With Fall officially arriving, we are reminded once again that we are closer to the end of the year than we are to the beginning. Along with that comes the holiday season, family time, and last-minute shopping. And while we may not be able to assist with the cooking, cleaning, and shopping that’s just around the corner, we want to help in the best way we know how—making sure your end of year financial checklist is complete!
First and foremost, now is the time to make sure you are on track to meet your contribution goals for retirement and other tax-advantaged accounts. Roth and Traditional IRAs have an annual contribution limit of $6,000 for individuals under age 50 and $7,000 for individuals aged 50 and above. Health Savings Accounts have an annual contribution limit of $3,600 for individuals and $7,200 for families. The deadline for contributions to these accounts for the current tax year is actually April 15th of the following calendar year, but for those of you that prefer an annual schedule now is the time to make any final contributions. Remember that the contribution limits on these accounts means you will not be able to make up missed contributions later down the road.
Another retirement savings option available to many workers would be an employer-provided retirement plan. The type may vary (401k, 403b, Simple IRA, etc), but one common feature is some type of employer matching contribution. Usually, the employer will match employee contributions up to a pre-determined percentage of income. If you have not yet reached that set percentage, increasing contributions over the remainder of the year could get you closer to claiming as much of this “free” money as possible.
Maximizing retirement contributions is one great way to improve your likelihood of a successful retirement, but another valuable strategy is to ensure that you maximize the portion of your retirement dollars that you keep after the tax bill comes due each year. A Roth conversion is one strategy that could save thousands, hundreds of thousands, or even millions of dollars in taxes over the course of time. A Roth conversion allows you to move dollars from your pre-tax IRA to a Roth IRA to benefit from tax-free growth going forward. The catch is that any amount converted is includable in taxable income for that calendar year. The name of the game is to determine when and how we can pay the lowest tax rate possible to ensure that you keep as much of your accounts as possible. The deadline for a Roth conversion is December 31st each year, so now is the time to start thinking through strategies.
As far as your investment portfolio is concerned, you may have heard us talk about the “bucket strategy” we use to assign a specific level of risk to each dollar in your portfolio. This strategy involves mapping out how many dollars will need to be withdrawn from your portfolio for any purpose over the next 6 years. Once we have those figures, we then create different “buckets” of risk within your investment portfolio—lower risk for withdrawals in the next 3 years, medium risk for withdrawals in years 4-6, and higher risk for the remainder of the portfolio. Now is a good time to start thinking about any potential withdrawals you expect to make in the coming years so that we can position your portfolio accordingly going into 2022.
Who said Spring cleaning had to be done in the Spring? These end-of-year housekeeping items are important to think through to ensure that you have maximized the financial opportunities available to you in 2021.
Do you have other questions about retirement?
Text our team for answers at 309-925-2043!