2021 is just around the corner, but there's still time to trim your 2020 tax bill, boost your nest egg, help your community, and secure your financial future in the process. Here are 12 smart money moves to make before 2020 ends.
- There's still time to boost your nest egg, make charitable contributions, and trim your 2020 tax bill.
- If possible, max out contributions to your IRA, 401(k), and other tax-advantaged retirement-saving plans.
- If you have a flexible spending account, you must use the money by the end of the year unless your employer offers a grace period or carryover.
1. Get Your 401(k) Employer Match
A 401(k) can be one of the easiest ways to save for retirement. For 2020, you can contribute up to $19,500, with an additional $6,500 "catch-up" contribution if you're age 50 or older. If you can't contribute the max, aim to contribute enough to get the full employer match—it's like getting a 100% return on your money.
2. Max Out Your IRA
For 2020, you can sock away up to $6,000 in your IRA, or $7,000 if you're age 50 or older (income limits apply to Roth contributions). If you contribute to a Traditional IRA, you can deduct your contributions the year you make them, lowering your tax bill. With a Roth IRA, you don't get a tax break now, but your contributions and earnings grow tax-free, and you can make tax-free withdrawals during retirement.
3. Review Your Required Minimum Distributions (RMDs)
According to the IRS, "The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year."
If you don't need the money, consider skipping the RMD this year and letting the money continue to grow on a tax-deferred basis.
4. Consider a Roth Conversion
A Roth conversion lets you turn a traditional IRA into a Roth IRA. The move triggers a potentially large tax bill: You'll owe ordinary income tax on the entire amount you convert, and it could be enough to push you into a higher tax bracket.
However, moving forward, your contributions and earnings grow tax-free, and qualified withdrawals in retirement are tax-free, as well. If your IRA balance or income has dropped during this tumultuous year, now may be an especially good time to consider a Roth conversion.
5. Self Employed? Consider One of These Retirement Plans
If you're self-employed, you won't be able to save for retirement with an employer-sponsored 401(k). The good news is there are retirement savings accounts designed for the self-employed that let you save more than is possible with a traditional or Roth IRA. Here are three options, along with contribution limits for 2020:
- SEP IRA: The lesser of 25% of compensation or $57,000
- SIMPLE IRA: The lesser of 100% of compensation or $13,5000 ($16,500 if you're age 50 or older)
- One-Participant 401(k)—aka solo 401(k), solo-k, uni-k, or individual 401(k): Salary deferrals up to $19,500, or $26,000 if you're age 50 or older, and total contribution can't exceed $57,000, or $63,500 if you're age 50 or older
With a one-participant 401(k), you can contribute both as an employer and an employee.
6. Donate To Charity
Under the CARES Act, you can now take an above-the-line deduction for up to $300 in annual charitable contributions if you take the standard deduction. And just for 2020: If you itemize, you can deduct donations up to 100% of your 2020 AGI instead of the usual 60%. Meanwhile, corporations can deduct qualified contributions of up to 25% of taxable income.
7. Max Out Your Health Savings Account (HSA)
Health savings account offer three key tax advantages:
- Contributions are tax-deductible
- Savings grow tax-free
- Withdrawals for qualified medical expenses are tax-free
For 2020, you can contribute up to $3,550 for individual coverage or $7,100 for family, with an additional $1,000 catch-up contribution if you're age 55 or older. HSAs are intended to help you pay for healthcare expenses as they arise.
Still, if you're in a financial position to do so, you can treat your HSA as an investment. The longer you leave the funds to grow—and compound tax-free—the more money you'll have to cover healthcare costs during retirement.
The average couple will need an estimated $295,000 in today's dollars for medical expenses in retirement, excluding long-term care, according to a report from Fidelity.
8. Use Your FSA Money
A flexible spending account lets you use tax-free dollars to pay for medical expenses that your insurance doesn't cover. If your employer offers a flexible spending account, you can contribute up to $2,750 through payroll deductions during 2021.
The catch? Under the FSA use-or-lose provision, you generally have to use the money by the end of the year (your employer may grant a two and a half month grace period or allow you to carry over up to $500 of unused funds to the next year). Now is the time to use any remaining FSA money before it's lost forever.
In light of the COVID-19 pandemic, Congress passed the Consolidated Appropriations Act, 2021 that offers more discretion for FSA and dependent care assistance programs. The Act allows for more flexibility when it comes to carrying over unused balances from plan years 2020 and 2021, as well as extending permissible grace periods for these plan years.
9. Contribute to a 529 College Savings Plan
If you have any education expenses coming up, a 529 can be a tax-advantaged way to save. Under new tax laws passed in 2017 and 2019, you can now use a 529 plan to pay for K-12 expenses, not just college and other post-secondary education.
Contributions aren't tax-deductible at the federal level, but more than 30 states offer a full or partial tax deduction or credit. Contributions grow federal tax-free, and withdrawals are tax-free when used for qualified education expenses. You can contribute any amount to a 529, but anything over $15,000 per individual—the annual gift tax exclusion—can trigger federal gift taxes.
10. Pay Home Business Expenses
If you have a home business or freelance gig, now's a good time to review your income and expenses to avoid surprises on Tax Day 2021. If your taxable income is higher than you expect, pay for any home business expenses you've been planning now—before the end of the year—to lower your overall taxable income for 2020.
11. Make Up for Estimated Tax Shortfalls
If you haven't paid enough in taxes throughout the year, you could end up owing a tax penalty. To make up for an estimated shortfall, contact your human resources department to update your W-4. If you need help figuring out how much your employer should withhold from your paychecks, try the IRS withholding calculator. If you're self-employed, add more to your remaining quarterly estimated tax payment.
12. Use Your Annual Gift Tax Exclusion
It won't save you any money this year, but you can lower your estate tax exposure by using the annual gift tax exclusion. You can give up to $15,000 each to as many beneficiaries as you like each year without triggering a tax impact.
To take advantage of the exclusion this year, the gift needs to be "completed" in 2020. That's not the same as handing someone a check on New Year's Eve. Instead, a completed gift requires you to give up control of the asset—and your ability to take it back. Unless you're giving cash, send checks and transfer securities as soon as possible to complete the gift by Dec. 31.
The Bottom Line
As 2020 comes to a close, now is an excellent time to get your financial house in order. Use these tips to trim your tax bill, boost your nest egg, and help the community. Remember to update your beneficiary designations and check in with your financial planner or tax advisor if you have any questions about your financial strategy.