End of the Year Planning Considerations

It’s hard to believe we are quickly approaching the end of the year. As we head into the holiday season and work (hopefully) begins slowing down, here are some end of the year planning considerations. 

This list is of course not exhaustive, but these are some of the major planning items to review including important dates, tax planning, savings considerations, and estate planning needs. 

Important Dates

Typically, October and November tend to be open enrollment periods for employer benefits, so it’s important to review and analyze all your elections. 

In terms of employer benefits, disability insurance coverage is especially valuable as you review your coverages to ensure your household’s income is protected. Arguably, this is even more critical than life insurance coverage if you are in your prime earning years.

Disability insurance replaces your income if you become disabled and cannot work. The actual amount of disability coverage you get will be based on your income. Social Security estimates that 1 in 4 20 year olds will become disabled before reaching age 67. 

Ideally, you want a disability policy in place that can cover at least 60%-80% of your AFTER-TAX base pay.

Here are some additional key dates as we approach the end of the year:

November 1st: Open Enrollment begins on the Health Insurance Marketplace (if you do not have coverage through an employer or spouse’s plan this is an important consideration) 

December 31st: Deadline for satisfying RMDs, retirement plan contributions and competing gifts for tax year

January 15th: Open Enrollment ends on the Health Insurance Marketplace

Tax Planning Considerations

Consider filling up your Roth bucket (Roth IRA and/or Roth 401k) if you expect your tax liabilities to be higher in retirement.

Consider filling up your traditional bucket (Traditional IRA and/or 401k) if you are right on the threshold of a tax bracket and/or expect your tax liabilities to be lower in retirement. 

For example, in 2021 a single filer with income over $164,925 (or over $329,850 for MFJ) would jump from the 24% to the 32% bracket for every dollar of income over that threshold.

Contributing additional savings to a traditional IRA or employer sponsored plan may be one way to stay within the lower tax bracket for 2021. 

Do you expect a major windfall that could impact your tax liability such as vesting RSUs, stock options, an inheritance, or an end of the year bonus? You should take some time to review your tax withholding and determine if estimated tax payments may be due in advance of the 2022 tax deadline. 

Savings Considerations

Do you have a high-deductible health insurance plan with access to an HSA (health savings account)? You may be able to contribute up to $3,600 as an individual ($7,200 as a family).

Contributions to an HSA are typically excluded from your gross income, earnings are not taxed within the account, and as long as distributions are used for qualified medical expenses they are tax free. 

HSAs are normally portable, meaning they can also move with you when/if you change jobs. 

If you have access to a 401(k) plan, are you planning to max it out in 2021? If you are under the age of 50, you can defer up to $19,500 of your income from your employer. 

This is also a good time to review what types of contributions your 401(k) or employer sponsored retirement plan allows you to make, whether that’s traditional pre-tax, post-tax Roth, and even after-tax employee contributions. 

If your plan does allow for after-tax contributions above your standard $19,500 traditional or Roth limit, it is also worth reviewing if you would benefit from executing a mega backdoor Roth.

This is a strategy that allows higher earners to set aside additional money into Roth, especially when they are not eligible to contribute to a Roth IRA because of IRS income phaseout limits. 

Do you still have a balance in your FSA (health flexible spending account) or do you expect to have a balance at the end of the year? In some cases you may be able to rollover up to $550 in FSA funds into next year. 

Normally, FSA funds are “use it or lose it” in that calendar year 12 month, so be sure to spend any outstanding FSA funds on qualified medical expenses for 2021 or confirm with your benefits team your options for rolling over up to $550 into 2022.

It’s also a good time to review how much to contribute to your FSA going into 2022 to ensure you have the right amount being set aside to be spent on health care costs next year. 

Estate Planning Considerations

Do you have a will in place and if so, did anything change in 2021 that warrants an update to your will? 

Having a will in place is one of the most important tools for you and your family to ensure your wishes are carried out according to your desires and preferences. There are different types of wills, but the most common type is a testamentary will. 

A testamentary will is a legal document, preferably notarized and reviewed by an estate planning professional, that spells out how you want your affairs to be handled after you die. This includes anything from how you want your assets distributed, guardianship for minors, funeral arrangements, and even personal belongings. 

The major benefit of having a will is the ability to determine how and what happens to your property in a way that clearly defines your wishes.

If you pass away without a will, also known as “intestate”, the state laws in place determine what happens to all of your property and assets, which is something you likely want to avoid if you want to have a say in how your property is passed on.   

Most everyone should have a will in place, especially if there are multiple parties involved in your estate planning picture. The end of the year is a great time to set up your estate plan before life gets busy again. 

You also need to consider setting up a power of attorney (POA) to ensure your affairs will continue to be managed in the event you become incapcited. You should designate a trusted person to act on your behalf in the event you are unable to do so. 

The type of POA can take different forms, such as being restricted to matters of health care or finances, but it’s important to determine your need for a POA.

The process is relatively straightforward by completing a legal document and designating the type of POA whether that be conventional, durable, springing, or medical. 

A durable POA stays in force for the lifetime of the individual unless altered or cancelled and is a popular structure given the low cost and ease of being able to manage someone’s affairs. 

Summary

The end of the year is a great opportunity to take an honest inventory of your overall financial situation and start making a plan to fill in any gaps. 

For example, do you have the proper estate planning documents in place? This is especially important if your family situation changed at all in 2021, whether you are newly married or a first time parent. 

Do not hesitate to put a proper financial plan in place as we approach the end of the year. Plan for the emergency, not during the emergency. 

It’s important to work with a financial planner that you can trust focused on educating and empowering you in your journey toward financial independence. We are here to guide you through any end of the year planning scenarios and making any needed adjustments to your financial plan. 

Before you take on any investment or retirement strategy, it is vital that you seek out proper investment and tax advice beforehand. Investment performance is never guaranteed and investments may lose some or all of their value. On top of that, there may be severe tax consequences if withdrawals are taken improperly and can have a significant impact on your portfolio and retirement. Although we provide Investment Advice and Personal Financial Planning Services, we at MWM do not provide tax advice and any tax advice should be rendered by a licensed tax professional such as a CPA.