The end of the year isn’t the only time to tackle financial to-dos. The first of the year can be a great time to wrap up tasks you didn’t quite get to in Q4, or to set yourself up early for wealth planning success in the coming months.
If you’re ready to start 2021 on solid financial footing, rather than putting things off until later on in the year, then check out our first-of-year wealth and financial planning checklist.
#1 Review your 2020 finances and investments and make necessary adjustments.
Take a look at your spending, savings for retirement, cash flow, withdrawal strategy, and debt structure — whatever is applicable to your personal finances. Determine where you may need to make adjustments for 2021 based on projected expenses. For example, are there any major purchases or financial obligations on the horizon, like a relocation or child’s college tuition? What changes will you have in compensation or new stock grants?
Try to understand (as much as you can in advance) your 2021 financial outlook, so you can ensure that you are as prepared as possible.
#2 Increase contributions to your tax-advantaged accounts.
As you may know, the Treasury Department released inflation-adjusted figures for retirement account savings for 2021. Although contribution limits remain the same as 2020 for most accounts, there were some changes. Here are a couple notable ones:
- For 401(k)s, the basic salary deferral amount ($19,500) and the 50+ catch-up contribution limit ($6,500) is the same, but the overall limit (including after-tax contributions in eligible plans) increased $1,000 (from $57,000 to $58,000).
- Small business owners: That $58,000 also applies to SEP IRAs and Solo 401(k)s.
- HSAs limits increased $50 for 2021 for individuals with self-only coverage ($3600) and $100 for individuals with family coverage ($7200).
For IRAs, the limit is still $6,000, and the catch-up contribution limit is still $1,000. The inflation adjustments have positive implications for deductible IRA and Roth IRA phase-outs, so be sure to discuss with your wealth advisor. Still need to contribute to your IRA for 2020? Take care of that now, as well (the deadline is April 15).
#3 Get a jump start on tax prep.
Meet with your tax professional as soon as possible to get the ball rolling on your 2020 returns, and start gathering and organizing the documents you’ll need to file.
Looking ahead: Adjust your tax withholding if needed, and also discuss any adjustments you need to make. We believe it’s unlikely we’ll see any major changes in tax legislation for 2021, but it’s always a good idea to consider tax-smart planning options with your accountant or CPA.
#4 Review estate plan & beneficiary designations.
Periodic review of your beneficiary designations is a task that can get overlooked, but is important to do, especially if you’ve had a major life event or have new assets that need to be included in your designations. This will ensure your assets will be distributed per your wishes.
Other estate planning updates you should take care of early in the year might include your will, real property ownership, living trust, or setting up or funding an irrevocable life insurance trust (ILIT).
#5 Review your gifting plan for children and grandchildren.
If you intend to gift money to children or grandchildren in 2021, consider the best way to make the gifts (cash gifts, 529 plans, and so on). The annual gift exclusion for this year (what you can give without you or the recipient having to notify the IRS) is $15,000 per person, or $30,000 if each spouse gives separately. Giving more than that amount will necessitate that you disclose the gift to the IRS.
Note: If you’re “gifting” more than that to help pay tuition or medical bills, then paying the educational institution or hospital directly can help you avoid the gift tax return requirement.
#6 Hire a wealth advisor.
If you’re really serious about wealth management and having an objective outside party in your camp who can help you fine-tune your financial plan and keep you on track to reaching your wealth goals, then it’s time to seek out professional wealth management.
One thing you may not know about wealth management? We do more than just help you with investing or retirement planning. We’re here to help you with every single piece of your financial picture, including tax planning, legacy and estate planning, succession planning and other services for small businesses, and so much more.
With so much to navigate in the current financial landscape, it can bring peace of mind to know you’re working with a trusted wealth advisor. Learn more about the comprehensive financial planning services we offer at Ironwood Wealth Management, and get in touch with us today.