3 Financial Planning Tips Before Year-End

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With only a few months left in 2020, various end-of-year deadlines are quickly approaching. Here are three things you should consider before it is too late:

  1. Convert Your Pre-Tax Money

    • If you have a tax-deferred investment account (401k, Traditional IRA, SIMPLE IRA), it might be beneficial to convert some or all into a Roth IRA. A Roth conversion is a process where you take pre-tax funds and re-classify them to grow tax-free. The trade-off? You pay income taxes now on the amount you convert.

    • If your income fell this year (i.e., due to COVID-19), this an opportune time to consider a Roth conversion. If you wait until a future year where your income is substantially higher, this might bump you into a higher tax bracket, resulting in greater taxes.

    • The main benefit of a Roth conversion is tax-free growth. In addition, Required Minimum Distribution (RMD) rules do not apply to Roth IRAs, which means you are not obligated to start taking money out when you turn age 72, as is the case with Traditional IRA or 401k accounts.

  2. Minimize Your Capital Gains (investments owned in non-401k or IRA accounts)

    • If you have a brokerage account in which you have sold various funds or stocks throughout the year, evaluate the amount of short-term gains you have accumulated year-to-date. If you anticipate hefty capital gains taxes this year, here are two suggestions that can help you reduce that looming tax burden:

      • Look For Losses - If you have a fund or stock that has lost value year-to-date, it can be advantageous to sell that particular investment for a loss to offset other gains. This is also called tax-loss harvesting.

      • Avoid Wholesale Changes - Rather than sell all the shares of a stock or fund you own, instead consider selling those shares gradually. If your overall goal is to reduce your position size, sell some shares before the end of 2020 and then more in 2021. This will help spread out your tax burden over multiple years.

    • If you are unsure whether or not you will owe capital gains taxes within your investment account, speak with a qualified professional.

  3. Increase Your 401k Contributions

    • Assess how much you have contributed to your 401k (or similar employer-sponsored plan) so far this year. If there is room to increase your contributions, you receive two primary benefits from doing so:

      • Lowering Your Income Taxes - Contributions into a 401k are shielded from federal income taxes. The more you save, the lower your taxable income will be for the given year, which means fewer taxes are owed.

      • More Money Working For You - As additional funds enter your account, there is a greater opportunity for growth and compounding. As more money is set aside during your working years, there is a stronger probability of reaching your retirement goals. The flip-side is leaving those funds sitting in your bank account earning next-to-nothing, or worse, spending it.

I hope you enjoyed reading!

Joshua J. Baird
Investment Adviser Representative