“Making a list and checking it twice” applies to everyone this time of year.
We’re usually on top of jolly holiday to-dos like parties, goodies and gifts, but when the season is in full swing, it’s easy to forget important year-end financial to-dos. The financial to-do list isn’t very festive, but with a little help from Covenant Trust, you can make quick work of good financial planning and get back to your year-end fun. Read on and take steps to make your finances and your future bright.
Holiday Financial To-Do List
✔ Retirement Savings
Saving money early and often can make a huge difference in the size of your retirement nest egg. No amount is too small. You can maximize your retirement savings each year in two ways:
- 401(k) or 403(b) Contribution
If you work for a company that provides a 401(k) or 403(b) retirement plan, participate each year by depositing a portion of your paycheck directly into the plan and selecting mutual funds for investing it.
Contribution min/max: $1 – $19,500 annually. Deadline: December 31, 2021. Workers aged 50+: Can make an extra $6,500 annual catch-up contribution. Benefits: Contributions grow tax-free – no capital gains taxes or income taxes until assets are withdrawn. Free Money: Companies often match employee contributions up to a certain percentage and the match is not counted in the contribution limit. Rollovers: Your balances usually can be rolled into an individual retirement account (IRA) if you leave the company.
- Individual Retirement Account (IRA) contribution
If you aren’t working for a company that provides a retirement plan, consider making an annual IRA or ROTH IRA contribution for tax-advantaged savings.
Contribution min/max: $1 – $6,000. Deadline: April 15, 2022, for 2021 contributions. Individuals aged 50+: Can make an extra $1,000 catch-up contribution. Taxes: Your contribution may be deductible from your income tax return – ask an advisor. Benefits: Contributions grow tax-free – no capital gains taxes or income taxes until assets are withdrawn. (ROTH IRAs have their own rules and different tax treatment.)
✔ Required Minimum Distribution
Check if you’re old enough to have to take an IRA Required Minimum Distribution (RMD) in 2021. In 2020, account owners were allowed to skip taking the 2020 RMD due to the pandemic and provisions of the CARES Act. In 2021, the RMD is back and must be taken to avoid tax penalties.
RMDs are required for anyone who turned age 70 before July 1, 2019 (RMD deadline: December 31, 2021) or age 72 in 2021 (RMD deadline: March 31, 2022). Penalty for not taking the RMD: 50% excise tax.
- Experience the benefits of charitable giving.
- Giving to qualified charities during your lifetime helps the world around you and increases personal feelings of purpose and wellbeing. Charitable giving can reduce your taxable estate and sometimes counts as a deduction on your income tax return in the year the gift is made. Talk with your tax advisor about your specific situation and, if you give a gift, remember to ask the charity for a receipt to document the gift.
- Reduce your taxable estate through early gifting.
- Lifetime gift tax exemption amounts are subject to change at any time. Those with substantial assets to pass on to children or extended family may want to consider gifting some assets now versus in their estate plan to avoid potential estate taxes in the future.
Individuals can give a $15,000 gift to anyone they want each calendar year. If you are married, your spouse can also give $15,000 to anyone they would like as well, even to the same person to whom you gave a gift. These annual gifts won’t reduce your lifetime tax exemption amount but will reduce your taxable estate. By making these gifts you also get the future growth of the gifts out of your taxable estate.
✔ Estate Planning
Rest easy when your will and beneficiaries are up to date. Are your children now adults? Is there a new baby in the family? Did anyone get married or divorced? You want all of your important documents to be up to date. As changes occur, it’s essential to check your will, trust, IRA, company retirement plan, annuities, insurance policies and any other account on which you have a designated beneficiary to determine if the correct beneficiaries are selected. Make sure each document reflects your current wishes.
- Learn through collaboration with your tax advisor.
- It’s a good habit to talk with a tax advisor about your situation to understand your taxable estate and any unrealized opportunities to steward your resources for the future.
For more information about year-end financial to-dos, or to speak with a Covenant Trust representative about developing a strategy that’s right for you, contact us at 800-483-2177.
The information provided is general in nature, educational and is not intended as either tax or legal advice. Consult your personal tax and/or legal advisor for specific information. Covenant Trust is incorporated in the State of Illinois and is supervised by the Illinois Department of Financial and Professional Regulation. Covenant Trust accounts are not federally insured by any government agency. Clients may lose principal as a result of investment losses.