Year-End Financial Checklist: 10 Money Tasks to Complete by December 31st
What should you include on your year-end financial checklist? Here are 10 money tasks to complete before the new year.
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With the year quickly drawing to a close, this is a great time to take a holistic look at your financial health. There are also several time-sensitive money tasks that you may want to complete before it's too late.
Below, we list 10 financial tasks to accomplish by December 31st. Many of the items on this list can save you money when you file your taxes. Others will simply help you gain more control of your financial life as you enter a new year. Here's the list.
1. Max out your retirement account contributions
If you have a tax-deferred retirement account such as a 401(k) or Traditional IRA, every dollar that you contribute to your plan this year up to your annual limit will be deducted from your taxable income.
So if you have the money available in your budget to max out these plans, it's to your advantage to do so. Not only will it help you reach your future retirement savings goals faster, but it will reduce your current-year tax bill.
Note that current-year tax deductions don't apply to Roth IRA or Roth 401k contributions. But you should still max out these plans if you can since they grow tax-free and you won't pay any taxes on qualified withdrawals in retirement either.
For 2021, you can contribute up to $19,500 ($26,000 for those who are age 50 or older) to a 401(k) plan. The 2021 contribution limit for IRAs is lower at $6,000 ($7,000 for those who are age 50 or older).
The deadline to contribute to a 401(k) is generally December 31st or the last paycheck of the year. But if you have an IRA, the IRS will allow you to make contributions up until Tax Day of the following calendar year (April 15, 2022 for the 2021 tax year).
Related: What's the Difference Between a Roth IRA and a Traditional IRA?
2. Estimate and adjust your tax withholdings
Did you have a big life change this year such as getting married, welcoming a new child into your family, or buying a home? If so, you may want to use the IRS Tax Withholding Estimator to make sure that the amount of taxes you're having withheld from your paycheck is accurate.
In some cases, you may need to increase your withholdings to avoid owing the IRS back taxes at the end of the year. But in other cases, you may find that your tax burden has gone down. In these latter cases, you may want to reduce your tax withholding.
The overall goal is to get your tax refund amount as close to zero as possible. That way you can steer clear of costly tax penalties while also maximizing your tax-home pay so that you're not giving the IRS a hefty zero-interest loan until you file your tax return.
3. Spend any unused FSA funds
Flexible Spending Accounts (FSAs) are employer-sponsored accounts that allow you to put up to $2,750 of money in per year to help pay for certain medical expenses. Employees aren't taxed on any contributions they make to their FSA accounts.
All of that might sound a lot like a health savings account (HSA). And, indeed, these accounts do share many similarities. However, FSAs are different from HSAs in that you generally will lose any money remaining in the account at the end of the year.
In some cases, your employer may offer a grace period up to 2 ½ months for the money to be spent or allow up to $550 of the leftover funds to carry over to next year. But your employer isn't required to offer either of these options.
If you have unused FSA funds that you need to spend before the end of the year, consider preventative healthcare services. For example, this could be a great time to schedule a physical, cancer screening, eye appointment, or teeth cleaning.
4. Check for tax-loss harvesting opportunities
It's never fun to discover that some of your stock market investments have lost value during the year. But did you know that selling these investments to realize their capital losses can reduce your tax bill by offsetting some or all of your realized capital gains?
But it gets better. If your capital losses are greater than your gains, you can use the amount leftover to offset up to $3,000 of your ordinary taxable income. And if you still have any capital losses leftover, they can be rolled over to offset income in future years.
Note that the “wash sale rule” prevents you from buying a "substantially identical" security within 30 days before or after the sale of a security if you intend to harvest the losses. There are ways to avoid the wash sale rule, though, without having to hold cash for 30 days.
Tax-loss harvesting can be a bit complicated for the average investor. For this reason, you may want to schedule an appointment with a fee-only financial advisor before the new year. A financial professional can give you advice on how to harvest your losses without running against the wash sale rule or generating short-term capital gains.
Related: How to Succeed At Investing: 5 Tried-And-True Tips
5. Consider a backdoor Roth conversion
Unlike Traditional IRAs, withdrawals from Roth IRAs in retirement are tax-free. Many investors find this benefit to be especially attractive. But due to the income limits that are set by the IRS, many high-income earners aren't able to contribute to a Roth IRA.
For 2021, single taxpayers must have incomes below $140,000 to contribute to a Roth IRA. The income limit for those who are married and file jointly, meanwhile, is $208,000.
But high-income earners may be able to still benefit through the use of a backdoor Roth conversion. To conduct a backdoor Roth, you'll need to contribute money to a non-deductible Traditional IRA and then later convert it to a Roth IRA.
It's important that the original contribution is made to a non-deductible Traditional IRA so that you don't have to pay income taxes on converted contributions. However, converted earnings will be subject to tax.
There's technically no deadline for a backdoor Roth conversion. But completing it within the same calendar year and tax year can make it easier to report on your tax return. Plus, the sooner you execute the conversion, the less time you'll have for taxable earnings to accrue and compound.
6. Donate to charitable causes
In the past, only itemizers could deduct charitable contributions from their taxable income. But for the 2021 tax year, the IRS has expanded charity benefits to allow non-itemizers (i.e. those who take the standard deduction) to benefit as well.
In 2021, single filers are able to deduct up to $300 of cash contributions made to qualifying charities. And the maximum benefit is twice as high, at $600, for married couples who file jointly.
There's additional benefits for itemizers as well. Typically, the IRS limits your deduction of charitable contributions to 20% to 60% of adjusted gross income (AGI). But for 2021, charitable contributions can be used to deduct up to 100% of your AGI.
Note that unlike IRA contributions, you don't have until Tax Day to make tax-deductible charitable contributions. To be claimed on your 2021 tax return, the donations must be made before midnight December 31, 2021.
7. Enroll in a health insurance plan
Healthcare.gov's Open Enrollment Period for 2022 runs from November 1, 2021 to January 15, 2022.
If you miss the January 15th deadline, you won't be able to use the Health Insurance Marketplace® to get 2022 coverage unless you have a life event that qualifies you for a Special Enrollment Period. It should also be noted that if you want your coverage to start on January 1, 2022, you'll need to enroll even earlier, by December 15, 2021.
Even going a few days or weeks without health insurance is risky as medical emergencies can happen at any time, so don't procrastinate on this one. If you plan to purchase a Marketplace policy, do so as soon as possible so that you don't accidentally forget to enroll once the hustle and bustle of the holiday season kicks into full gear.
8. Check your credit reports and FICO® Scores
The end of the year can be a great time to perform a checkup on your credit standing. You can check your Equifax, TransUnion, and Experian credit reports for free once every 12 months AnnualCreditReport.com.
While AnnualCreditReport.com is great for viewing your credit reports, it can't show you your FICO® Scores. With myFICO you can see both your credit reports and FICO® Scores in addition to your industry-specific scores for mortgages, auto loans, and more.
Note that if you find any errors on your credit reports, you can dispute them and request their removal. Learn how.
9. Take your retirement plan RMDs (if required)
As a general rule, you must begin taking required minimum distributions (RMDs) from Traditional IRAs and employer-sponsored retirement plans in the year that you turn 72.
If you just turned 72 this year, you have till April 1 of next year to take your first RMD. But if you're 73 or older, December 31st is your deadline. This means that if you wait till April 1 of next year to take your first RMD, you'll need to take another one by December 31 of that same year.
It's imperative that you don't miss these deadlines. If you fail to take your full RMD by your required deadline, a brutal 50% tax penalty could be levied on the amount that's not withdrawn.
Note that RMDs aren't required for Roth IRAs. Also, if you're still working and don't own at least at 5% of the company that you work for, you may be able to delay RMDs from your employer-sponsored retirement plan until after you retire.
10. Set financial goals for next year
Once you've checked off all of the above items, now comes the fun part. Pick a night to sit back with a cup of coffee or glass of wine and think through what you hope to accomplish financially in the coming year.
First, set debt reduction and spending goals. If you have high-interest debt (such as credit card debt), write down how much you'd like to see it reduced within the next 12 months. And if you know that you'll have a few big expenses during the year, make plans to save for these a little each month so that you don't have to increase your debt load to pay for them.
Second, create saving and investing goals. If you haven't already built up your emergency fund, that's a great place to start. Or if you're looking to invest more, consider raising your weekly (or monthly) contributions by 1% to 5%
Finally, create a budget that will allow you to work towards those macro goals throughout the year. By clearly setting your course now, you'll increase your chances of achieving meaningful financial progress next year and beyond.
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