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Quick, did you look at your calendar? The year is almost over. Were you able to get everything done that needed to get done?
And what about planning for your retirement? Did you forget about that?
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As the end of the year approaches, you may find yourself up against important deadlines. There’s still time to make some moves. More importantly, there’s a chance some moves don’t have a deadline at year end.
“The beauty of retirement planning and year-end is that it is the only tax deduction that can happen after December 31st,” says Wendy Barlin, a CPA at About Profit in Los Angeles. “All other deductions must happen before 12/31, but pension plans can be funded and the deduction created any time before filing your tax return. This is a great strategy for cash flow and tax planning purposes.”
It’s not just pension plans, but also IRA contributions that can wait until April 15th.
There are some moves, however, that must be done in this calendar year in order to maximize their impact on your finances. Among those, especially if you’ve found yourself making less this year and possibly slipping down a tax bracket or two, is to convert your tax-deferred IRA into a Roth IRA.
“More than ever, Roth IRAs and Roth Accounts are proving to be a good way to squirrel money away for retirement,” says Steve Parrish, Co-Director of the Center for Retirement Income at The American College of Financial Services
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Are you under the impression you don’t qualify to take advantage of Roth IRAs? If so, think again. You’ll need to speak to a tax professional to understand your specific situation. But there is a way.
“Consider a Backdoor Roth IRA if you have maxed out your 401k plan,” says Syed Nishat, Partner at Wall Street Alliance Group in New York City. “An amount can be contributed post tax to an IRA account and can be converted immediately into a Roth IRA. The funds grows tax free and withdrawal is also tax free in a Roth IRA.”
Speaking of IRAs, and most other retirement plans for that matter, it’s important to pick the right beneficiary. This means you should regularly revisit your beneficiaries. Year end is a perfect time to do that.
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“Check beneficiaries on retirement accounts to make sure they are up to date,” says Jason D. Field, Financial Advisor at Van Leeuwen & Company in Princeton, New Jersey. “Make sure the appropriate beneficiaries are listed.”
At the same time, December 31st represents one of the two dates of the year you might pick to annually review your financial situation. (The other date is your birthday, but many people pick year end because of the relevance to tax planning.)
“Year-end financial planning is a good time to review existing retirement savings and consider whether you need to make any catch-up contributions to reach your savings goal,” says Diana Torzewski, Product Manager at Human Interest, San Francisco. “To figure out what your current savings total will mean for you in retirement, divide it by 240 to get a ballpark monthly income (that’s 12 months a year x 20 years of retirement if you expect to live to age 85). For example, if you have $100,000 in retirement savings, you’re looking at $417 a month.”
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Your retirement saving goals should comprise multiple factors. Be sure not to overlook any one of them.
“It is important to review if you have met your savings goals for the year,” says Daniel Kellogg, Financial Planning Income Specialist and Senior Financial Advisor at Personal Capital, an Empower Company, in Denver. “For example, did you contribute enough to employer plans to capture any available employer matching? Is the savings goal you set appropriate to meet your long-term goals? If not, you may still have time before year end to make additional contributions.”
Believe it or not, retirement planning isn’t limited to retirement accounts. Various taxable accounts represent important components to a comprehensive plan that leads to a comfortable retirement. Kellogg says, “Looking ahead to next year you should review your current cash savings to confirm you have an adequate emergency fund to help with unexpected expenses, as well as cash available for large, one-time purchases you anticipate in the coming year.”
Finally, aside from an emergency fund, you may have after-tax savings too. Those bring different issues that need to be decided before a new year begins.
“For those saving in taxable brokerage accounts, the year-end is a great time to check your account to see if you will have any capital gains tax liability,” says Tiffany Lam-Balfour, Investing and Retirement Specialist at NerdWallet in San Francisco. “If so, you can review your holdings to see if it may be beneficial to take advantage of tax-loss harvesting to offset any significant gains.”
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Tax loss selling is a December tradition that stretches way back. This year may offer opportunities not seen in years.
“If there were ever a year to take advantage of tax loss harvesting, 2020 is that year,” says Anthony Pellegrino, Founder of Goldstone Financial Group in Oakbrook Terrace, Illinois. “When you have a year with massive drops that we saw in February and March followed by a substantial recovery in that same year, the opportunity is created to sell your losing funds to create losses to help offset capital gains. There is still time in the 2020 tax year to take advantage prior to the end of the year, especially with the likely rising taxes coming in 2021 to offset rising debt.”
Again, if you find yourself with less income this year, your usual way of handling capital gains may no longer apply.
“Look at your current tax situation and understand what bracket you fall into,” says Pellegrino. “There are plenty of people who are in a zero-tax bracket for long-term capital gains who do not realize it. They may be able to ‘recognize’ gains on taxable investments without paying income tax on the gains. Given that the tax laws are likely to change in the future, never waste an opportunity to use a zero-tax bracket.”
There’s still time to take action, but the clock is ticking. When the crystal ball ultimately drops, your time may be up.
Don’t let the clock defeat you. Act now.
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