2021 year-end financial planning checklist

Emergency funds, retirement accounts, and more.

The end of the year is a good time to check in on your financial plan to see if everything is on track or if some things need adjusting. You will be in a better position for 2022 the sooner these items are addressed and adjusted if they are off-track.

Check Emergency Fund

If you utilized your emergency fund at some point this year, it is important to make sure the account is replenished to appropriate levels. The general rule of thumb for appropriate emergency fund amounts is:

  • 3 months for a dual income family
  • 6 months if in a single income household.

A 6-month emergency fund is also recommended if one person earns significantly more than the other and their income is relied upon to maintain the family’s standard of living.

Max Out Retirement Accounts

The contribution limit for 401(k)s and 403(b)s in 2021 is $19,500. The catchup contribution amount for those over age 50 is an additional $6,500. The deadline for making 401(k) and 403(b) contributions is 12/31/2021. The contribution limit for individual retirement accounts (IRAs) is $6,000 and an additional $1,000 for those over age 50. IRA contributions can be made up to the April 2022 tax filing deadline.

Use Money Saved in Flexible Spending Accounts (FSAs)

Utilizing a healthcare, dependent care, or limited purpose FSA is a great way to pay for certain services on a pre-tax basis. Be aware, most FSAs are use-it-or-lose-it accounts, meaning any money remaining at the end of the year gets forfeited back to the plan, not back to you. Some employers allow a $500 carryover to the following year or a grace period into the spring, but most do not.

Contribute to 529 Accounts

The cost of college continues to rise. 529s provide tax-advantaged investment growth to assist with saving for post-high school educational opportunities like university, community college, trade schools, and apprenticeships. Many states offer considerable state income tax deductions for contributing to a 529. To receive a 2021 tax deduction, contributions must be made before 12/31/2021.

Make Gifts

You can give up to $15,000 as an individual and $30,000 as a married couple to an unlimited number of people per year without having to pay gift tax. Making gifts can be an effective way of removing assets from an estate to avoid future estate taxes. To count for 2021, gifts must be made before year-end.

Donate to Charity

If you are hoping to get a tax deduction for donating to charity, those donations must be made by 12/31/2021 to count toward your 2021 taxes. However, to get a tax deduction, you may need to gift a significant amount to get above the standard deduction. Look to see if you have appreciated assets you could donate instead of cash. Donating appreciated assets from your taxable accounts allows you to avoid paying capital gains taxes when the investments are sold. The charity can sell the investments and avoid paying the taxes, and you get to claim a deduction for the full value of the donated investments.

Harvest Tax Losses

Tax loss harvesting can be an effective tool to reduce taxes. If any investments in your taxable accounts have lost money, those investments can be sold, and the loss captured. This loss can then be used offset gains in other investments or potentially lower your 2021 tax bill. Up to $3,000 ($1,500 if you are married filing separately) of net capital losses can be deducted against ordinary income, self-employment income, and interest income. If you have captured losses above these amounts, the excess can be carried over to future years to offset gains or deduct against income. Tax loss harvesting must occur before 12/31/2021 to count towards 2021.

Update Beneficiaries

Major life events can result in a need to update your beneficiaries. If you got married, divorced, had a birth or death in the family, you may need to update the beneficiaries on your retirement accounts and life insurance policies. These events may also necessitate updating your Will and Power of Attorney documents. There is no deadline for these changes, but the sooner the better.

This list should give you a nice head start, but there are likely to be other items to check up on. Speak with your financial advisor and/or accountant to see if they recommend any additional strategies for the year. Doing so should put you on strong financial footing heading into 2022.

Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at witz@mediqus.com.
200 North LaSalle Street - Suite 2300 - Chicago, Illinois 60601
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