With the holiday festivities just around the corner and only a few days left before we finally call 2021 a wrap, it’s so easy to get carried away and relegate matters of our finances for later. However, to remain on track as well as plan for the upcoming year, there’s no better time to get your financial ball rolling for 2022 than now. You want to use the few weeks left to revisit your financial goals, find ways to maximize your financial health and make critical money moves for the forthcoming year. In this article, we’ve identified smart money moves to make before the year ends.
Before You Go On; Evaluate Your Investments
It’s expedient to check if your investments are profitable or running at losses. You can do this by running an audit on your investment portfolios especially when it’s beyond retirement accounts. You can start by realigning your portfolio based on those that have more gains or losses. For instance, if your asset allocation is 60% bonds and 40% shares, the profits and losses in each one can help you rebalance them back. You can sell off the one that has a higher dividend to add up to the one that has losses. Moreover, you can also adopt the tax-loss harvesting method where you sell off your investment on loss to reinvest in a new market. For this to be successful, you need to be aware of the following;
- Short-term gains: This is profits made in a sale of less than 1 year (366 days). Their tax margins are high, so you need to aim at reducing them.
- When harvesting losses, do not interfere with your long-term investment plans.
- A “wash sale” disallows the tax loss deduction so, always check the “wash sale” rule before and after making a loss sale. The IRS considers a security a “wash sale” when a new substantial identical security is purchased within 30 days after selling off a security at loss.
- Consult your financial advisor on the best tax-harvest strategy to make.
What You Should Contribute to Before the End of Year
Below are six places worth contributing to before the year comes to a close:
#1. Max Your Retirement Accounts
Catch up with your retirement plans by doing what you can to max out your contributions. Maxing out your retirement contributions, whether your traditional plan or Roth option is a smart money move that will position you for future success down the line. Since 401(k) contributions are paid with pre-tax income, your monthly salary drops with each pay period— meaning that you get to pay less in both federal and state taxes. In essence, you’re giving the government less and paying yourself more each month (although you can’t withdraw those funds until you’re up to 59½ )—and in that time, you’re also giving your funds time to grow and compound. Contributing to your Roth IRA does not reduce your taxable income, however, accumulating the much you can before retirement is one of the best investments you’ll give yourself. Depositing a higher contribution in your 401(k) or IRA before the end of the year not only lowers your taxable income, it also has the added benefit of maximizing your savings and in turn, your overall health.
#2. Max Out Your HSA
Individuals with a high deductible health plan can use a “health savings account” to save money for qualifying medical expenses tax-free. You can also use the money tax-free. The main benefit here is the tax savings. With an HSA account, you can save money for future medical expenses without fearing the “use it or lose it” policy of an FSA. Plus, distributions for qualifying health expenses are tax-free and contributions are tax-deductible. Because HSAs roll over from year to year, taking your year-end bonuses and putting them directly into your HSA is a smart way to reduce your taxable income while growing the account.
#3. Use Up Your Flexible Spending Accounts (FSA)
Have you heard of the FSA “use it or lose it” rule? Unlike Health savings accounts (HSAs), FSA funds don’t roll over if they are not used up. Of course, the money doesn’t just disappear, it is reimbursed back to your employer. If you have been committed to contributing to your (FSA), then you should try to use it up otherwise you’ll lose all your contribution. You should know the conditions backing up your employer’s FSA plan so as to determine if you have a rollover or use it all option. When your FSA has a carryover policy, you can choose to roll over any unused balance into the next year. You may be allowed to carry over up to $500 in a health FSA to spend in the following year if your FSA has a carryover policy. Your employer may also give you a 2½ month grace period to spend any leftover funds in your FSA. However, a standard-issued healthcare FSA plan makes no provision for these reliefs and so uses the “use it all or lose it” rule. Your FSA funds may also be used to purchase other medical products and not just medical bills. Therefore, you can use it to stock up things that could be of benefit to you in the future.
#4. Fund Your Child’s Education with a 529 Plan
Another fund which you can contribute to before the year runs out is a 529 plan. A 529 contribution plan allows you a free federal tax deduction as long as it is used towards educational expenses. As much as there is no maximum contribution limit per year, the IRS is against contributing more than $14,000 for the beneficiary as doing so could lead to a gift tax. You’re also not limited to using your state’s 529 plan if you believe another state’s plan is better.
#5. Donate to Charitable Organizations
What better time to give than in this festive season? Donating to your favorite charitable organizations can benefit you in your income-tax deductions as long as you donate to an organization with a 501(c)(3) status. All donations given to such organizations are classified tax-exempt by the IRS. Check to confirm that your gifts are going to a legitimate charity organization before sending them. You can check this with sites like GuideStar, CharityNavigator, and GiveWell.
Bottom Line
Make the most of these last days by contributing to your accounts and maximizing your returns going forward