Top 5 Year-End Financial To-Dos

December 11, 2020

Year-End Financial Review

As you prepare for the holidays with shopping lists and visits to the mall, we recommend that you take care of some financial things before the end of the year. To keep it simple, we have created a list of the top 5 year-end financial to-dos. Checking these items off your list will help you reduce taxable income and prepare for the new year.

1. Review Taxable Investments

If you have taxable investments that are not in a retirement account, it is important to review your gains and losses near the end of the year. Investment income in these accounts is taxed differently from your retirement accounts, and you can use your gains and losses to reduce taxable income.

If you sell an investment in a taxable account for more than your purchase price, this is called a capital gain. On the other hand, if you sell it for less, you have a capital loss. When you sell an investment, your gain or loss becomes “realized” and creates taxable income (or losses). For tax purposes, you can use your losses to offset gains and reduce taxes on investment income.

Now is a great time to review your taxable accounts for gains or losses. If you have investments that have performed well, consider selling some of your winners and using losses to reduce taxes on your gains. Alternatively, if you have some losers that have not performed well, sell enough of them to total $3,000 in losses. This is the maximum amount the IRS allows you to use to reduce ordinary taxable income. Taking advantage of this rule can save as much as $1,110 in taxes!

2. Make Charitable Donations

Retirement Savings

The end of the year is a great time to consider making or increasing your charitable donations. Due to the pandemic, many charities are struggling and need financial support. Gifts of cash or stock to qualified organizations can help those in need while reducing your taxable income. You can deduct your charitable donations from your income if you itemize your tax deductions. Even if you take the standard deduction, the CARES Act allows you to deduct up to $300 for cash contributions to qualifying organizations.

You can also make a charitable donation directly from your IRA with a Qualified Charitable Distribution (QCD). To do this, you must be at least 70 ½ years old. The funds must be paid directly from your IRA to the qualified charity, and the distribution must be made before December 31 to count for 2020. The QCD does not create taxable income like a normal IRA distribution since it is getting paid directly to a charity. The maximum annual distribution for a QCD is $100,000 for each tax filer, so a husband and wife can donate as much as $200,000 from their IRAs in one tax year! Accounts that are eligible for this are Traditional IRAs, Inherited IRAs, SEP IRAs (inactive plans only), and SIMPLE IRAs (inactive plans only).

3. Maximize 401(k) Contributions

Contributions to your 401(k) plan can reduce your taxable income and build your retirement savings. Your contributions for 2020 must be made by payroll deduction before December 31. The maximum allowable contribution for those under age 50 is $19,500. For those 50 and over, the maximum is increased by an additional $6,500 to reach $26,000.

Review your total 401(k) contributions for the year and consider increasing them for the last few payrolls. This will help you maximize the tax and retirement benefits of this savings vehicle. If you are not saving the maximum amount, consider increasing your contributions for 2021. The contribution limits are the same for 2021 as they are this year.

4. Required Minimum Distributions

Required Minimum Distributions

If you turned 70 ½ in 2019 or earlier, you are required to take a certain amount each year from your retirement accounts, known as Required Minimum Distributions (RMDs). Normally, you must take your RMDs before December 31, and you should review your retirement accounts to make sure you have taken them. If not, the IRS charges a hefty penalty. However, the CARES Act suspended all RMDs for 2020, so this is not an issue this year.

Unless Congress enacts a change for 2021, you should be prepared to take your RMDs next year. The amount will depend on your age and account balance as of December 31, 2020. If you take them monthly, contact your financial institution so they know to begin taking withdrawals in January. Or, if you don’t need all your RMDs, consider using some of them to make a charitable donation using a QCD (see #2). If you turn(ed) 70 ½ in 2020 or later, the SECURE Act changed the beginning age for RMDs to 72.

5. Set Financial Goals for 2021

This is a great time to begin planning for 2021. You should review your income and expenses for the year and create a budget. This will help you plan your spending and saving for next year. As you review your budget, it is important to set specific financial goals. Do you want to pay down debt in the coming year? Are you on track with your retirement savings? Maybe you have children and want to save for college. Whatever your goals, take the time to review your finances and create a plan.

Trinity Wealth Management

At Trinity Wealth Management, our team of fiduciary financial advisors can help you complete everything on your year-end financial to-do list. Contact us today for more information on what you should do to prepare for the next year financially. Let us help you start 2021 off on the right foot!

The commentary on this website reflects the personal opinions, viewpoints, and analyses of the Trinity Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Trinity Wealth Management, LLC or performance returns of any Trinity Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Trinity Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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