The lights are strung, presents have been bought and plans are set for holiday entertainment. For many people it’s time to leave work behind and enjoy the last few days of the year.
However, if you can find a few minutes to spare before turning out the lights on 2021, it may be worthwhile to review your finances and make some last-minute moves. Here are five possible actions that won’t take much time and may end up saving you plenty down the road.
Maximize 401(k) Retirement Plan Contributions
Many professionals still have one paycheck left in the year. If you haven’t contributed the maximum amount to a company-sponsored 401(k) retirement plan, see if you can make up any lost ground. For example, if you typically contributed $500 per paycheck, you may want to bump the last contribution up to $1,000.
For those 50 years old or older, you can make a catch-up contribution as well – the maximum limit in 2021 for the catch-up is $6,500. If you turned 50 during 2021 and didn’t adjust your election, make sure you maximize this contribution as much as possible in your last paycheck.
Next, review your contributions for 2022. The contribution limit will go up next year – from $19,500 to $20,500. The catch-up contribution will stay the same, so if you will turn 50 next year, make sure you take advantage.
Recent changes in the federal tax laws provide a higher hurdle for some taxpayers to itemize donations, so many no longer can take a deduction for their charitable gifts.
One of the most well-known tools to reach the itemized deduction threshold with charitable gifts is a Donor Advised Fund (DAF). This vehicle allows one to contribute cash, stock or other appreciated assets, receive a tax deduction at the time of the gift and make generous donations to charitable organizations over time when they choose to do so.
My firm works with families who contribute significant dollars annually to various nonprofit organizations. One client recently had an unusually high income after cashing in stock options and receiving other compensation at retirement. Needing a tax deduction to offset these gains, he set up a DAF with a $200,000 tax-deductible contribution.
While the tax deduction helped offset his high income, he used money from the fund to make $20,000 in annual contributions to his favorite charities for the next 10 years. Now that he is retired and his taxable income is significantly lower, he will simply take the generous new …….