If you’re ready to close the book on 2020, you’re not alone. This year been among the most challenging in recent memory for many people — and for many different reasons.
While hardship and uncertainty remains, popular sentiment is that 2021 will be better. There are always strategic year-end moves you can make to improve your standing for the new calendar and beyond, at least financially.
Here are eight money moves worth making before 2021 officially arrives.
1. Max out your individual retirement account (IRA)
In 2020, you can contribute up to $6,000 to your IRA; $7,000 if you’re age 50 or above. (These limits will remain the same in 2021.) Contributions to a traditional IRA are tax-deductible for the tax year that you make them in. This means can lower your tax bill come April.
With a Roth IRA, you won’t get the tax break right now, but your contribution and earnings grow tax-free. You also don’t have to pay taxes when you withdraw the money for retirement like you do in a traditional IRA.
Block out some time in your busy schedule to research both types of IRAs online. It’s always a smart move to consult a tax professional regarding your particular situation as well.
2. Self-employed? Set up one of these retirement plans
If you work for yourself, you’re not able to save for your retirement through an employer’s 401(k) plan. Fortunately, there are retirement plans that are specifically designed for the self-employed. They allow you to put away more than is allowable with a traditional or Roth IRA. Three of these plans are:
- SEP IRA: You can contribute the lesser of 25% of compensation or $57,000.
- SIMPLE IRA: Contribute the lesser of 100% of your compensation or $13,500 ($16,500 if you’re age 50 or above).
- Individual 401(k): If you’re under age 50, you can defer up to $19,500 in salary, with your total contribution not exceeding $57,000. If you’re over 50, you can defer up to $26,000 in salary, not to exceed $63,500.
While on the topic of preparing for your future, let’s talk disability insurance coverage. It’s important for anyone who earns an paycheck, but especially the self-employed. As you’re own boss, you don’t have the access to traditional employee benefits, such as group coverage. That means you need an individual plan. Without personal income protection, a serious injury or illness can prevent you from earning money and put you at risk of wiping out the retirement savings you’ve built.
3. Use flexible spending account (FSA) money or lose it
If you’ve contributed to a FSA in 2020, make sure you use this money by the end of the year. Otherwise, you’ll forfeit what you put into the account. FSA money is “use it or lose it”.
There are some exceptions, however. Your employer can grant a two and a half month grace period. It can also allow you to carry over $500 to 2021. Your employee benefits administrator at work can confirm what the provisions are for your plan.
As far as using your FSA money, consider having end-of-year dental work completed, or an eye exam where you can purchase a new pair of glasses if needed. Just make sure you know what qualifies as an eligible expense.
4. Pay for home business expenses
As result of the COVID-19 pandemic, many people have had to work from home for the first time. Some people have already worked from home for years. Either way, you can lower your overall taxable income for 2020 by paying for any home business expenses you need to incur this year that you haven’t already. These could include:
- Education and training expenses
- A new computer or printer
- Office expenses and supplies
- Maintenance and repair costs
If you have a home office, or space that is exclusively used to conduct business, you may be able to deduct a portion of your rent or mortgage. The rules get complicated quickly here, so be sure to consult a tax professional.
5. Make a donation
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in the spring in response to economic hardships of the pandemic. While it wasn’t the most notable provision, It did include a new tax write-off for charitable donations.,
Under the CARES Act, you’re now able to take an above-the-line deduction for up to $300 in charitable contributions you’ve made in 2020 if you take the standard deduction. If you itemize your tax return, you have a much larger deduction available: up to 100% of your 2020 AGI (adjusted gross income). Corporations are allowed to deduct qualified contributions, not exceeding 25% of taxable income.
6. Review your spending and debt
The end of year is always a good time to take a close look at your spending. Can you make adjustments to reduce spending and increase savings? Ordering take-out, shopping online, the latest streaming service —these and other areas may be places where you can save some of your hard-earned money each month.
Take a close look at your monthly credit card statements. If you’re making the minimum payment each month with exorbitant interest rates, consider using some of the money you just pay down your credit card balance. If you carry unpaid balances forward each month on more than one card, consider consolidating to one payment with a lower interest rate.
Because of the pandemic, many people are struggling to make their mortgage payments each month. If that’s the case for you, contact your lender and ask them if they’re offering short-term disaster relief assistance. You may qualify due to unemployment or a significant reduction in income. This can help you defer payment for six to twelve months, or produce a loan modification.
7. Consult with a financial advisor
If you’re not already working with a financial advisor, make an appointment to see one now or in January. Getting objective advice on your financial situation is well worth the time and cost.
A financial advisor can help you:
Create an investment strategy
Minimize taxes
Lower your financial risks
Structure withdrawals from retirement accounts
Evaluate your insurance: life, health, disability
Establish a retirement plan
You don’t have to be financially independent to work with a financial advisor. Many advisors will work with you if you’re just starting out or if you’ve been working a while and just don’t have a handle on your finances.
Having a financial advisor will also provide you with some much needed and well-deserved peace of mind. Making financial decisions on your own can be very stressful. Talking with a professional will give you new ideas and very likely affirm some of the strategies you’ve deployed on your own.
8. Reinforce your health insurance
The annual open enrollment period ended on December 15. That means there’s a good chance you just finished reviewing your health insurance.
Whether you made some changes this year and kept your coverage as is, you plan likely has some gaps. Does your plan fully cover serious illnesses like cancer? What about the burden of a high deductible you couldn’t afford to pay if you needed?
Critical illness insurance policies are designed to fill the gaps. If you are suffer a first-time diagnosis of cancer, heart attack, stroke, or another covered condition, your policy will pay out a one-time, lump sum benefit up to $75,000. This money can be used to cover deductibles and copays, pay bills at home, replace missed paychecks — truly whatever you need.
Final thoughts
These eight money moves are actions you can can take right now now to set yourself for a better 2021. The events of this year are proof that you can never be too prepared when it comes to your finances. Anything can happen to any one at any time.
Here’s to a better 2021 financially — and just about every other way imaginable.