As you close your finances this year, you may want to take advantage of a few investment and tax strategies that could become more expensive or disappear altogether in 2022.
Financial advisers, retirement advisors, and tax experts recommend these smart money-making steps now – or at least by December 31 – that could benefit your retirement and investment portfolios.
1. Maximize contributions to the pension plan
You might have an extra chance to put more money into your 401 (k) or other retirement savings plan at work this year. Some employers have an extra pay period for 2021. With 27 weeks instead of 26, if you get paid bi-weekly, some employees will receive three paychecks this month. This is another opportunity to add more money to your 401 (k).
For those who are able, financial advisers recommend putting the maximum amount of funds into retirement accounts before the end of the year.
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You can contribute up to $ 19,500 in 2021, whether it’s a traditional 401 (k), a Roth 401 (k), or a combination of the two. If you are 50 or older, you can contribute an additional $ 6,500, for a total of $ 26,000.
If you are self-employed, be sure to create and fund your “solo 401 (k)” by December 31st. For 2021, self-employed people can contribute up to $ 58,000 in a 401 (k) solo – plus an additional $ 6,500 if you’re 50 or older, for a total of $ 64,500.
2. Make Roth conversions
Unlike traditional individual retirement accounts and 401 (k) plans which are funded with pre-tax dollars and taxed at your regular tax rate when you make withdrawals, Roth accounts are funded with after-tax money and grow tax free, and you pay no taxes when you withdraw the money.
“A Roth IRA is about the best thing since sliced bread most people will agree,” said Denise Appleby, CEO of Appleby Retirement Consulting Inc. in Grayson, Georgia. “The question is, how do you get into the Roth IRA game now? ”
The ability to do what is known as a Roth IRA “backdoor” conversion may cease if the federal Build Back Better Act is passed. A Roth IRA backdoor conversion typically involves making a non-deductible after-tax IRA contribution and then converting those dollars into a Roth account. The bill would end the conversion.
Many financial advisors recommend clients to make IRA contributions and conversions now. You can make a regular IRA contribution – up to $ 6,000 for 2021 or $ 7,000 if you’re 50 or over – until your tax return due date next April, but that doesn’t matter. not apply to a Roth conversion.
“If you want to do a Roth conversion, you have to do it by the end of the year,” Appleby said. “There is no tax return due date that applies to a Roth conversion.
“You have to do it now. “
According to experts, converting traditional IRA or 401 (k) money from existing accounts to Roth accounts by December 31 also makes sense if you want to pay tax at your current tax rate.
“If your tax rates are going to increase in 2022, then it makes sense to do so in 2021 so that you pay income taxes at the lowest tax rate,” Appleby said. “That doesn’t mean you have to convert your entire account balance.
“You can do micro-conversions, a little this year, a little next year.”
3. Avoid the bite of the crypto tax
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If the tax changes proposed in the Build Back Better Act are passed, crypto investors could be hit by the “wash sale rule” next year. This rule states that if you sell an investment at a loss and redeem an identical or substantially identical asset within 30 days, you are not entitled to claim that loss.
“This would start to apply to cryptocurrencies, foreign currencies as well as commodities,” said certified financial planner Jeffrey Levine, director of planning at Buckingham Wealth Partners in St. Louis. “So if someone has positions in these investments that are currently at a loss, selling them and then buying them back soon after can help lock in those losses.”
That’s true, at least for now. And, “those losses can be used to offset capital gains – plus up to $ 3,000 in other income,” Levine said.