End-of-Year Financial Planning Strategies

The last quarter of the year is a good time to review your finances. These are some financial planning strategies to reduce taxes and prepare for the coming year.

As we begin the final quarter of 2021, there are three months left in the year for you utilize some financial planning strategies to maximize your wealth planning for the year. It’s also a good time to check off those planning items that you meant to get around to doing. The end of the year is much like Spring cleaning for your financial planning items. 

We’ve talked about a variety of topics over the year, and here is where they all come together. I’ve linked several additional articles and resources throughout this column – they’re there to go deeper on certain topics while keeping this article short and to the point. I hope you find them useful. 

Our firm helps the families we serve utilize many of these strategies effectively and timely, since they must be done before year-end in order to count towards the 2021 tax year. Three months may sound like plenty of time, but the holidays come up quickly, and many people are scheduling last-minute appointments with their advisors and accountants to accomplish their year-end business. Don’t wait until last minute and risk running out of time get deploy these strategies. 

Many involve using straightforward features and strategies available to you within the tax code. Need a refresher of how taxes impact federal employee retirees? Read our article here

Review Health Insurance Coverage 

Open season is right around the corner, making it the very next financial planning item on the agenda. If you missed my recent article about picking your FEHB plan, you can find it here. While many people choose to continue carrying their same health plan, it’s important to ensure that there hasn’t been a change in coverage, or that there isn’t another plan better suited for your needs. The linked article above covers FEHB plans more deeply and will be helpful when open season begins later this year. 

IRA/TSP Contributions 

If you’re still working, take a look at how much you’ve contributed into your TSP thus far this year. You can contribute up to $19,500 for 2021 if you’re under 50, and $26,000 if you’re 50 or older. If you’re not on track for maxing out your TSP for the year, you can accelerate your contributions from now until the end of the year to get as close as possible. The TSP is an incredible savings tool, and most people should do all they can to help maximize their results.

Earning outside income may also make you eligible for making an IRA contribution over and above your TSP investment during the year. Making an IRA contribution allows you to move more of your assets to future savings, which can help with savings self-discipline as well as tax reduction. Just be cautious of the income-limits for the deductibility of your IRA contributions. For people with access to a work-retirement (TSP/401k/403b/etc.), you may phase out of being allowed to deduct your Traditional IRA contribution. This doesn’t mean that you can’t contribute, it just means you may not be eligible for a deduction for that contribution. You can, however, move those non-deductible IRA contributions directly into a Roth IRA without paying taxes. This leads us to the next item.

Backdoor Roth contributions

Without going into detail about this strategy, a backdoor Roth IRA contribution is when you move non-deductible IRA dollars directly into a Roth IRA. Doing it correctly can allow you to put additional capital into the tax-free vehicle of a Roth. Take extreme caution when utilizing this strategy and make sure you include the proper professionals. There are a variety of tax laws surrounding this strategy that can be confusing, such as the pro-rata rule. If done properly, it’s a nice benefit that may be going away shortly, so take advantage of it while it’s still around this year. 

Tax-Loss Harvesting

As a refresher, tax-loss harvesting is a strategy that portfolio managers use to reduce the capital gains tax liabilities for having realized gains on winning investments. When rebalancing a taxable account, you can sell off specific positions within your portfolio that may not be doing as well while simultaneously realizing the winning investments, therefore offsetting your tax liability. 

Not every investment will perform brilliantly all the time. Using volatility strategically will allow you to maximize the potential for your portfolio. This is another strategy that should be consulted about with both your financial planner and accountant. It too has myriad laws and considerations surrounding its proper use but can be an extremely useful tool and help you save thousands in taxes. 

Justice Learned Hand once said, “…anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes…for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.”

For a more in-depth look at utilizing the tax-loss harvesting technique, check out this other article I wrote around this time last year. You can find it here

Charitable Donations

If you and your family are charitable, discussing your philanthropic desires with your financial professionals during the fourth quarter should be on your list. By the time the last few months of the year come around, you should have a pretty good idea of what your income will be, allowing you to plan your charitable donations appropriately. 

You may consider donating your appreciated stocks instead of donating cash. If you sell an appreciated asset inside a non-retirement account, you will owe capital gains taxes on the gain. Many charitable organizations accept donations of stock as well as cash. By donating your appreciated stock, you effectively remove that tax liability from being your responsibility. This helps fulfill your charitable desires as well as being strategically smart about your wealth. 

If you or your spouse have ever been compensated with stock options from the private sector, these too may be good investments with which to be charitable. There are greater complexities involved with stock options, so be sure you know how to navigate this if it applies to you. 

RMDs and QCDs

Next up is everyone’s favorite topic: Required Minimum Distributions (RMDs). If you are 72 years old (formally 70.5, changed by the SECURE Act), the IRS requires that you take a certain amount from your retirement accounts, forcing the realization of ordinary income on those dollars, and thus the tax liability for which they wish to collect. Remember, every dollar that leaves a non-Roth retirement account is considered taxable as ordinary income. 

It’s critical that you remember to take your RMDs prior to the end of the year. RMDs were waived last year due to the pandemic (CARES Act) but will resume as normal for this year. RMDs for 2021 are to be calculated as if the 2020 waiver did not occur, meaning there is no “make-up” RMD required.

If you are 72 years old and charitably inclined, then perhaps you may want to consider using a strategy called Qualified Charitable Distributions (QCDs). The concept is like the aforementioned stock donations in that you can accomplish two goals with one task. Certain qualified charities will allow you to make a distribution from your retirement account directly to the charity – meaning you cannot take possession of the distribution – thus effectively removing it from being counted as ordinary income on your taxes. The benefit is that the amount distributed directly to the qualified charities will also count towards your RMD for the year. This lets you do something good for the world while doing something good for yourself. 

Beneficiary Confirmations

The final quarter of the year is a good time for you to reflect on everything that happened during the year. Are there any new grandchildren to whom you wish to leave a part of your legacy? While children that aren’t of age can’t directly inherit, you’ll want to make sure you update your estate planning documents to allow them to benefit as you wish regardless of age.

If you purchased a new property or if there are changes in your family, you’ll want to ensure you let your estate attorney know to implement the appropriate changes necessary within your legal documents. Perhaps you went through a divorce this past year – you may wish to revisit the beneficiary designations on your investment accounts and insurance policies. 

Be Aware of Potential Law Changes 

There are currently many tax law changes being proposed. Don’t worry about reading the bill – we already did, and here’s the summary. The proposed changes may get rid of some of the strategies available to investors, so make sure you read up on anything that you’d like to utilize before the laws change.

Taking Action

Review your plan – what actions items did you promise yourselves you would do? Did you call that estate attorney that your financial planner gave you? Think about the strategies mentioned above and consider how each can help you maximize your financial position. Since many involve complex laws, ensure that you’re well-informed before making any decisions; mistakes can be costly to correct. 

Year end is the time to tie a bow on all your planning work, so next year you don’t have to start with a resolution of “not to procrastinate my planning”. Let us know how we can help you make a clean start for 2022. After all, it’s not just your money, it’s your future.

About the Author

Thiago Glieger, AIF®, ChFEBC℠ is a Director and advisor at RMG Advisors, a premier private wealth management firm in the Washington, DC metro area. As fiduciaries, he and his team have served federal employees for over 40 years by helping them grow, manage, and protect their wealth. Their program, The Fed Corner, produces content specifically designed to help federal employees make better financial decisions.