As December days dwindle, it’s time to wrap up financial planning tasks for the year.
Less onerous than a day of shopping at a crowded mall, year-end financial housekeeping is a gift that keeps giving well after the tinsel and toys are tucked away.
From RMDs to Roth IRAs, here are top moves for putting a bow on those 2021 finances.
#1 Mind Your RMDs
While the CARES Act temporarily suspended required minimum distributions (RMDs) last year, RMDs are back.
For the majority of IRA holders, this means fulfilling RMDs by December 31. Individuals who turned 72 in 2021 can hold off until April 1 of next year.
Still need to meet an RMD? A qualified charitable distribution (QCD) can fulfill giving goals, satisfy up to $100,000 in RMDs, and help individuals avoid a 50% penalty on unmet RMDs.
Vista proactively communicates with clients who still have RMDs to take.
Don’t Forget Inherited IRAs
Individuals who inherited an IRA before 2020 will need to take an RMD this year.
For those who inherited an IRA in 2020 or 2021, balances are, in most cases, required to be fully distributed by the end of the 10th year following the original owner’s passing.
It’s important to consider timing when exhausting these accounts. Account holders may wish to withdraw more in a lower income year and less (or none) in a year with higher income.
#2 Make the Most of Giving
In 2020, the CARES Act expanded deductibility of charitable contributions to encourage giving.
These provisions have been extended and expanded for 2021, so it’s still a favorable time for charitable giving.
Charitable contributions must be made during the 2021 calendar year—this includes gifts to family or friends.
This year, individuals can gift $15,000 ($30,000 for married couples filing jointly) to any number of recipients with no federal gift tax consequences.
A future bonus: The gift tax annual exclusion jumps to $16,000 (or $32,000 for married couples filing jointly) starting in 2022.
#3 Hit Your 401K Contribution Goal
Still working? It’s always a good idea to double-check you’re on track to meet your annual 401k contribution goal.
For 2021, those under 50 can sock away $19,500, and folks 50 and older can contribute $26,000. These maximums will increase by $1,000 each for 2022.
The overall limit for 2021, including employer contributions, is $58,000. This will also increase in 2022—by $3,000.
Now is a good time to set a reminder to adjust your 401k contributions in the new year to account for the increase in maximizing contributions.
#4 Use Up Those Flexible Spending Accounts
It may seem like small potatoes, but it’s wise to deplete funds in flexible spending accounts each year.
While $550 can be carried forward into 2022, unused funds in excess of this amount go back to the employer.
To use up surplus funds, stock up on contact lenses, prescription refills, or other reimbursable items.
#5 Maximize IRA, 529 Plan, and HSA Contributions
While April 15 is the deadline to maximize IRAs, 529 plans, and health savings accounts (HSAs), a little pre-planning can help grease the wheels come spring.
In 2021, people under the age of 50 can contribute $6,000 to an IRA. Those 50 and older can contribute $7,000. These amounts will not change in 2022.
Maximum HSA contributions this year are $3,600 for individuals and $7,200 for families, plus a $1,000 catch-up for those 50 and older.
In 2022, HSA limits will increase to $3,650 and $7,300, respectively, with no change to the catch-up amount.
#6 Determine Whether This is a Good Year for a Roth Conversion
In a low-income year, a Roth conversion may make sense. Here’s what to consider:
Tax bracket. If you expect to be in the same tax bracket or higher in the future, it might make sense to “prepay” those taxes today by converting to a Roth instead of paying a higher tax rate on future IRA withdrawals.
Time horizon. Ideally, you’ll want to wait 10 to 15 years before taking any withdrawals from a Roth IRA. This enables tax-free account growth that will exceed the amount you pay in taxes to convert.
Cash flow. Be sure you have enough cash outside the IRA to pay conversion taxes.
Roth Conversion Deadline and Backdoor Roths
The deadline to convert to a Roth IRA is December 31. Be sure to think it through carefully since there’s no “undo” button as in past years.
Roth conversions do not make sense for everyone, so it’s worth checking in with your Vista team.
Finally, you may want to take advantage of a backdoor Roth this year, as these are on the chopping block under the current proposed Build Back Better Act.
Toward a Prosperous 2022
With big tasks out of the way, it’s important to take stock of 2021 before setting goals for 2022.
Did significant life events, such as a new job or an addition to the family, occur this year? It may be wise to review beneficiaries and estate documents in light of these changes.
Reflect on the year’s positives and hardships, and contemplate how these experiences contributed to your growth.
Then formulate goals for the new year, being sure to loop in your Vista team. We want to know what matters most to you so we can help you achieve your goals and plan for a prosperous 2022.
