Posted by The TaxAdvocate Group, LLC

Smart Money Moves Before the End of 2020

Smart Money Moves Before the End of 2020

2021 is right around the corner, but there is still a short time to lower your 2020 tax bill, increase your savings, help your community, and secure your financial future in the process. Here are some smart things to do before 2020 is over.

  • If possible, maximize contributions to IRAs, 401 (k), and other tax-benefiting retirement savings plans.

  • If you have an FSA, you must use the money before the end of the year unless your employer offers a grace period or an extension.

  • There is still time to increase your savings, make charitable donations, and lower your 2020 tax bill.

Obtain your employer's 401 (k) contribution

A 401(k) may be one of the easiest ways to save for retirement. This year, you can contribute up to $ 19,500, with an additional $ 6,500 to "catch up" if you're 50 or older. If you cannot contribute a lot, try to contribute enough to get the full employer contribution; it's like making 100% profit from your money.

Maximize your IRA

You can save up to $ 6,000 in the IRA or $ 7,000 if you're 50 or older (income limits apply to Roth contributions). If you contribute to a traditional IRA, you can deduct your contributions in the year you make them, lowering your tax bill. With a Roth IRA, you are not tax-exempt now, but your contributions and income increase tax free, and you can make tax free withdrawals during retirement.

Check the Required Minimum Distributions (RMD)

According to the IRS, "the CARES Act allows any taxpayer with an RMD due in 2020 from a defined contribution pension plan, including a 401 (k) or 403 (b) or IRA plan, to omit those RMD this year."

If you don't need the money, consider skipping the RMD this year and let the money continue to grow with the tax-deferred.

Consider a Roth conversion.

A Roth conversion enables you to convert a traditional IRA into a Roth IRA. The conversion triggers a potentially high tax bill - you owe normal income tax for the full amount converted, which may be enough to put you in a higher tax category.

However, in the future, your contributions and income will increase tax-free, and qualified withdrawals during retirement will also be tax-exempt. If your IRA balance or income has fallen through this tumultuous year, perhaps now is an especially good time to consider a Roth conversion.

Self Employed? Consider one of these retirement plans.

If you're self-employed, you won't be able to save for retirement with a 401 (k) plan sponsored by your employer. The good thing is that there are retirement savings accounts for the self-employed that allow you to save more than you would with a traditional IRA or Roth. Here are three options, as well as the contribution limits for 2020:

  • SEP IRA: $ 57,000 or the lesser of 25% compensation

  • SIMPLE IRA: $ 13,500 or the lesser compensation of 100% ($ 16,500 if you are 50 years or older)

  • Solo 401 (k): salary deferral up to $19,500 or $ 26,000 if you are 50 years or older, and the contribution total cannot exceed $ 57,000 or $ 63,500 if you are over 50 years old. With a Solo 401 (k) plan, you can contribute both as an employer and employee.

Donate to charities

Under the CARES Act, you can now make an offline deduction of up to $ 300 per year for charities if you make the standard deduction. And only for 2020: if you itemize, you can deduct donations up to 100% of the AGI of 2020 instead of the usual 60%. In the meantime, companies can deduct qualifying contributions up to 25% of taxable income.

Maximize your health savings account (HSA)

Health savings accounts offer three main tax advantages: contributions are tax-deductible, savings increase without taxes, and eligible medical expenses are exempt from taxes.

You can contribute up to $ 3,550 for individual coverage or $ 7,100 for your family, with an additional recovery contribution of $ 1,000 if you are 55 or older. HSAs are designed to help pay for healthcare costs when they arise.

However, if you can do this, you can view your HSA as an investment. The more you allow funds to grow and stay tax-free, the more money you have to cover retirement care costs.

Use your Flexible Spending Account (FSA) money.

An FSA enables you to use tax-free dollars to pay medical bills your insurance doesn't cover. If your employer offers a flexible spending account, you can contribute up to $ 2,750 in payroll deductions.

Depending on your usage or FSA provisions, you usually need to use the money before the end of the year (the employer may give you a two-and-a-half-month grace period or transfer unused funds up to $ 500 until next year.) Now is the time to use up the rest of the FSA money before it is lost forever.

Contribute to a 529 savings plan 

If you have to pay for education, a 529 could be a way to save taxes. 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 are not tax-deductible, but more than 30 states offer full or partial tax deductions or credits. Contributions increase without federal tax, and withdrawals are tax-exempt when used for qualifying educational expenses. You can contribute any amount, but any amount over $ 15,000 per person (excluding the annual tax on donations) may result in federal tax donations.

Final Word

With the end of 2020, now is the perfect time to prepare financially. Use these tips to lower your taxes, increase your savings, and help your community. Remember to update your beneficiaries' names and consult your financial planner or tax advisor if you have questions about any financial strategy.



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