It is that time of year where getting your financial ducks in a row is in order. With that, I created a quick list of 5 items to consider below.
- Roth IRA Conversions: Many people believe that they have until April of the following year to convert their IRAs to Roth IRAs in order to have it count for the current year (2021). This is not true. For Roth IRA conversions, you must have the conversion completed by 12/31 of the year you want the conversion to be added to your taxes. This is different than the contribution deadline that I point out below in bullet point #2. Note: If you are converting your “Non-deductible IRA” that I point out in bullet point #4 below, remember that there is a “pro-rata” formula that may mean that your non-deductible IRA conversion is partially taxed.
- 2021 Tax Year Contributions to IRAs and Roth IRAs: Although technically you have until April 15 of 2022 to make contributions for 2021, I always like to remind folks around this time to consider socking some away. For those aged 49 and younger, the contribution limit is $6,000. For those aged 50 and older, $7,000. Of course, keep in mind that there are income limits that you cannot exceed in order to contribute to a Roth IRA. There are also income limits you cannot exceed in order to deduct your contribution to a Traditional IRA! If you would like to know those levels, let me know. And always remember, Bill Gates himself can contribution to a NON-DEDUCTIBLE IRA. A great strategy is to later convert the non-deductible IRA to a Roth. They call this the “Backdoor Roth” and is currently in the crosshairs of congress.
- Required Minimum Distributions: This is a big one because the penalties for dropping the ball on this one are severe. If you have money in pre-tax retirement accounts like IRAs, SEP IRAs, 401ks, 403B’s, etc, the IRS eventually wants their tax money!!! What this means is, Required Minimum Distributions. The RMD requirements generally kick in once you turn age 72 (formerly 70 1/2) and are based off an annual “divisor”. Without going too much into details on the “divisor”, a 72 year old would have to cash out around 3.9% of their pre-tax dollars and pay taxes on it. The percentage you need to take increases year after year. DO NOT MISS THE DEADLINE TO TAKE YOUR RMD!!! Missing the deadline means a 50% penalty on what your RMD Shortfall was. You will only do that once I bet. The deadline is December 31st of every year, other than the year you turn age 72. Generally, for the first year of RMDs (age 72), the IRS gives you until April 1st of the following year – an additional 3 months. Now, 2021’s RMD deadline is a little funky because of recent legislation. For this year, if you turned age 72 prior to July 1st, you must take your RMD by 12/31/2021. However, if you turned age 72 on or after July 1st, you have until April 1st of 2022. This is the only year with this 12/31 anomaly for those born prior to July 1st.
- Tax-Loss-Harvesting: This can be lumped into my “0% Tax Bracket” conversation I mentioned in the this post. If you have any non-retirement-account securities holdings that have turned out to be dogs and if the current value is less than what your “cost basis” is, then you can cash out of that position for a “capital loss”. That capital loss can offset other capital gains that you might have. If you don’t have enough capital gains to absorb all of your capital loss, up to $3,000 of your capital loss can actually offset your INCOME. If you still have unused losses, you can “carryforward” into future years. Rinse and Repeat. Note: If you buy that same security back or one that is “substantially identical” within 30-days, it is considered a “wash-sale” by the IRS, which undoes what you were trying to do.
- Anticipate Higher Taxes: I am not alone when I say that taxes in the future are likely to go up. As a result, you may want to consider accelerating certain sources of income into this year versus future years. Or, consider delaying certain one-time deductions for the future, when we are likely to be in a higher tax rate environment. Be strategic and work with an advisor that is strategic when it comes to your taxes!!!