for non-medical expenses.

If you get a raise or receive a bonus this year, reward yourself with something nice, but also consider increasing your retirement savings instead of spending all of it. 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 2022, above the new $20,500 deferral limit. IRA contributors aged 50 and over can save an additional $1,000 above the $6,000 limit.

Make sure your investment portfolio is tax efficient. To the extent possible, hold bonds and REITs in tax-deferred retirement accounts. Bonds and REITs generate more income than other asset classes. Income generated in tax-deferred accounts is not taxed until you take a distribution, at which point you may be in a lower tax bracket. 

Look for tax-loss harvesting opportunities. If any of your mutual funds have significant unrealized losses, consider selling them and using the proceeds to replace them 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.

IRA owners age 70 ½ or older with charitable intent can donate up to $100,000 a year to a qualified charity, directly from their IRA. Known as Qualified Charitable Distributions, these satisfy the Required Minimum Distribution (which now do not have to start until age 72), and the distribution is not included as taxable income.

Other Things to Consider

While it may not seem like a pressing matter now, it is very important for everyone to have a will in place. 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 to your will 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. The 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.

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 2021, start thinking about next year! Now is not only a good time to address the above topics, but also to set your goals for 2022. 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 questions that you and your family may have.

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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