Your 2021 Year-End Checklist
By: Cameron Diehl, CFP®
Friends – This is now the fifth year I’ve written my annual year-end planning checklist (you can read previous versions here: 2020, 2019, 2018, 2017) and to some extent it feels like déjà vu – markets are again near all-time highs and we’re again wondering what future changes to the tax code may have in store.
And while future tax changes remain very much influx, as I wrote about last month, there can be opportunity in uncertainty and there are still steps we should consider every year.
With that said, I wanted to again share my annual reminders, with a few updates, but most importantly I want to urge anyone who is unsure about how these strategies impact their personal planning, to please reach out. I’m always happy to help and would hate for anyone to miss opportunities because we didn’t have a conversation in time.
- Plan for higher taxes – With the prospect of higher taxes in some cases going forward, many of the suggestions I wrote about last year still hold true, including selectively realizing gains before year-end, considering Roth conversions and revisiting municipal bonds for tax-free income.
- Assess Your Tax Efficiency – If you own mutual funds in taxable accounts, it is likely you’ll receive some type of year-end capital gain distributions. The tax bill on these distributions will likely be increased given this year’s strong market performance. Not all investments are created equal in this regard and a careful review may identify opportunities to save on taxes going forward. I’ve written about assessing your portfolio’s overall tax efficiency previously.
- Rebalance – Strong equity markets over the past year may have tilted your investment allocation off target. Consistent, disciplined rebalancing helps you to sell high and buy low and stay on track with your intended mix of investments over time.
- Contribute to 401(k)s, IRAs and other retirement accounts – As always, maximizing pre-tax contributions to these accounts can reduce your taxable income and give your retirement savings a boost (up to $19,500 for 401(k)s and $6,000 for IRAs in 2021 with catch up options for anyone over 50).
- Take advantage of Health Savings Accounts (HSAs) – HSAs continue to grow in popularity and are still the best deal going to save and invest. You can read more about HSAs in one of my previous blog posts.
- Harvest losses – Even in strong years, selectively harvesting losses in your portfolio to offset gains and reduce income by up to $3,000 can be valuable.
- Take required minimum distributions (RMDs) – If applicable, don’t forget to take required distributions from retirement accounts to avoid up to a 50% penalty on undistributed amounts.
- Give thoughtfully – I’ve written about this topic in more depth in previous years. If you’re making any gifts in the near future, please review my tips on tax-efficient giving.
- Look ahead to future years – Added complexity from recent and potential future reform means tax planning is no longer something that can be done one year at a time. Planning should now take a longer-term perspective and be thoughtfully coordinated over multiple tax years, whether through accelerating or deferring income, “bunching” deductions or other strategies.
Disclosures: This material provided herein is for informational purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
