With yesterday’s 72 degree day (here in Maryland) behind us and today’s 40-ish degrees setting in, it’s a fierce reminder that winter is coming; and that means another calendar year is coming to a close. That said, there’s still time to warm up that financial plan and position yourself to finish out the year well.
With that in mind, we thought it would be helpful to send along six financial “best practices” to do just that:
- Keep Your Eye on the Ball. While there are always distractions, hasn’t it seemed as if 2021 has had more than its fair share of them? Remember the January excitement over GameStop? That frenzy was soon followed up with “SPAC” trading, “memes” and “non-fungible tokens (NFTs)”. Not to mention Bitcoin sharing headlines with “dogecoins”…. 2021 sure did lend itself to numerous ways for investors to (potentially) keep their minds fixated on the idea of “getting rich quickly”.
Our Best-Practice Advice: If I’ve said it once, I’ve said it a thousand times – be cautious of fads. While some of this new technology could lead to new opportunities in time, the tried-and-true method of focusing on the long term does not go out of style in terms of delivering results and helping you to reach your goals.
- Revisit Your Saving and Spending. COVID changed a lot of things, including our saving and spending patterns. Stimulus and unemployment checks offered cash flow relief for some. Businesses owners received generous loans. Moratoriums on paying off college debt or being penalized for dipping into retirement savings helped as well. Retirees were permitted to skip taking Required Minimum Distributions (which is NOT the case in 2021), and for many travel plans (and travel spending) were put on hold.
Our Best-Practice Advice: As these issues wind down, and as travel and maybe home improvement plans ramp up, now is an excellent time to recalibrate your own financial plans. If you became accustomed to spending less on items you used to think you couldn’t live without, try directing those former expenditures to restoring your retirement and rainy-day funds, if necessary. Work with us or your financial planner to assess other ways your budgeting may benefit from a fresh take. Every little bit counts!
- Watch for Fund Distributions. Even as we’ve continued to weather the pandemic storm, our forward-looking, global markets have been delivering relatively strong returns year-to-date for many foreign/U.S. stock funds. That’s good news, but it also means mutual funds’ capital gain distributions may be on the high side this year. Capital gain distributions typically occur in early December, based on the fund’s underlying year-to-date trading activities through October. For funds in your tax-sheltered accounts, the distributions aren’t taxable in the year incurred, but they are for funds held in your taxable accounts.
Our Best-Practice Advice: Taxable distributions aside, staying put to earn all potential market returns is the more important determinant in any long-term investing approach. With that said, in your taxable accounts only, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains. If you’re a client, we’re already having (or have had) discussions with you on this topic.
- Consider Tax Gain Harvesting. Along with relatively strong year-to-date market performance, many Americans are also benefiting from historically lower capital gain and income tax rates that may or may not last. Often, taxpayers view each tax season in isolation, seeking to minimize taxes owed that We prefer to view tax planning as a way to reduce your lifetime tax bill. Of course, we can’t know what your future taxes will be. But it can sometimes make sense to intentionally generate taxable income in years when tax rates seem favorable.
Our Best-Practice Advice: If you have “room” to take some taxable capital gains this year—and if it actually makes sense for you to take them—you may want to consider working with your tax advisor to do so.
- Seize the Day on Your Charitable Giving. Unlike many other pandemic-inspired tax breaks, several charitable-giving incentives still apply for 2021, but may not moving forward. This includes the ability for single/joint filers to deduct up to $300/$600 in cash contributions to qualified charities, even if they’re already taking the standard deduction on their tax return. If you’re so inclined, you also can still donate up to 100% of your AGI to qualified charities.
Our Best-Practice Advice: Charitable giving remains another timeless tactic for offsetting taxable capital gains you may want or need to report, as well as any other extra taxable income you may be incurring. And charitable organizations need our contributions as sorely as ever. So, if you’re charitably inclined, you may as well make the most of your generosity by pairing it with your 2021 tax planning.
- Plan Ahead for Estate Planning. Holiday shoppers may not be the only ones facing supply chain shortages this year. Estate planning attorneys, CPAs, and similar planning professionals may also be in shorter supply toward year-end and beyond. In addition to the usual year-end crunch, many such service providers have been extra busy responding to a “COVID estate planning boom,” as well as to the fast-paced action in Washington.
Our Best-Practice Advice: If you’ve been thinking about revisiting your estate or tax planning activities, know that the process may take longer than usual. Especially if you’re planning for changes that are up against a hard deadline (such as year-end or April 15th), you’ll benefit yourself by giving your attorney, accountant, and others the time they need to do their best work for you. High-end estate planning in particular is best approached as a months-long, if not years-long process.
If there is any way we can help you wrap up 2021 and position yourself and your wealth for the year(s) ahead, as always don’t hesitate to contact us.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.