Money Pilot Financial Advisor Podcast
Money Pilot Financial Advisor Podcast
Episode 70 Year End
Today we’re looking at things you should consider before the end of this year. If you single and have less than $40,400 taxable income in 2021 or $80,800 if married filing jointly you’re in the 0% capital gains tax bracket. You have a capital gain when you sell an asset, like property, stocks, bonds or mutual funds, for more than you paid for it. So this may be an opportunity to sell assets that have grown in value, pay 0% taxes on that profit and reinvest into something else. For more info on the capital gains tax check out Episode 44.
If you saving for college in a 529 account, you may be eligible for State Income tax deductions or credits. Some sates will even add or match contributions for taxpayers with modest incomes. Check out your states 529 account website for rules and details.
If you haven't maxed out your 401k or TSP contributions this year there's still time to increase your savings. For 2021 the max is $19,500 a year or $26,000 if you are 50 or over. At least save enough to get your full match. For BRS military and FERS federal employees, that's at least 5% of you annual income.
If you are single with an Adjusted Gross Income less than $125,000 or Married Filing Jointly with under $198,000 of income, you can contribute earned income to a Roth IRA. And a non-working spouse can also contribute to a ROTH IRA as long as your working spouse has enough earned income. You contribute money to Roth IRA after you’ve paid tax on it. Then it grows tax-free. It's a great way to take advantage of being a low tax bracket now to save something, grow overtime, and be tax-free to you in retirement. You can contribute up to $6,000 a year to an IRA or $7000 a year if you’re 50 or older for this year through April 15, 2022.
If you will be in a higher income tax bracket when you retire, consider doing a Roth conversion. You take money from a traditional IRA, 401k, or TSP, pay income tax now on the withdrawal, and deposit it in a ROTH 401k or ROTH IRA. You cannot covert a traditional TSP into a ROTH TSP. You can convert a Traditional TSP into a ROTH IRA. Conversions must be completed within 60 days of making your withdrawal to avoid penalty. And It is best to use cash to pay the income tax on the conversion, instead of using retirement savings to keep your savings growing and avoid possible early withdrawal penalties. ROTH conversions can take a while, so if you want to do one for 2021, don't delay. To learn more about ROTH accounts listen to Episode 28 Meet Roth, Episode 29 Roth IRA, and Episode 30 To Roth or Not to RotH.
Did you get a raise or a bonus or your spouse start working this year? Did you owe federal income tax or get a big refund last tax season? Then take another look at your federal income tax withholding to make sure you don’t end up with a large tax bill or a refund at the end of next year. The IRS has a great online tool to help you determine how much withholding you should have and print out a new W-4 to your employer. https://apps.irs.gov/app/tax-withholding-estimator
If you do not itemize your taxes you are eligible for a tax deduction for cash charitable contributions you make this year of up to $300 if your single or $600 if MFJ. Save your receiptsand make the gift before the end of the year.
If you have a Flexible Savings Account you may be able to carry over unused benefits from this year into 2022. Check with your particular plan. Federal employee with a FSAFEDS account, can carry over all remaining funds into 2022. But you must re-enroll in the same account(s) during Open Season, Nov 8th to December 13th this year. If you fail to re-enroll, you forfeit all your unused funds. Note though, this benefit carryover only applies to Health Care FSAs. You cannot carry over any balance left in a 2021 Dependent Care FSA.
Welcome to the Money Pilot Financial Advisor podcast, where you team up with Money Pilot founder, former Army helicopter pilot, and your host Katie Cannon to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and land your financial life. Hello, and welcome back to the podcast. Today, we're going to take a look at things you should consider before the end of this year. Our discussion includes a bunch of numbers and things, but don't fret, you'll be able to see them in the show notes. So other than planning your New Year's Eve party, what's so important to consider before the end of December? Well, there's quite a few opportunities to make sure you get the best deal out of your savings, and decreasing your taxes. So listen up, we'll be looking at investments, retirement accounts, health care, flexible savings accounts, charitable, charitable giving, and more. So sit back, and let's get started. Let's begin with those of you that are in the lower income tax bracket. I mean, having less money is a bit of a drag. But honestly, there's some great opportunities, especially for tax planning in these lower tax brackets. If you're single and have less than $40,400 of taxable income in 2021 or$80,800, if you're married filing jointly, you're in the 0% capital gains tax bracket. You have a capital gain when you sell an asset like property stocks, bonds, or mutual funds for more than you paid for it. So this may be an opportunity if you have any assets that have grown in value, because you're in the 0% capital gains tax bracket. If you sell your asset, you pay 0% taxes on that profit, it may be a great time to reinvest the profit, again, called capital gains into something else, sort of resetting your buying price. So when you sell it again, in the future, you would owe taxes on a lesser amount than if you held the first investment the whole time. Just remember, your capital gains will increase your taxable income. So for example, if you're married and right now earn $70,799, you can have an additional $10,000 in capital gains taxed at 0%. That's because your earned income plus your capital gains is just under that $80,800 income limit for that 0% Capital Gains bracket. For more info on the capital gains tax, check out my Episode 44. Are you saving for child's college education in a 529 savings account, you may be eligible for state income tax deductions or credits. Some states will even add or match contributions for taxpayers with modest incomes. So check out your state 529 account website for rules and details. And if it makes sense, get those contributions in before the end of the year. Have you maxed out your 401k or TSP contributions this year? For 2021 that's $19,500 a year or$26,000 a year if you're aged 50 or over. There's still some time to increase your contributions and save more before the end of the year. This can be especially beneficial if you haven't contributed enough yet to get your full match for 2021. For BRS military and first federal employees, that means you must contribute at least 5% of your annual income to get your full government matching contribution. But you need to act fast to change your pay deductions for November and December. Would you like to save more for your future retirement. If you are single or file as a head of household and have an adjusted gross income of less than$125,000, or married filing jointly with less than $198,000 of income, you can contribute to a Roth IRA. You need at least as much earned income as you want to save into your Roth IRA this year. But a non working spouse can also contribute to a Roth IRA. As long as your working spouse has enough earned income. With a Roth IRA, you contribute the money after you've earned it and pay tax on it. But since once it's in the Roth account, all the increase in value is tax free. So when you tap into it in old age, every dollar goes in your pocket, none of it goes to Uncle Sam. Even though retirement seems like such a long way off, this is a fantastic way to take advantage of being in a low tax bracket. Now, to save something, have your investment grow over time, and be tax free to you in retirement. You can contribute up to $6,000 a year to a Roth IRA, or $7,000 a year if you're 50 or older. You can actually make contributions for 2021 all the way through April 15 2022. So if you know you have the money available, go ahead and do it before the end of the year. But if you're unsure, keep it on your to do list and just take a relook at it before April 15. If you think you'll be in a higher tax bracket when you retire than you are now, you may consider doing what's called a Roth conversion. With a Roth conversion, you take money from a traditional IRA, 401k, or TSP, pay the income tax now on the amount you withdraw, and then immediately deposited it into a Roth 401 K or for Roth IRA. Unfortunately, you cannot convert a traditional TSP into a Roth TSP, but you can convert a traditional TSP into a Roth IRA though. The idea is that you pay income tax on it early while you're in this lower tax bracket. Then your withdrawals after age 59 and a half, including the growth on your investments is all tax free. Also, you're not required to take distributions from a Roth IRA at age 72. Like traditional IRAs, the Roth gives you more flexibility. Conversions need to be completed within 60 days of making your withdrawal to avoid penalty, and it's best to use cash to pay the income tax on the conversion. Instead of using retirement savings to keep your savings growing and avoid possible early withdrawal penalties. Roth Conversions can take a while and they can be a bit complicated. So if you want to do one for 2021, you need to get going on it. Want to learn more about Roth accounts? Take a listen to episode 28. Meet Roth, Episode 29, Roth IRA and episode 32. Roth are not to Roth. Alright, how about did you get a raise or bonus this year? Did your spouse start working? Did you owe federal income tax or get a big refund last tax season? Now's the time to take another look at your federal income tax withholding to make sure you don't end up with a large tax bill or refund at the end of next year. The IRS has a great online tool to help you determine how much withholding you should have and print out a new W4 to give to your employer I put a link to that app in the show notes. It's at irs.gov. And remember, if you're charitably inclined and do not itemize your taxes, which is almost everyone, you are eligible for a tax deduction for cash charitable distributions, you make this year of up to $300 if you're single, or $600 If married filing jointly. So save your receipts. This deduction is not scheduled to continue next year. So if you're thinking of making a gift to charity in the next few months, do it before the end of the year and get a little break on your taxes. All right next up, according to COVID related legislation. A Health Care Flexible savings account may allow participants to carry over unused benefits from this year to the plan year ending in 2020. Check with your particular plan. If you're a federal employee with an FSAFEDS account, you may carry over all remaining funds in your health care FSA, or LEXFSA in 2022. But you must re enroll in the same account during the Open Season, which runs from November 8 to December 13. This year, if you fail to re-enroll, you forfeit all your unused funds at the end of the year. So if you have a balance and are on the fence about re-enrolling in an FSA, spend it all before the end of this year, or re-enroll so you can carry it over to next year. And just one more note, this benefit carryover only applies to health care FSA, as you cannot carry over any balance left in 2021 in a Dependent Care FSA, so for that, you must still use it or lose it as usual. All right, the holiday season is just around the corner, and you're gonna be busy enough as it is. Take some time now, to think about how you might pay less taxes, save more for retirement, or keep unused FSA funds before the end of the year and get in gear. To wrap it up. If you're in the 0% capital gains tax bracket, it may be worthwhile to sell some assets, pay that 0% tax and then reinvest it. If you're saving or considering saving in a 529 account for education expenses, check out your state 529 program to see if you qualify for state tax breaks or matching funds. Speaking of matching funds, if you aren't saving enough to your TSP or 401k to get your full match this year, consider upping your allotment to get this free money or contribute up to the max to save the most for retirement. You can also put away more for retirement by saving directly to into a Roth IRA as long as your income is under certain limits. And anyone can do a Roth conversion, which often makes sense if you will be in a higher tax bracket in retirement and you have the cash now to pay the taxes on the converted amount. If your income tax withholding has been off or will change, check out IRS withholding calculator and get a new W4 to submit to your emp oyer for 2022. If you donate cas to charities keep your 2021 rec ipts for tax deduction. And las ly, if you have a health car FSA, either spend it before the end of the year, or re-enr ll in your FSA during Open Sea on to carry over your unused enefits. I hope this has been elpful and have a great finish o 2021.
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