2021 Year End Planning Ideas

As you think about year-end investment and tax planning, below are 8 ideas we think are worthy of consideration for all investors. Keep in mind, following blind “rules of thumb” isn’t always a good idea. Your situation is unique. Your income and investment situation is unique. Each year is unique. So careful consideration is warranted. 

1) Contribute to retirement funds where appropriate

The caveat here is not to follow the masses blindly and max out your deferred retirement accounts every year. If your income was particularly high this year, then fully funding a 401k or IRA may make sense. 401k and IRA contributions also make sense if you expect your future tax rate to be lower than today’s tax rate. However, most clients expect their income to grow and to pay more in taxes down the road. If this is the case, paying taxes now and investing through a traditional account may net you more assets long-term. Regardless of your tax situation, make sure to fully leverage the employer match in your 401k or 403b plan, it’s the closest thing to free money in economics! Business owners can get in on the retirement account game as well with SEP-IRAs and Solo-401ks. And don’t forget about your team. Creating a retirement plan for your business may be a competitive advantage in what is proving to be a competitive talent market.

2) Rebalance

Yes, the boring stuff works. After a year of considerable equity returns, ensuring your portfolio remains within your long-term asset allocation targets is essential. Markets may continue to rise, or they may revert to the mean. Either way, out-of-line equity exposure means you are taking more risk than you expect, which can have undesirable consequences if a correction occurs. Also, rebalancing is a great way to “sell high and buy low” in a disciplined way, without trying to time the market.

3) Consider a ROTH Conversion

ROTH accounts are tax efficient because, after paying taxes now, assets grow and can be withdrawn tax-free. Generally, ROTH IRAs and 401ks are the most tax efficient retirement accounts available. As a result, they have strict income limits, making it difficult to contribute annually. This is what makes conversions so valuable. However, congress considered eliminating the provision to convert traditional 401ks and IRAs to ROTH accounts in the “Reconciliation Bill,” but that bill was not passed and remains undecided. Consider taking advantage of a conversion now while this strategy is available and tax rates are stable.

4) Contribute to 529 Plans

If you have children, or really love someone else’s children, consider contributing to a 529 plan to save for college. Current year contributions are tax deductible on many state tax returns, including Alabama and Georgia. Unfortunately, Tennessee does not provide a tax deduction for contributions. Also, keep in mind that you can make “catch-up” contributions if you have older children.

5) Wait to buy mutual funds until after capital gains distributions

This is key, especially in a year with significant investment gains in the stock market and many investors looking to change strategies after high equity market returns. If you buy right before distributions are made, you may be on the hook for taxes on gains that you didn’t benefit from throughout the year.

6) If you own a business or are self-employed, review business entity structure

This is your LLC, C-Corp, S-Corp or sole proprietor set-up. This can be especially important if your business structure or income has changed dramatically during the pandemic.

7) Review unrealized capital gains

Typically, portfolios are tax-managed to reduce current year taxes by harvesting losses and deferring gains. However, current congressional proposals in the “Reconciliation Bill” call for higher income and capital gains tax rates. If those are enacted next year, rates may be higher going forward. Consider taking gains now vs. deferring to near-term into 2022 or 2023.

8) Consider charitable donations….from your IRA

If you are already retired, and over age 70½, your IRA is a great source of funds for charitable contributions. Qualified charitable distributions (QCDs) from your IRA count towards your required minimum distribution (RMD) and the income is deductible as a charitable contribution. This is a great way to minimize taxable income in retirement if you have other sources of funds outside your IRA. So spread a little holiday generosity for others…and for yourself knowing your tax bill may be lower for 2021.

If you have questions, or would like to discuss whether any of these strategies may be of benefit to you, we would be happy to schedule a call to discuss. There is still plenty of time before year-end for you to participate in a financial planning workshop to nail your 2021 tax strategy and start 2022 off strong.