Wrapping Up 2021 Financial Planning

Financial planning may be far from mind heading into the most festive part of the year, but as we close the books on this one, there is little time left to tick off any incomplete items on your to-do list. Here are a few things to consider before you pop the champagne to toast the New Year!

Tying up loose (RMD) ends. Congress suspended required minimum distributions—RMDs—from retirement accounts in 2020 for some relief that year, but they are back on in 2021, with the rule changes in 2019’s SECURE Act fully phased in. Your 2021 RMD is your ending retirement account balance from 2020 divided by the typical life expectancy for someone of your age, according to the IRS. Note: Roth IRAs (funded with after-tax dollars) aren’t subject to RMDs, but Roth 401(k)s are. One thing to look forward to: The IRS will use new tables next year reflecting lengthening life expectancies—and reducing RMDs, which should give more of retirees’ savings longer to grow.

In any event, if you are age 72 or older and you haven’t taken your RMD yet, don’t forget! You could be in for a hefty penalty—50% of the RMD amount—if you don’t take it by December 31. Unless you turned 72 this year, that is, in which case you have until April 1, 2022 to take your 2021 RMD—a bit of a reprieve. But if you go that route, remember you will also need to take 2022’s RMD (using the new life expectancy table) before yearend—2 in ’22. Also note, if you inherited an IRA or 401(k) from an owner who died after 2019, non-spousal beneficiaries must take RMDs from it—even if younger than 72—and withdraw the full amount within 10 years, although the timing is up to you. This includes inherited Roth IRAs (but if the owner had it for at least five years, you won’t owe taxes on withdrawals).

A lesson in mutual (fund) appreciation. 2021 highlights some potential tax headaches you should probably be aware of if you own mutual funds in taxable accounts. After a strong year, many mutual fund investors redeemed their shares for a profit. Great for them! But not so much for the remaining fund holders, if the fund manager had to sell appreciated holdings to meet redemption requests. Whenever a fund realizes gains, it is required to distribute the proceeds among all shareholders, reducing the fund’s net asset value by the distributions’ amount. If you aren’t among those who sold the fund, these aren’t gains you realized, but a return of your money from the fund—that you nevertheless have to pay capital gains taxes on.

The lesson: For larger investors, there may be more tax-friendly ways to construct a well-diversified portfolio. Namely, with sufficient funds, you can buy stocks and own them directly, allowing you much greater control over when you realize capital gains—while still maintaining adequate diversification. Direct ownership also allows strategies like tax-loss harvesting—selling securities at a loss to offset realized gains from other positions—to minimize the tax consequences. We think this flexibility lets you redeploy funds to meet your individual financial goals and circumstances much more effectively.

The (tax) gift of giving. Speaking of lessening the sting come tax time, one pandemic tax break remains in effect until December 31: a deduction on cash donations to charities. Usually charitable tax breaks are available only to people who itemize their deductions rather than take the standard deduction (a lot of people nowadays, since 2017’s tax overhaul about doubled it). But Congress extended a 2020 CARES Act provision to 2021, allowing filers who claim the standard deduction to deduct charitable cash donations.

The deduction isn’t big: $300 for single-filers and $600 for joint. But it is easy to take advantage of—and help a charity of your choice. If interested, check out the IRS’s website to see which charitable organizations are eligible. Also, keep a record of your donation. If the receiving organization doesn’t send you written acknowledgement, ask for a receipt. For those who do itemize, the IRS offers another charitable tax break just for this year. If you are inclined to make a cash donation that is 100% of your adjusted gross income, the IRS allows a full deduction. Normally, it is limited to 60%. Time is running out, though, so if this seems like it makes sense for your situation, you may want to consult a tax professional sooner rather than later.

With that, in the spirit of giving, we wish you very happy holidays!