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Year-end Financial Planning for Retirees - Consider These Strategic Tax Moves Before the End of 2021

Shockingly, 2021 will be winding down in the coming weeks. Another notable year has flown by with continued repercussions from the pandemic, wildfires and cyber-scandals filling the news.

For retirees, year-end tax and financial planning should be an annual affair. But with a new tax bill on the floor that proposes changes to income, estate and gift taxes, this year could be especially important. No matter what happens with the bill in Congress, here are some strategies you can stand by.

Consider These Year-end Tax Moves Now to Boost Your Future Retirement Savings

Think about making these year-end financial moves in 2021 to minimize taxes and maximize your personal retirement portfolio. 

1. Does a Roth Conversion Make Sense? 

Financial advisors often recommend year-end Roth IRA conversions for their tax advantages - and this year is no different. Converting assets to a Roth from a traditional IRA means you pay taxes now, and reap the benefits (ie tax-free growth) when you withdraw. 

If you had a less than stellar year, it might make sense to eat some taxes this year versus when you’re in a higher tax bracket. 

Roth conversions have tax and other potential implications, so make sure you understand the rules fully before making a move - or speak to a financial advisor

2. Maximize Charitable Giving 

If you’re planning to make a year-end gift in 2021, there are a few financial strategies you might want to know about.  

Bunching: If your aggregate itemized deductions are equal to or below the 2021 standard deduction of $12,550 for single filers ($25,100 for couples filing together) you might benefit from the “bunching” technique. Bunching means consolidating tax-deductible charitable contributions you’d normally make over multiple years into a single tax year. For example, instead of donating $10,000 each year for three years, you’d donate $30,000 in a single year to cover a 3-year timeframe and claim a deduction. 

Qualified charitable distributions: Retirees age 70½ and older can make a payment directly from an IRA to an eligible charity, tax-free. This is known as a qualified charitable distribution (QCD). If you’re over age 72, you can also use a QCD to satisfy your required minimum distribution and save some money on taxes.

3. Accelerate Income Into 2021

If you believe 2021 tax rates will most likely be lower than in 2022, you might want to start planning ahead for this strategy. Accelerating income means taking actions to declare more income this tax year (when you expect to be in a lower tax bracket) and postponing deductions into the next tax year (when you expect to be in a higher tax bracket). Combining these two strategies results in minimizing your overall tax liability.

There are several ways to accelerate income:

  • If you’re self-employed, try to collect all accounts receivable in the current year vs waiting until next
  • If you receive a year-end bonus from your company, see if you can get it before 2022 begins
  • If you’re over age 59½ and you have any planned IRA or retirement plan distributions, take them this year instead of next year
  • Consider moving the sale of any capital gains assets to this year

Postponing deductions involves delaying deductible expenses until the following year. For example: 

  • Postpone major business expenses
  • If you normally pre-pay property taxes and interest for the following year, consider waiting this time around
  • Wait to make charitable gifts 

Ongoing Financial Planning is the Best Way to Secure Your Retirement

It can be tough to know how to approach your retirement plans when changes may, or may not, be on the horizon. But the best financial plan is one that’s built for the long-term, not for changing with the political tides. 

As you begin making plans and resolutions for 2022, add these important year-end financial tasks to your list. They are all tenets of well-rounded financial planning, thus you can do them every year: 

  • Review your financial plan including your financial and personal goals for retirement
  • Review existing retirement savings and consider whether you need to make any catch-up contributions to boost your nest egg
  • Maximize 401(k) contributions to capture any available employer matching
  • Do you have enough cash in your emergency fund?
  • Max out your IRA contributions (you have until April 15th 2022 to do so for 2021)
  • Revisit the beneficiaries on all your retirement accounts to make sure the right person is designated 

If you have questions about how changes in legislation might affect your retirement plans, speak to a financial advisor. A trusted advisor, such as a Certified Financial Planner, will evaluate your situation and provide honest advice to help you meet your retirement goals. 

If your retirement plan needs a tune-up, or you’re not sure where to begin, the Essential Retirement Guide is for you! Get the guide to learn the seven things you need to do before you retire.

Essential retirement guide 2021

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