Financial Planning

Things you can do for your future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is an excellent time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

Can you contribute more to your retirement plans this year? In 2021, the contribution limit for a Roth or traditional individual retirement account (IRA) is expected to remain at $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA. With a traditional IRA, you can contribute if you (or your spouse if filing jointly) have taxable compensation, but income limits are one factor in determining whether the contribution is tax-deductible.

Remember, withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty starting again in 2021 because the CARES Act ends December 31, 2020. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for tax-exempt and penalty-free withdrawal. Tax-free and penalty-free withdrawals from Roth IRAs can also be taken under certain other circumstances, such as a result of the owner’s death.

Keep in mind, this article is for informational purposes only, and not a replacement for real-life advice. Also, tax rules are constantly changing, and there is no guarantee that the tax landscape will remain the same in years ahead.

Make a charitable gift. You can claim the deduction on your tax return, provided you follow the Internal Review Service (I.R.S.) guidelines and itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you should consider documenting it. Some contributions can be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the I.R.S. does not equate a pledge with a donation. If you pledge $2,000 to a charity this year but only end up gifting $500, you can only deduct $500.  You must write the check or make the gift using a credit card by the end of December.

These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your record-keeping approach or your strategy for making charitable gifts.

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to write off expenses linked to the portion of your home used to conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,600 contribution for 2021 if you are single; $7,200 if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.

If you spend your HSA funds for non-medical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Review your withholding status. Should it be adjusted due to any of the following factors?

* You tend to pay the federal or state government at the end of each year.

* You tend to get a federal tax refund each year.

* You recently married or divorced.

* You have a new job, and your earnings have been adjusted.

These are general guidelines and are not a replacement for real-life advice. Make certain to consult your tax, human resources, or accounting professional before modifying your withholding status.

Did you get married in 2020? If so, it may be an excellent time to consider reviewing the beneficiaries of your retirement accounts and other assets. The same goes for your insurance coverage. If you are preparing to have a new last name in 2021, you may want to get a new Social Security card. Additionally, retirement accounts may need to be revised or adjusted?

Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Might any commissions or bonuses come your way in 2021? Do you anticipate selling an investment that is held outside of a tax-deferred account?

If you are retired and in your 70s, remember your RMDs. In other words, Required Minimum Distributions (RMDs) from retirement accounts. Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts.

Vow to focus on your overall health and practice sound financial habits in 2021. And don’t be afraid to ask for help from professionals who understand your individual situation. Give us a call if you would like to discuss. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

Sources:

https://thefinancebuff.com/401k-403b-ira-contribution-limits.html

https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act

https://www.irs.gov/publications/p590b

https://www.azcentral.com/story/money/business/consumers/2020/11/22/these-tax-laws-charitable-donations-were-changed-help-pandemic/6295115002/

https://www.investopedia.com/articles/tax/09/self-employed-tax-deductions.asp

https://www.investopedia.com/articles/personal-finance/082914/rules-having-health-savings-account-hsa.asp#:~:text=You%20can%20only%20open%20and,as%20a%20catch%2Dup%20contribution.

https://www.thinkadvisor.com/2020/11/29/10-tax-tips-to-take-by-year-end/

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

October is Financial Planning Month which serves as a useful, annual checkpoint to make sure you are on track to meet your financial goals. A written, up-to-date financial plan encompasses not only investments, but risk management solutions, tax reduction strategies and estate planning.

10 Reasons You Need a Financial Plan

1. To have one comprehensive document to address your finances.

Financial planning provides one summary location for everything related to your family’s financial life. From your budget, to your savings, to your investments, to your retirement, a financial plan helps you consider your finances in a holistic manner, and gives you one central place to see everything at a glance.

2. To ensure your investments are in line with your current short- and long-term goals.

A financial plan includes short-term goals like buying a house and long-term goals like saving for retirement, as well as everything in between. As your goals change through time, your financial plan is a living document that should get updated with your advisor on at least an annual basis.

3. To ensure you’re not spending too much money each month—to have adequate cash flow.

A realistic budget is very important to keeping you on track with your goals. This doesn’t mean you have to deprive yourself of little luxuries—it just means that those are already built into the plan so you don’t overspend.

4. To ensure you’re saving enough money, in the right places, including adequate reserves.

As many of us have learned during the pandemic, having adequate emergency funds is important. That amount varies from person to person, and your advisor can help you define the amount you have saved for emergencies, and help you find the right strategies to use so that your savings are liquid and accessible when you need funds.

5. To ensure your retirement is on track.

Making sure your retirement funds are invested for best performance while matching your risk tolerance and time horizon to retirement is one part of making sure your retirement is on track. Another part is making decisions about your desired retirement lifestyle and the corresponding monthly budget you will need later. These retirement lifestyle decisions can change throughout your working career, but should get more solid as you get from five to 10 years away from retiring.

6. To put and keep adequate protection in place against risks—like health, disability, accidental death and liability.

Providing for your family’s financial security is an important part of the financial planning process, as is assessing other risks you may face such as liability from lawsuits. Having the proper insurance coverage in place can protect your whole family. And today’s policy designs mean you may be able to cover multiple risks with fewer policies—and may even be able to enjoy “living benefits” while providing death benefit protection for your family members.

7. To address and have a plan in place for your estate.

Everyone needs an estate plan. A will allows you to spell out your final wishes, such as listing recipients of each of your possessions and designating minor children’s guardians. A trust can bypass probate court, saving money and keeping things private while easily transferring wealth. Health care directives and powers of attorney are critical should you become incapacitated. When creating your estate plan, your ideal team should include an estate attorney, your financial advisor and your tax professional.

8. To help you manage changes.

A financial plan includes all its various parts and pieces so that you can quickly see what needs updating when life changes happen. Remember, the beneficiaries you list on your individual insurance policies and your retirement accounts (like 401(k)s) take precedence over what is in your estate planning documents. Too many people have had their ex-spouses receive money because they forgot to update all documents properly.

9. To help you mitigate taxes.

It’s truly not how much you have; it’s how much you get to keep. Tax reduction strategies can help you annually, but your advisor can also help you look further ahead to reduce taxes later, such as during retirement. Remember, all the money you have saved in accounts like traditional 401(k)s are pre-tax dollars—you will have to pay ordinary income tax on that money when you withdraw it, which you have to do starting at age 72. Making a plan for taxation can help.

10. To help enhance your peace of mind.

Reducing stress and sleeping more soundly may be the best reason of all to have a financial plan in place.

If you would like to create, update or review your financial plan, please call us. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.