2020 has been a rollercoaster ride for most of us, and while it may be tempting to avoid money matters and celebrate the arrival of a brand new year, investing a few hours in some intentional money moves will keep your financial goals on track.
What works to motivate many of us to think about strategy in our finances is to remember that the decisions and choices we make with our money are one of the few things we have control over this year. Who doesn’t like feeling in control and smart with money?
We’ve prepared a list of smart money moves to act on before ringing in the new year.
1. Consider W-4 Adjustments
If you’re an employee, your W-4 form (formally called an "Employee's Withholding Certificate) is the IRS form you completed when you started your job. Your W-4 determines how much tax is withheld from your paychecks, and it’s based on a couple of numbers you can adjust at any time.
If you received a huge federal tax refund from your 2019 taxes or owed a significant amount, both are red flags to revisit your W-4 withholding information and adjust if you’d like fewer or more taxes withheld each month.
Other situations that warrant W-4 updates are family status changes such as marriage, divorce, new children or other new dependents you will account for on your 2020 tax return.
2. Assess cash reserves for retirement accounts
Tax-deferred retirement accounts are a great way to reduce taxable income or take advantage of what some call a “forced savings account” due to penalties assessed with early withdrawals.
Assuming you have an ample emergency fund set aside (at least six months of living expenses), we recommend maxing out your tax-deferred retirement account contributions each year.
Each type of tax-deferred retirement account has an annual monetary contribution limit. For example, a Traditional IRA allows tax-deferred contributions up to $6,000 for 2020 and 2021 ($7,000 if you’re 50 or older). 401(k) contribution limits for this year and next are $19,500 ($26,000 if you’re 50 or older).
Remember that whatever you contribute to tax-deferred accounts reduces your 2020 taxable income. If your cash reserves don’t allow for a max-out of retirement contributions for the 2020 tax year, consider directing an end of year bonus or future salary increases to one of your accounts. You must make these contributions by December 31, 2020.
3. Finalize decisions on giving
December is an ideal time to reflect on gratitude and talk with your family about how and where to help, give, donate, and share.
The act of giving and expressing generosity helps us reconnect with our humanity and what it means to be part of a community and the world of need beyond ourselves. There’s no greater feeling than that of abundance and a genuine desire to share our wealth and our time with those less fortunate. Giving is an easy way to express gratitude for our good fortune.
Recently we wrote about how to make charitable giving a family experience. Many families we know have integrated a “DAF” into their family tradition. A DAF, or donor-advised fund, is a charitable investment vehicle that allows you to contribute cash or other assets to an investment fund of your choice. From that fund, you designate payments to the charities of your choice. Donations are also tax-deductible in the year you donate.
Donor-advised funds are flexible in that your money goes directly to support the causes that matter to you. As with any family-focused charitable tradition, they are also a great way to get your kids involved, since they can help select which charities they would like the family to support.
4. Rest, reflect, and recharge
As the year comes to a close, we encourage you to spend quality time with yourself and those you love. It is a good time to focus on all that has gone well this year. There’s a reason “they” say that the key to happiness is being thankful for what we have, and for all the good in the world.
Grace, gratitude, grit, and generosity are our chosen themes for this holiday season. 2020 has been a tough year emotionally, spiritually, and financially for most Americans. Remember, a year in which your net worth does not increase at all, or increases by a small amount is not a reflection of your personal value as a human being. Some years our financial accounts are up, and some years they are down due simply to random fluctuations.
As your financial advisor team, we are focused on your financial well-being, and we view financial health as an integral part of our overall well being. We’re here to guide you to make the best decisions for you and your family, so you can enjoy what matters most to you.
We hope to have inspired you to give a little time to your finances in December, considering how your goals at the beginning of the year have changed, how your finances performed, and what you may want to expand on next year.
You’ll likely have questions for us in December about money moves you’ll need to make before December 31. Call us now to book some time with our team. All our best to you and yours.