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business man leaning over counter writing on a document with a pen - Financial Planning Checklist blog

2021 Year-End Financial Planning Checklist

November 16, 2021

Now is the time to consider some year-end strategies and to plan for the year ahead. Because everyone’s financial situation is unique and because this is not a comprehensive list of all tax-related strategies, please consult your tax advisor for guidance concerning your specific tax situation. 

By December 31st, 2021:

Maximize contributions to tax-advantaged accounts, including catch-up contributions. Consider maximizing your 401(k) contributions and your IRA contributions, including catch-up contributions, before the end of the year to maximize tax savings. Note that you have until tax day of the following year to establish and/or contribute to an IRA for the prior tax year, but contributions to 401(k)s and other qualified plans must be made by December 31st.

Take Your Required Minimum Distributions (“RMDs”). If you are 72 or older (or if you reached 70 ½ years of age in 2019), you are required by the IRS to take a Required Minimum Distribution (RMD) from certain retirement accounts prior to December 31st. The penalty for not taking your RMD is high – 50% of the sum you failed to withdraw. If you turned 72 this year, you have until April 1st of the following year to take your first RMD without penalty. That said, deferring your first RMD will mean taking two distributions in one year, which could bump you into a higher tax bracket than expected.

  • If you do not need the funds for living expenses, consider making a Qualified Charitable Distribution (“QCD” – see Charitable Giving section below). QCDs can be counted toward satisfying your RMD for the year, and the amount is excluded from your taxable income. QCDs have very specific requirements, so consult your tax advisor for more information prior to distributing funds.

Did you inherit an IRA this year or the prior year? Many of the rules for RMDs still apply. In addition, there may be rules based on your relationship to the deceased original owner.  The rules for RMDs for an inherited IRA fall under 3 categories, depending on the beneficiary: spouses, non-spouses, and entities (e.g., trusts, estates, or charities). Contact your tax advisor for more information.

  • Many institutions, including First Western Trust, have internal processing deadlines to ensure that RMDs are processed prior to year-end. If your IRA is managed by First Western Trust, signed paperwork must be received and submitted by [December 17, 2021] in order to ensure timely processing of your RMD. If your IRA is held at another institution, be sure to contact that institution regarding its own internal processing deadlines. 

Consider a Partial or Full Roth Conversion. A partial or full conversion of your Traditional IRA to a Roth IRA may make sense depending on many factors, including your current and expected future tax rates, the costs of conversion and how you expect to pay for those costs, and how long you have until retirement and/or how long before you will need to access the funds. Keep in mind that Roth conversions are permanent and whether a Roth conversion is right for your particular situation involves consideration of a number of complex factors. Any evaluation of a potential Roth conversion should include input from your tax advisor, as well as your financial advisor. 

Spend Flexible Savings Account (“FSA”) dollars. Unused funds in FSAs are typically forfeited at year-end, so be sure to use the funds for eligible health and medical expenses by December 31st. Some plans may not follow the calendar year, so check with your employer to confirm your plan’s deadlines.

Contribute to a 529 Plan. In most states, contributions must be made before the end of the year in order to take advantage of any state income tax benefits or to be eligible for the federal gift-tax exclusion. Each state’s 529 plan may vary; contact your 529 plan administrator for specific information regarding your plan. If you make monetary gifts to grandchildren or others who are beneficiaries of a 529 plan, contributions to 529 plans may qualify for the annual federal gift tax exclusion (see “Annual Gifting” below). You may also consider front-loading a 529 plan by utilizing a special 5-year gift tax election whereby you can make a lump-sum contribution in one year of up to 5 times the annual gift tax exclusion ($75,000 in 2021) and your contribution will be treated as if you’d made a $15,000 gift for each year over a five-year period. Consult your tax advisor and your plan administrator for more details.

Offset Capital Gains by Harvesting Losses. Capital losses realized prior to December 31st can be used to offset realized gains. Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any future tax year, indefinitely, until exhausted.

Adjust your W-2 Withholding if Necessary. Verify that your W-2 withholding has been sufficient to avoid being unexpectedly over or under-withheld this year. Contact your tax advisor or you can also use the withholding calculator on the IRS website for more information (https://www.irs.gov/individuals/irs-withholding-calculator).

Charitable Giving. Be sure to make all charitable donations prior to December 31st. There are strategies, such as bunching charitable donations in alternating years, that may allow you to itemize and make the most of your charitable donations in alternate years. Be sure to speak with your tax advisor to see how this strategy might affect your particular tax situation. 

  • Also consider donating appreciated securities rather than cash to reduce capital gains in your portfolio. If you would like to make an in-kind donation of securities managed by First Western Trust, signed paperwork must be received and submitted by [December 1, 2021], in order to ensure timely processing of your in-kind charitable donation. If the assets you wish to donate are held outside of First Western Trust, be sure to contact that institution regarding its own internal processing deadlines for in-kind charitable donations. 

Annual Gifting. The annual gift tax exclusion in 2021 is $15,000 per year, per person, and you can gift up to this amount to as many people as you like without having to file a gift tax return. If you’re married, that means that you and your spouse can each gift $15,000 to any one recipient. 


By Tax Day 2022:

Maximize Contributions to Health Savings Account (HSA). If you are eligible to contribute to HSA, you should maximize your annual contribution (annual contribution limits are set by the IRS) and take advantage of the catch-up contribution if you are 55 or older. Unlike FSA funds, these funds are not “use it or lose it” each year. Similar to IRAs, you may make prior-year contributions through tax day of the following year. 

Establish and/or Contribute to an IRA. You have until tax day of the following year to maximize your IRA contributions for the prior year. If you’re planning on making a contribution for the current year, you should consider making that contribution as early as possible (rather than on the last date possible) to maximize that contribution’s time invested.


Annually or As Needed

Update Estate Planning Documents as Needed. At a minimum, you should review your estate plan every 3-5 years and more often if there have been any major life changes or major changes in tax laws. The estate plan that you executed years ago may now lead to unexpected tax consequences, and it’s a good time to revisit and revise your plan with your estate planning attorney to ensure that your estate plan works in conjunction with current law. 

Use of the Lifetime Estate and Gift Tax Exclusion. This is the total amount you can give away tax-free over the course of your lifetime. The federal estate, gift, and generation-skipping transfer (GST) tax exemption is currently $11.7 million per person in 2021 ($23.4 million for a married couple). This exemption amount is set to expire at the end of 2025 unless Congress acts to change existing tax laws. If this exemption amount does expire, it will revert back to $5 million (as adjusted for inflation). For those with taxable estates, it would be wise to visit with your estate planning attorney and tax advisor to discuss strategies that may be used to take advantage of the higher exemption before it sunsets on December 31, 2025 (or possibly sooner, depending on whether any changes are made to current tax laws).

Update Beneficiary Designations as Needed. Make sure your beneficiary designations are still in line with your estate plan. It is especially important to make sure you update your beneficiary designations after a major life event, such as a spouse’s death, a divorce, or the birth or adoption of a new child or grandchild.

Discuss Major Life Events with Your Financial Advisor. It’s a good time to discuss any major life events with your financial advisors to address any financial planning issues that may arise. This can include things like family changes, a change in your job or employment status, moving to a new state, and any significant expenses/inflows that you expect in the coming year (real estate purchases, tuition payments, a sale of a business, etc.) that may affect your investment portfolio. Generally, it’s also a good time to revisit your financial plan to reassess your risk tolerance, investment allocation, and retirement goals to ensure that your investment portfolio is still appropriate for your situation. 

Revisit W-2 Withholding. If you expect a significant change in your income or your tax liability for the coming year, you should verify that your W-2 withholding will be adequate. Contact your tax advisor or you can also use the withholding calculator on the IRS website for more information (https://www.irs.gov/individuals/irs-withholding-calculator).

Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank, and may go down in value. This information is not legal, investment, accounting or tax advice and is for informational purposes only. Readers should not rely on this information as a substitute for their own research or for obtaining legal, accounting or tax advice from their own counsel. Information is current as of October 13, 2021 and is subject to change without notice.

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