Your 2021 Year-End Financial Planning Checklist
With just a few weeks left until we begin 2022, it's time to check off your year-end financial planning items. Here are several to consider:
Charitable contributions
If you intend to make charitable contributions prior to the end of the year, please consult your tax advisor to maximize the tax benefits. Transfers of appreciated securities to a non-profit or to a donor-advised fund may have additional tax benefits. Individuals who are 70½ or older can donate all, or a portion of, their required minimum distribution (up to $100,000) directly to charity through a Qualified Charitable Distribution (QCD), subject to rules. A QCD excludes the amount donated from taxable income, unlike regular withdrawals from an IRA.
To ensure that contributions are reflected in the current tax year, transfers need to be completed by December 31st.
Individual i401(k)s
In order to make 2021 contributions to i401(k) accounts, the plan must be established / adopted prior to year-end.
529 College Savings Accounts
Many states, including Illinois, offer tax benefits for contributions to 529 College Savings Plans. To ensure eligibility for a 2021 benefit, contributions must be received prior to year-end. Please inform your tax advisor of the contribution.
Gifting
The annual gift tax exclusion amount for 2021 is $15,000. Gifts up to this amount can be made to anyone— relatives, friends, etc., without the need to file a gift tax form, and do not have any tax consequences for the recipient.
Required Minimum Distributions (RMDs) from retirement accounts
You generally have to start taking RMDs by year-end from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½. However, due to the SECURE Act, if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72. (Your initial RMD may be taken by April 1st of the year following the calendar year in which you turn 70½ or 72, depending on your age.) Roth IRAs do not require withdrawals until after the death of the owner.
In 2020, RMDs were not required due to the pandemic. They are required again in 2021, and failure to take them out may result in a penalty.
Flexible Spending Accounts
Some employer plans do not allow rolling money over into the next year. If this is the case with your plan, make sure you spend the balance on qualified expenses prior to year-end. Check with your employer to see how the rules apply to you.
We recommend that you check with your tax advisor regarding your specific situation. Best wishes for the holidays and New Year!
David Rappaport, CFP®