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End of Year Financial Planning Tips: Pandemic Style
By: Jordan Sowhangar, CFP®, Vice President and Wealth Advisor, Girard, a Univest Wealth Management Division
Uncertain, chaotic, controversial – just some of the words that come to mind when reflecting on 2020. For many, this year has been both a whirlwind that will cause us to look at the upcoming years through “new normal” colored glasses. While we have focused on social distancing, masks, and media headlines for most of this year, it is time to direct our attention to our finances. Now, more than ever, it is important to review how your finances were impacted this year and what should be done to help improve them by year-end. Below are five end of year financial planning tips – pandemic style.
- Check on your retirement accounts. If you haven’t done so already, now is the time to review your asset allocation in accounts like your 401(k) or IRA. After years of what was overall a rosier market environment, 2020 has been the perfect test for investors in terms of gauging their risk tolerance. We saw extreme volatility in a short period of time, swinging our major market indexes both significantly upward and downward throughout the year. If you were like many investors who lost sleep over those fluctuations in your portfolio, it may be time to adjust the risk in your portfolio. It is important to review these potential changes with your wealth advisor in order to find an appropriate mix for both your overall risk appetite as well as your financial situation.
- Tax-loss harvesting in non-retirement accounts. This is good practice in any year, but certainly in years with volatility, and 2020 is no exception. The idea behind tax-loss harvesting is to look at ways to offset capital gains with capital losses or even use those losses to help offset regular income. This year has brought significant discrepancies between certain sectors as well as individual companies creating various “winners” and “losers.” This scenario can create an excellent opportunity for offsetting the “winner’s” gains, with the “loser’s” losses. It is important to review this strategy both with your wealth advisor and tax advisor as there are several rules to consider for this to be effective.
- Review a potential Roth IRA conversion/Roth IRA contribution. For those who have not been able to contribute to a Roth IRA because of income limitations in the past, 2020 may have brought an opportunity for you to do so. If you experienced any job loss or decrease in income, as many did during this pandemic, your overall income figures may now be at a point where the IRS will allow you to contribute some of your earnings into a Roth IRA. While there aren’t income limitations on a Roth IRA conversion, every dollar that you convert from Traditional IRA assets into Roth IRA assets is taxed at your ordinary income rate. Utilizing this conversion strategy during a lower income year can potentially help minimize the amount you’ll be paying in overall taxes. Again, it is vital that you review this with both your wealth advisor and tax advisor to ensure you are complying with IRS rules and to make sure these strategies fit in with your overall financial picture.
- Review your 529 expenses and reimbursements. This is especially important for 2020 as students saw a huge disruption to their regular college experience. Many colleges shut down only to return with online classes or some sort of hybrid schedule for their students. For some students and parents, this resulted in a refund or partial refund of payments previously made from their 529 plan. For this refund to avoid taxation and penalties, it must either be redeposited back into the 529 plan within 60 days of the refund being issued or it must be used for another qualifying education expense before the end of the year. To that end, with all the disruption colleges have seen this year, it is important to also take this time to review any qualifying education expenses you incurred this year that you have yet to get reimbursed for. For most 529 plans you will have until the end of this year to complete this.
- Look into charitable giving. Charities too are struggling this year amidst our global pandemic, making it as important as ever to give, if you are able. Your donations could also have a positive impact on your tax situation, creating a win-win for both you and the nonprofit organization. Earlier this year, the CARES Act was passed in direct response to the 2020 pandemic. As a result, individuals have an opportunity to realize an “above the line” deduction for charitable gifts made in cash up to $300. An “above the line” deduction means you do not have to itemize deductions in 2020 in order to claim this. If you are itemizing deductions in 2020, the CARES Act is also allowing individuals to deduct up to 100% of their AGI (Adjusted Gross Income) for cash contributions made in 2020. Consult with your tax advisor on how to handle for your specific situation.
Although most people are anxious to put 2020 in the rear-view mirror, it is crucial that we take the time to make the most of our finances before year-end. Reviewing these tips with your wealth and tax advisors to understand how they fit into your overall financial plan can help you to finish this year on a financially positive note.
Working with a financial advisor can help you create an investment strategy that matches your time horizon and risk tolerance and help you stick with that plan even while navigating challenging years like 2020. To have a conversation about your financial goals and how we can help, please reach out to a Girard advisor.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial, tax and/or legal professionals before making any financial decisions.