The Definitive Year End Planning Checklist for 2020

December 9th, 2020               Matt Bacon

2020 is finally coming to a close and thank goodness! The year may as well have been a Tarantino flick. We can count a global pandemic, millions of deaths, trillions of dollars in global debt, mental depression, social unrest, and a contested US Presidential election to its impressive list of achievements. There is at least one silver lining; kind of. Savings rates for workers in the ‘knowledge economy’ skyrocketed this year.

Somewhat unsurprisingly, you can save a truckload of money when your income doesn’t dry up but the things you can spend it on do. If you have a fancy new pile of cash or are just looking for some great tips to tidy up your portfolio before we officially wave goodbye to 2020, read on.

Investment Portfolio

  • Check for tax loss harvesting opportunities. Sometimes it makes sense to sell one thing at a loss and use the proceeds to buy something incredibly similar / nearly identical with the proceeds. Your allocation doesn’t change but you can claim a loss for tax purposes. Just be careful not to get tripped up with Wash Sale rules. Check with an advisor (we can help!) if you’re not sure how to do this.
  • Rebalance your portfolio. Take the money out of the winners and stick it back into the losers. Does it feel counterintuitive? It is. But you still have to do it to keep your portfolio from running rampant and ratcheting up risk.
  • Buyer beware on new mutual fund purchases in December. Many funds distribute gains at year end. You could be get hit with the tax impact from decisions made earlier in the year despite the fact that you didn’t own the fund at that time. Tread lightly. That, or postpone the purchase until January.
  • Reevaluate your risk tolerance and time horizon. 2020 was a hard and weird year and the goalposts may have moved for you. Taking a second look at your risk profile may make for a shrewd move; especially if you’re planning on retiring sooner than initially thought.

Income Tax

  • Double check your withholding rate with your employer. Why overpay?
  • Roth IRA conversions. You might be in an artificially low tax bracket this year with the pass you got on required minimum distributions. Couple that with the historically low current tax environment and Roth conversions may be a good option for you this year.
  • Accelerate your stock options. We have a low current tax environment. If you or your spouse had any period of unemployment this year you may be in a low tax year to boot! Think about accelerating some of the income from your stock options into the current year and check with your tax advisor to ensure this makes good financial sense.

Retirement Planning

  • Max out your retirement accounts. There is still time to get money into your 401k if you haven’t tapped out for the year. Check with HR and up your final contributions if you’re not already there. Don’t have a 401k? Open an IRA and fund to the maximum. Have a non-working spouse? Consider doubling up and opening a spousal IRA.
  • Did your minor aged children work for a real job with real income this year? Consider setting up a Roth IRA for them. Be very careful if that real job was working in the family business. There are strict rules against self-dealing.
  • Examine the employer stock in your 401k if you switched jobs, retired, or hit age 59.5 this year. You may be eligible for Net Unrealized Appreciation (NUA) treatment on that stock, which can be a true game changer for some.
  • Fund your Health Savings Account (HSA) for the year. Balances can be used for medical expenses like long-term care premiums and doctor copays tax free.

Estate Planning

  • Check your beneficiary designations. Your ex-spouse is probably thrilled that you included her in your final plans. Your current spouse might not be.
  • Check on your life insurance. We’re in the middle of a pandemic. Get this done.
  • You get a pass on all required minimum distributions this year, but the charities you love to support still need your help. Don’t forget to make a qualified charitable distribution from your retirement accounts if this is something you normally do.
  • Add a trusted contact person to your investment accounts. This person can’t exercise any control on the account but can be given information about it. This is incredibly helpful in preventing fraud and financial exploitation if you are incapacitated.

Workplace Benefits

  • Double check your beneficiary designations on your workplace life insurance benefit and retirement account. ‘Nuff said.
  • Spend your Flex Savings Account money. This is usually a use it or lose it type of arrangement. Spend it if you have money here and your employer doesn’t allow you to roll it over!
  • Make your deferred compensation elections. Too much money is a fantastic problem to have. Defer what you don’t need to a future year when your tax bracket will be lower (i.e. retirement).

All the Other Stuff

  • Check your credit report. TransUnion, Experian, and Equifax are the big three. You can request a credit report from each one of these guys once a year for free. Space these out and make a request every four months. Inform the credit bureau if you spot an error. It’s an absolute chore to rectify an error but worth it in the long run.
  • Top up your emergency fund. You should keep three to six months worth of expenses in cash. You probably know better but don’t shove it under your mattress or bury it in the backyard. Stick it in the bank like a normal person and don’t touch it until bad stuff happens.
  • Include one financial goal in your New Year’s Resolutions. “Saving more” is a bad one. “Increasing my 401k deferral to 12% by March” is a great one. Make it tangible. Make it count.
  • Don’t leave your kids hanging. Make sure you fund those 529 college savings accounts.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risks and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.

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