If You Have Unrealized Losses
2020 was a wild ride for a lot of companies. If you have a stock or mutual fund in a taxable account that was on the losing end of this pandemic, consider selling (“realizing losses”) to offset any gains you have. Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year, and you can carry forward the remainder until the amount is exhausted.
If You Expect Your Income to Change
Perhaps you were furloughed this year, but still have funds to contribute to retirement for 2020. If you think your income will increase in the future, now is the time to embrace the Roth. You’ll pay taxes on the contribution at your current rate. When you take distributions in the future, while you are presumably in a higher tax bracket, they will not be taxed. This is also the time to consider converting existing Traditional IRAs or 401(k) to Roths. This move can have unintended consequences, like pushing you into a higher tax bracket, so proceed with caution.
You Are Able to Save More Money
If you are not maxing out your employee retirement plan or IRA, consider year-end a great time to remedy that as much as you can afford. Even just increasing your contribution by a percentage or two can have a huge impact on your retirement savings. Compounding is real, folks! If you are making the maximum allowable contribution, find out if you are eligible for a Health Savings Account. You may be able to contribute $3,550 ($7,100 for a family) and an additional $1,000 if you are age 55 or over.
Taking just a little time to review year-end finances can make a big difference in the long run. As always, if you don’t know where to start or are confused about your options, consulting a CERTIFIED FINANCIAL PLANNER™ is a great place to start.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 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 advisor.