Congratulations, you survived 2020!
There are only a few weeks left in the year, but still enough time for a few money moves.
Many economic commentaries have noted a “K-Shaped” recovery. This means that the economy has gone in very different directions, depending on one’s industry, role, education or location. We are seeing this dichotomy, even among our own clients.
Therefore, I’ve organized this advice regarding financial actions based on whether 2020 was a good or bad year for you.
If It Was Financially Not Good At All
First of all, there is no shame in having a bad year! It’s 2020 for goodness sake. Many, many people were laid off or furloughed this year.
Retirement Withdrawals. There is usually a 10% IRS penalty for withdrawals from retirement accounts that has been waived for persons under age 59 ½. This penalty was waived as part of the CARES ACT, but it expires 12/31. If you are having a rough year financially and have thought about withdrawing retirement money to pay essential bills or high-interest debt, this is a better time to do it than last year.
Health insurance. Many were unpleasantly surprised by the high cost of COBRA for health insurance after leaving their employer. You may do much better buying on the state health insurance exchange, or you may qualify for Medicaid. (This saved one of our clients $700/month.)
Roth IRA Contributions. Many of our clients have been unable to contribute directly to a Roth IRA for years because their income (or their spouse’s) exceeded the IRS limit. Reduced (but not completely eliminated) earned income in 2020 may mean that this year you may contribute. [This deadline is actually the tax filing deadline in April]
Capital gains harvesting. If you had little earned income during the year, you may actually be in the 0% tax bracket for taxable income on capital gains. For 2020, the 0% rate applies to taxable income of up to $40,000 on single returns and $80,000 for joint filers. Consult your tax advisor.
If It Was Actually (Surprisingly) OK
If you were able to work from home this year and maintain your income, you may find that you had an unexpectedly good year, financially speaking. Many people spent less on restaurants and travel, providing an opportunity to pay off credit card debt, pad their emergency fund, or save for the future.
Max Out Your Retirement Savings Accounts. Retirement accounts are tax-sheltered accounts, but there is a limit on how much you can contribute each year. Max it out if you can.
Mortgage Refinancing. If you own your home, you are probably aware that mortgage rates are currently very low and refinancing may reduce your monthly payment or save you many thousands of dollars in interest costs over the life of the loan. Worth looking into!
Saving for College? Make 529 contributions before the end of the calendar year. Some states offer a tax benefit for contributions, but you need to make them in the calendar year.
Tax Loss Harvesting. You are able to deduct up to $3,000 in capital losses per year. Investment markets were generally up this year, but specific positions may be down. Consult your financial advisor.
Invest Excess Cash. If you have paid off high-interest debt and have an ample emergency fund (enough to cover your basic expenses for six months), your savings are not “working” for you. The interest rate in a savings account is typically far less than inflation. It is our view that this may be an opportunity to invest. Discuss with your financial advisor.
Give to Charity. A lot of people could use some extra help this year. The CARES Act also made it easier to deduct charitable contributions this year. Taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations.
Summary
It seems like we’ll all be glad to put 2020 behind us, but we believe that moves like the ones above can be an effective part of your annual planning. You may still have time to make meaningful improvements to your financial picture in 2020. Schedule a 15-minute Intro Call if you’d like to discuss your financial plan.
The information above is provided for educational purposes only. Always discuss your personal situation with your financial or tax advisor.
She lives in Montauk, NY with her husband, 3 kids and Labrador puppy.
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