End of Year Planning: Set Goals and Reduce Taxes

End of Year Planning: Set Goals and Reduce Taxes

November 05, 2020

By the last third of the calendar year, you're likely to have a pretty good idea of what your annual income will be and whether any major expenses or big life changes await you. This can allow you to engage in more robust tax planning, creating the first draft of your federal and state income tax returns to see what factors you can tweak and what goals you can set to reduce your overall tax burden. Read on for some points to consider as you close out 2020. 

Maximize Your Retirement Savings

By knowing your adjusted gross income (AGI) and top marginal tax rate, you're better able to maximize the impact of your retirement contributions based solely on their tax status. Contributing to a traditional IRA or 401(k) can help reduce the amount of your gross income that is subject to tax, while contributing to a Roth IRA or 401(k) can allow you to pay taxes now and benefit from tax-free growth later.

By early fall, you should also have a better idea of whether you'll come close to the income limits for traditional or Roth IRA contributions. In some cases, it may make sense to push off irregular compensation like bonuses or stock payouts into the next calendar year (if you can) if receiving these funds in 2020 will cause you to phase out of certain tax benefits.

Investigate a Roth or Backdoor Roth

The Tax Cuts and Jobs Act of 2017 expires in 2026, and many expect tax rates to increase significantly by then. Contributing to a Roth IRA directly (or through a "backdoor Roth" conversion) can allow these funds to be taxed at today's lower rate and then withdrawn, tax-free, in retirement. 

A backdoor Roth allows those whose income puts them over the contribution limit to make non-deductible contributions to a traditional IRA, then roll these over to a Roth immediately.1 By performing this conversion, the account owner can benefit from all the features of a Roth even if they can't contribute to this account directly.

Don't Lose Your FSA Funds

If you have a healthcare or dependent care flexible spending account (FSA), these funds are likely covered by a "use it or lose it" rule. Once you're approaching the end of the plan year, you may want to go ahead and schedule any necessary procedures to take advantage of these funds while you still have access to them. Also investigate the claim deadlines—some FSAs have grace periods that allow you to incur (and seek reimbursement for) expenses in the early months of 2021 without diving into your 2021 FSA.

Analyzing your current FSA spending patterns through the first two-thirds of the year can also help you prepare for open enrollment, when you'll need to decide how much to set aside in an FSA for 2021. With the COVID-19 pandemic making it tough to plan too far ahead, you may want to be as conservative as possible in your estimates to avoid putting too many restrictions on these funds you may not be able to use. 

Important Disclosure Information

The comments above refer generally to financial markets and not Bazis Young portfolios or any related performance. The content of this article should not be considered financial advice. The article is not intended to  offer specific investment recommendations and  is general in nature and should not be considered a comprehensive review or analysis of the topics discussed. This article is not a substitute for a consultation with an investment adviser in a one-on-one context whereby all the facts of the attendee’s situation can be considered in its entirety and the investment adviser can provide individualized investment advice or a customized financial plan. Opinions expressed are current as of the date shown and are subject to change. Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss.  All investments carry some level of risk including loss of principal. Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed. This information does not provide recipients with information or advice that is sufficient on which to base an investment decision. This information does not consider the specific investment objectives, financial situation or need of any particular investor and may not be suitable for all types of investors. Recipients should consider the content of this information as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

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Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

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