November 11, 2020
The end of the year is a busy time for most people. Unfortunately, it is usually also the last opportunity to make financial moves that will count towards the current year.
If you’ve been slow to tackle your financial to-do list this year, consider completing your checklist before the end of the year. No matter how eager you are to say goodbye to 2020, it doesn’t mean you should leave money on the table.
Get started on your year-end financial checklist with four money moves you should prioritize now.
1. Put extra savings to work
Often, investors realize they’re holding too much cash , but they’re just not sure what else to do with the money. If you’re a high earner, you may notice your paycheck increased over the year as you exceed the Social Security taxable wage base, $137,700 in 2020. If you’re keeping too much cash in the bank (earning next-to-nothing), here are seven ways to put extra cash to work for you:
Ways to use extra savings
2. Review your benefit elections and 2021 contributions for open enrollment
Most companies allow workers to adjust their health insurance and other benefit elections at the end of the year. Don’t skip it! This is your chance to take advantage of tax-saving opportunities, employer-paid benefits, or save money by opting out of coverage you’re not using.
The IRS recently announced 2021 contribution limits , so keep this in mind when making your selections.
3. Look at your 401(k) – both old and new
Investors sometimes take set it and forget it too literally. As part of your year-end financial checklist, give your 401(k) some needed attention. Although there aren’t any changes to the 401(k) contribution limit in 2021, you should check your current investment choices, allocations, and scheduled contributions.
4. Diversify or reallocate your investments in a tax-efficient way
The end of the year presents an opportunity for tax-loss harvesting in taxable accounts. In all accounts, rebalancing and diversifying a concentrated position are opportunities. It’s usually best to consider these moves together, which is why it’s an important part of a year-end financial checklist.
Tax-loss harvesting is the process of selling an investment that has lost value in your portfolio to realize losses for tax purposes. Losses can offset taxable capital gains and potentially even reduce ordinary income by up to $3,000 in the current year. Remaining losses can be carried forward as a deduction in future years. Before putting this tax strategy into action, consider whether the savings are worth the risks of potentially being unaligned with your target asset allocation.
If you own actively managed mutual funds in a taxable account, be aware of dividend and capital gains distributions at year-end. If the fund hasn’t issued distributions yet, consider selling before the ex-date . When you own the fund on the ex-date, capital gains will be reportable to you for tax purposes even if you sell the day after the ex-date.
Rebalancing your accounts
Portfolio rebalancing is the process of buying and selling part of your investments to get back to your original investment mix. Without rebalancing, you may be taking on more risk than necessary. Over time, the value of your investments change as different asset classes outperform on a relative basis. This impacts the composition of your portfolio.
To correct it, consider portfolio rebalancing at a predetermined interval. When you rebalance, you sell overweight positions, reinvesting the proceeds in underweight funds to restore the intended asset allocation.
Selling a concentrated stock position, likely in employer stock
For investors looking to diversify out of a concentrated stock position, most typically employer stock , the end of the year presents an opportunity to spread taxable gains over two tax years in a matter of days or weeks. Particularly when the stock is also your employer, wild swings in the stock price can decimate on-paper wealth.
If you own stock that has outperformed, you may be hesitant to sell due to FOMO (fear of missing out). But if taking profits allows you to achieve or further your goals, why not take the opportunity? After all, that’s what really matters.
Getting help tackling your year-end financial checklist
Finding time to accomplish financial tasks or keep up with regular maintenance can be hard for busy professionals. Whether you truly need a financial advisor or accountant will depend on your situation.
But for individuals who would benefit from working with an advisor, delaying the decision may mean missing opportunities or making expensive mistakes. Just as the benefits of making good financial moves can compound over time (through investment returns or growing your savings), the negative effects of making the wrong financial choices can plague you for years.
(Sources: Forbes Media and AdvisorStream)