Believe it or not, another year has rounded third base and is dashing toward home plate. That said, there’s still time to make a few good plays in 2021, while positioning yourself to score in the year ahead.
Here are six of the best year-end practices that we're sharing with clients.
Keep Your Eye on the Ball.
While there are always distracting trading temptations, it seems as if 2021 has had more than its fair share of them. Remember the January excitement over GameStop and its ilk? (Read our article here, The Game-ification of Investing & GameStop.)
That frenzy was soon followed by “SPAC-Man” Chamath Palihapitiya, tweeting out “Shooters shoot” to his disciples, as SPACs started flying every which way. (Read our article here, Creatures of the Investing Jungle (SPACs and NFTs).)
Tradeable memes and non-fungible tokens (NFTs) became a thing around then too, followed by the pursuit of fluffy little dogecoins. (Read our article here, Caught up in Cryptocurrency.)
Instead of swinging at fast fads, we encourage you to lean into the returns our resilient global markets are expected to deliver over time. As always, this means looking past the wild throws and building a low-cost, globally diversified portfolio, tailored for your personal financial goals and risk tolerances. Isn’t that your aim to begin with? (Read our article here, The Investment Instructions in My Will.)
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 many families. 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). (Read our article here, Recent Coronavirus Aid and Relief Legislation.)
As these and similar relief programs wind down, now is an excellent time to recalibrate your own financial plans. If you borrowed from your future self by withdrawing from or not adding to your retirement reserves, please establish a disciplined schedule for paying yourself back. 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. Work with a financial planner (ideally, a fee-only fiduciary like Open Window) 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.
Taxable distributions aside, staying put to earn all potential market returns is the more important determinant. 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.
Consider Roth Conversions, Rebalancing, and 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 year. We prefer to view tax planning as a way to reduce your lifetime tax bill. (Read our article here, Keep More of What You Earn (Tax Planning).)
Of course, we can’t know what your future taxes will be. But it can sometimes make good, big-picture sense to intentionally generate taxable income and to trim back gains in years when tax rates seem favorable.
If you have “room” to take some taxable income/gains this year—and if it actually makes sense for you to take them—you may want to consider working with us and your tax preparer 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 under an extension of the CARES Act.
Charitable giving remains another timeless tactic for offsetting taxable items that you may need to report. 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 our tax planning strategies.
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. (Read our article here, Getting Your Ducks in a Row (An Estate Plan as a Gift).)
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. (Read our article here, Your Fair Share: Changes to Income, Gains, and Estate Taxes.)
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.
An opportunity for a fresh start?
How else can we help you wrap 2021 and position yourself and your wealth for the year ahead? As always, we stand ready to assist!
We can't predict the future, but we can prepare for it.
Let's talk. Schedule some time with us at www.openwindowFS.com/connect.