The end of the year is a great time to take a moment and reflect on the last 12 months of your financial life. What went right? Did you make progress towards your goals? Where did you fall short this year? Good financial habits are not built overnight. By taking the time to reflect, you can celebrate the areas where you made real progress and recognize the areas where you would like to make improvements. Only then can you adjust your plan going forward to make sure you are on the right path. Here are some year-end financial moves to consider to help you finish up the year strong and plan for the year ahead!
Make your charitable donations
Beyond supporting the causes that mean most to you and your family, donations can be a powerful tool to potentially minimize some of your tax burden. Even more, recent law has extended temporary tax changes through the end of 2021. Usually, taxpayers who take the standard deduction cannot deduct their charitable contributions. The law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations. These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.1
Year End Tax Loss Harvesting
Tax-loss harvesting refers to the strategy of selling investments that have lost value to offset taxes on profits from sales of those that have gained value. This strategy works great for investors who would like to sell an underperforming investment they have been holding onto in their taxable account. If you have made money from selling other better performers throughout the year, realizing the loss in the underperformer may potentially provide you with some tax benefits. Just remember, if you plan on buying one of the “harvested” investments back in the future, make sure to pay attention to the Wash Sale Rule.
Review and Update your Employer Benefits
The end of the year typically coincides with open-enrollment for many people, which makes it a great time to review and update your insurance coverage, beneficiary designations, tax withholding elections, and retirement plan contributions. It is important to reevaluate your insurance policies regularly to make sure that the coverage is still adequate and that you are not paying too much. For employer-provided benefits like health insurance, it can be helpful to contact a representative from your employer’s human resources department to discuss the pros and cons of the various options that are available, especially if your life has changed since the last enrollment period. Big life events like marriage, divorce, or having a child can also impact your tax withholding elections. Because your tax situation may have changed, it is important to review the amount of tax being withheld from your paycheck to determine if you are withholding the right amount. The IRS offers an online tax withholding estimator that can assist you in figuring out how much income tax to withhold. While you’re on the IRS website, it would be a good idea to see if there are any other changes for the upcoming year that could affect your financial life. One thing that we always look at is the updated contribution limits for 401(k) and other retirement plans. If you are contributing the maximum amount this year and would like to continue maxing out your retirement plan next year; make sure to adjust your contribution amount accordingly. (Check out the Insights page on our website to view our recent update on the 2022 Contribution limits) Even if you are not contributing the maximum amount, the end of the year is a great time to revisit how much you are saving towards retirement. Can you save more next year? Is your employer offering a matching contribution? Do you have a Roth 401(k) option? These are all great questions to consider going into the new year. And while you’re at it, don’t forget to check your beneficiary designations. Take a look at your retirement accounts and insurance policies to verify that the correct names are listed on those accounts.
Consider Rebalancing your Portfolio
Asset allocation, the overall mix of the types of investments you have in your portfolio, can make a big difference in your returns over time. It is important to make sure that your investments align with your risk tolerance, time horizon, and unique goals. As we have seen over the last few years, the volatility and returns for different asset classes can vary by quite a large margin. Some of your investments may have performed extremely well while others have not. This can cause your overall asset allocation to drift away from your original target and expose you to risks that you may not be comfortable with. The end of the year is a great time to review your investment plan and take a close look at your portfolio to make sure it is still aligned with your objectives.
Check in on your Emergency Savings Account
As we have mentioned in the past, we are big believers in the importance of establishing an emergency savings fund. Having savings on the side for emergencies or other unexpected expenses can help you avoid costly debts and gain greater peace of mind. Ideally, it is recommended to maintain anywhere from 3 to 12 months worth of expenses in your emergency savings account, depending on the specifics of your situation. When reviewing your emergency fund and cash holdings; it is a good idea to look back over the past 12 months and take note of the types of expenses that popped up. Could these happen again this year? Are there any other predictable expenses coming up? By maintaining enough cash and cash alternatives, you are more likely to keep your investment plan intact and less likely to dip into other investment or retirement accounts.
These financial moves can help you make the most out of the past year and be better prepared for the year to come. If this seems overwhelming, don’t worry, you are NOT alone. Transverse Wealth Solutions is here to partner with you and make 2022 the year you take control of your financial life. Please visit Take Action — Transverse Wealth Solutions to schedule your no-cost first call!
1. Expanded tax benefits help individuals and businesses give to charity in 2021 | Internal Revenue Service (irs.gov)