1. Literally Clean Out Your Old Stuff: Stop shuffling, and start decluttering. Go through every room, closet, and storage space with a fine-toothed comb. When in doubt, throw it out, sell it, or give it to someone who could use it. Separate your outgoing items into three piles: sell, donate, and trash. You’d be surprised what people will buy. There’s a market for your old cell phones, computers and other electronics, clothes, furniture, and children’s belongings. Sell these on Craigslist, eBay, or Etsy to recover some of your initial cost.
What you can’t sell, donate to a charitable organization. Make sure you keep your donation receipts in case you decide to claim a tax deduction for charitable giving. You’ll need to itemize each of these deductions come tax time.
2. Clean Up Your Paperwork: Keep all of my important documents digitally. Back them up through two systems: an automated cloud backup service that constantly uploads your files for secure off-site storage, and an external hard drive that you can keep at home. If your laptop stops working, critical documents won't be lost.
Make your file storage digital to be more organized and cut down on clutter. Borrow or rent a scanner if you don’t have access to one already to make the transition painless. For any original documents you simply can’t bear to part with, put them in a portable, fireproof safe. If something isn’t valuable enough to justify space in your fireproof safe, then it isn’t valuable enough to keep as a hard copy.
3. Set (or Check Progress on) Financial Goals for the Year: When you’re clear on your long-term financial goals, you can then work backward to set mid-term financial goals over the next two to five years and short-term financial goals for this year. For example, a long-term goal to reach financial independence within the next five years sets a target accordingly for net worth and passive income by the end of this year.
Your financial spring cleaning offers a perfect opportunity to check in on your progress. You can tweak and adjust your spending, savings, and investments as needed to put yourself on track for hitting your short-term targets for the end of this year.
4. Review Your Monthly Budget: Reframe how you look at budgeting. Instead of thinking in terms of sacrifice, think in terms of prioritization and intentionally designing your perfect life based on what’s important to you. Instead of taking two years to save a down payment to buy a home, for example, you could probably do it in one if you cut $500 or $1,000 in monthly expenses. Would you rather spend $100 per month on cable TV or save your home down payment faster? The same goes for spending money on new clothes, gadgets, eating out, and any other discretionary expense. Put even “necessary” expenses under the microscope.
5. Cancel unused or unnecessary subscriptions: List every single subscription you pay for, whether monthly or annually - video and music streaming, gym memberships, box subscriptions, landlines, antivirus software, hard drive backup services, etc. After you have a list of your subscriptions, apply a simple litmus test: Do you use this subscription multiple times a week, and does it make your life noticeably better? For instance, if you’ve been to the gym 10 times in the last month, that likely justifies keeping your membership. But if you’ve been once or twice, cancel your membership and switch to home workout routines instead.
6. Plan & Budget for Remaining Irregular Expenses This Year: Irregular expenses are the fly in the ointment of most people’s budgets. No one forgets to budget for their rent or mortgage payment. But most people forget to budget for wedding, birthday, shower, and holiday gifts, for example. Just because these expenses don’t pop up every month, that doesn’t mean they don’t cost you money and eat into your budget. So set aside money and earmark this account for irregular expenses. You should also budget for travel expenses. You will probably go on at least one vacation this year. Plan what you want to spend on these and other irregular expenses for the rest of the year, and set aside money accordingly.
7. Plan Your Retirement Contributions: Whether you want to max out your IRA or 401(k) or just take advantage of matching contributions, now is a good time to plan out how you’ll achieve your target retirement savings this year. Again, these contributions don’t just happen — you need to budget for them carefully.
8. Adjust Your Tax Withholding (if needed): Withhold too much, and you give Uncle Sam an interest-free loan. Withhold too little, and you get hit with IRS penalties. Aim for a $0 tax bill come April 15th (or May 17th this year) and adjust your income tax withholding with your employer as necessary. A consultation with a tax professional would likely be helpful.
9. Review Your Health & Life Insurance Policies: Your health insurance and life insurance requirements evolve as you get older. Someone with a spouse and children likely needs more life insurance than an unmarried person living alone. Research how much life insurance you need, if any, before talking to a sales rep.
Also, consider opening a health savings account (HSA) in combination with a high-deductible insurance plan. In addition to the low premiums, you can benefit from the unique triple tax benefits of an HSA.
10. Automate Your Savings: One way to automate your savings is splitting your direct deposit to go into not just your checking account, but also a savings or investment account.
You can also set up automated recurring transfers to take place every payday. For example, you could set your mortgage payment to go out automatically each month and pay more than the minimum payment if you want to pay off your mortgage early.
By automating good behaviors like saving money, you ensure they actually happen. Plus, automating your savings offers a great way to trick yourself into saving more because it takes the temptation out of spending. With less money calling to you from your checking account like a siren, you simply adapt to spending less.
11. Review Your Asset Allocation: Your ideal asset allocation changes over time. As you get closer to retirement, you should start easing away from stocks to avoid sequence of returns risk. In their place, you should gradually opt for more stable, income-oriented investments, like bonds and lower-risk real estate assets.
Your asset allocation also drifts on its own over time as certain investments in your portfolio outperform others. You need to periodically review your portfolio, even when you don’t plan to change your target asset allocation, so you can rebalance your portfolio to return to your target.
12. Create a Simple Monthly System for Tracking Key Numbers: There’s a saying in the business world: “That which gets measured gets done.” In practice, it means you should determine the most important tasks and indicators of progress, and track them regularly.
Create an extremely simple spreadsheet to track your own financial progress each month. If it takes you more than five minutes to do, you will end up blowing it off. Start by picking just three numbers: savings rate, investable net worth, and FI ratio (financial independence ratio or FIRE ratio).
Your savings rate is the percentage of your net income that you save each month.
Your net worth is the sum total of all your assets, minus your debts and other liabilities. You don’t have to manually calculate this yourself each month. Use a free tool like Mint.com or Personal Capital to track it for you automatically.
Finally, your FI ratio is simply the percentage of your monthly living expenses that you can cover with passive income from investments. If you live on $4,000 per month and you have $1,000 in monthly passive income, you have a FI ratio of 25%. The higher your FI ratio, the faster you can reach financial independence.
Create your own system for tracking your key financial numbers, and make sure it takes no more than five minutes of work each month.
13. Review Your Credit Report for Errors: The credit bureaus make mistakes all the time. According to the Consumer Financial Protection Bureau, one in five Americans has an error on their credit report. Luckily, you can check your credit report for free once a year from each of the three main credit bureaus. Your financial spring cleaning makes a great time to pick through your report and look for errors. If you find any, you can follow the simple process of disputing credit report errors. It’s free and requires little effort on your part.
A clean home and clean finances don’t happen by mistake. They only happen when you go out of your way to make them happen. Set aside some time this spring to review your finances and tweak them where necessary.
If you need help with your financial spring cleaning, contact Brien at Brien@TraditionsWealthAdvisors.com or Sarah@TraditionsWealthAdvisors.com
Whether you are in a financial position to give a little or a lot, there are ways you can maximize your donation with certain tax implications in mind. Below are some basic tips, but it is always good to verify your specific situation with your financial or tax advisor. Information on charitable contributions can also be found at IRS Publication 526.
Source: Turner, Trudy. Goldman Sachs. 15 January 2021. https://www.goldmanpfm.com/personal-investor-blog/to-whom-much-is-given-financially-smart-ways-to-give-back
Did you know that having a strong financial plan can also be beneficial to your health? When you’re in control of your finances, you tend to experience less stress, feel more confident and sleep better. Let’s take a closer look at some potential benefits.
Source: How a financial plan can benefit your health. 22 January 2021. Goldman Sachs. https://www.ayco.com/insights/articles/how-a-financial-plan-can-benefit-your-health2.html
“Everyone wants to know if they should be doing something, because there is just so much uncertainty about what might happen and when,” says David Peterson, head of wealth planning at Fidelity. “But making kneejerk moves is never wise, especially since many of these proposals may never get enacted. You need to think about them in terms of your long-range plan. Being prepared mostly means being educated about your options.”
Basing tax planning on what might come could be premature, because campaign proposals are rarely adopted in their exact form and often lack the specifics to perform pinpoint planning.
One possibility is that Congress simply allows the provisions of the Tax Cuts & Jobs Act to expire at the end of 2025. Or Congress could make major changes to tax laws that could impact financial planning for upper-income earners, investors, and anyone who is leaving assets to heirs. Those earning more than $400,000, especially those earning more than $1 million, and those with estates over $3.5 million, are perhaps more likely to be affected. But tax proposals could impact anyone—from a young executive to a retired couple living mostly off their retirement savings, to anyone leaving their home to their kids.
State taxes play into this too, given mounting pressure on state budgets in the wake of the COVID-19 pandemic. Some states, including California and New Jersey, are already moving to raise state taxes. Others may follow, and many are seeking federal aid to fill budget deficits.
The best kind of long-range financial planning helps you today, possibly helps you out much more in the future, and leaves you in a better position than if you hadn't planned at all.
To that end, here are some ways to look at the possibilities—no matter what Congress does.
Possible changes: During the campaign, Joe Biden proposed increasing the top federal marginal income tax rate from 37% back to what it was before 2018, 39.6%. Also, the income thresholds for the top brackets could get adjusted downward. While certain deductions may be reinstated, deductions in general could also end up limited at high income levels, potentially reducing the benefit of very large charitable deductions. Bottom line: There could be significant impacts for those currently in the upper tax brackets, if not by earlier legislative action, then when the 2018 changes expire at the end of 2025.
Actions to consider: Until rates for future years actually do change, there’s likely no need to do anything differently other than investigate your future options. If you’re concerned that rates could rise in future years, you may want to think about strategies to reduce taxable income in the future in order to stay below the upper threshold, or consider moves that accelerate taxable income from the future into this year. Converting from a traditional IRA to a Roth IRA, assuming that fits in with your overall plan, may be an option, since that both accelerates future income into this year and reduces future taxable income.* On the other hand, it’s possible (albeit unlikely given historical patterns) that a change in tax rates could be retroactive to the beginning of 2021, in which case part of the benefit of such a conversion would be lost. So again, it may make sense to just weigh your options for now.
In addition, remember that the tax code is progressive, and any tax increases for those earning more than $400,000 might only apply to the portion of your income that is over the cap. You might want to run the numbers with a tax professional to see the impact on you personally.
If you are over the age of 72, your options for reducing income will not include skipping your required minimum distributions (RMDs) in 2021, unless Congress authorizes another pause like it did in 2020. But it’s important to note that you have until the end of 2021 to decide how to take them—taking a single distribution at some point in the year or spacing out your distributions. Don't forget, though, because if RMDs are not waived again for 2021 and you do not take the right amount, you can be hit with big penalties and fees.
“The timing of your RMD from a traditional IRA doesn’t matter from a tax perspective, as long as it happens before the end of the year, with one exception—for your first RMD, in the year you turn 72, you have until April 1 of the following year. Just be aware that if you wait, you’ll end up with no RMDs in your first year and 2 in your second. That could have knock-on effects (e.g., getting pushed into a higher tax bracket), so give it some thought and consult with your tax advisor,” says Matthew Kenigsberg, vice president of investment and tax solutions at Fidelity.
Another move to consider this year involves charitable giving. One way of making the most of the tax deduction for charitable contributions is to “bunch” several years of planned contributions into a single year to take fuller advantage of itemizing. That tends to be an advantageous strategy for many people whose itemized deductions are below or only slightly higher than the standard deduction, but given the possibility of tax changes, the timing can be tricky.
“You might assume that if tax rates go up next year, you would benefit more from a large charitable donation then, but that does not necessarily hold if at the same time deductions are capped and phaseouts are reintroduced. Actually, you could do much worse,” says Kenigsberg. But again, at this point it’s hard to know whether any changes would go into effect in 2022 or be retroactive to the beginning of this year, so it could be smart to watch and wait.
The caveats: Your retirement income strategy and your charitable giving are highly personal decisions that depend on a lot of different factors. You do not want to make financial moves just because you think a tax change is coming, but instead you should do so because it helps you toward your overall goals. Before making a decision, always consult with a tax advisor.
Capital gains taxes:
Possible changes: Capital gains rates could go up in the future—Biden has proposed raising the top tax rate on long-term capital gains and qualified dividends from the current top rate of 20% to higher ordinary income tax rates for those earning more than $1 million a year. The top ordinary income rate is 37% currently and could increase to 39.6% (exclusive of the Medicare surcharge) under Biden.
Possible actions: If you are considering realizing some gains held in taxable accounts and you are concerned by the potential for higher rates in the future, you may want to think about doing it this year to capture today’s long-term capital gains rates. That's particularly true if you are considering or in the process of diversifying out of a concentrated investment position, and think your income will be over $1 million in the future, perhaps due to the sale of stock, a business, or other earnings. Once again though, there’s no guarantee the new rates would not include capital gains realized this year, so it may be sensible to watch and wait for now.
For both taxable investments and stock options, you want to think about your overall timetable, understand your tax rates, know where your taxable income falls in the tax bracket, and how the increased income fits into your overall tax picture now and if rates rise.
For the sale of a business that can’t be completed this year, you may want to consider the value of an installment sale versus an outright sale to spread out the gain and mitigate the potential tax impact of rising rates.
You may also want to look at charitable options, because donating appreciated stock now could provide a useful tax deduction if laws change. When you gift appreciated stock to a qualified charity or donor-advised fund, you pay no capital gains taxes and can deduct the contribution if you itemize, with some limits.
The caveats: You may be tempted to realize gains on highly appreciated stock you want to hold for the long term, and then buy it back later at a higher cost basis. This strategy could work for some. But for others, paying taxes early on some gains could end up reducing after-tax returns over the long term.
“Don’t let the tax tail wag the investment dog,” says David Peterson. “You should be buying and selling based on your view of the long-term value of the assets, not based on the tax consequences.”
Possible changes: The changes proposed in the estate area could be huge and could have more of an impact than all the other areas on some families. At the top of the list is the current federal estate tax exemption amount of $11.7 million for an individual (double for a married couple), which under current law is set to revert in 2026 back to prior amounts, adjusted for inflation. Congress could further reduce this for individuals. This would change the planning calculus for many families.
Further, Biden has proposed repealing the step-up in basis at death, which could mean that these assets would be subject to capital gains taxes based on their original purchase price, not the price at death. It’s also possible that changes could require those taxes to be paid at death versus when your heirs sell the property, but it is unclear whether a tax credit against any estate tax due would be allowed. That would affect anyone who plans to pass on appreciated assets, from a family home to a stock portfolio.
Actions to consider: Review your needs and goals. Estate planning for years has leaned toward setting up a plan for your assets to pass to heirs after your death, but if the taxation changes, the focus could shift to spreading out gifting of an estate over a longer span of time while you are still alive, either outright or with the help of a variety of trusts. “Market conditions could also affect your strategic plans,” says Peterson.
For 2021, you can give up to $15,000 ($30,000 for married couples) a year to anyone without affecting your lifetime gifting limit of $11.7 million for individuals ($23.4 million for a married couples), which can add up. You can also pay for a loved one’s tuition or health care costs directly, without impacting your lifetime gifting limit. And there are different trust options to consider. Many, however, will be irrevocable, meaning they are difficult or impossible to change once established. You may want to set up the trust structure you desire now and then take the step to fund the trust later.
The urgency here is that estate planning takes time—you must think through what you want, which is difficult for many people. You then need to engage financial and legal professionals, who get very busy at times of uncertainty. No matter what happens with potential tax law changes, reviewing your estate planning needs is one of those tasks that’s best to do sooner rather than later.
The caveats: Once you give money away or fund an irrevocable trust, you can’t control it, so be sure that it’s what you desire. You want to stress test your plan to make sure you have the assets and income you need for your own retirement. You also may want to talk with your heirs about your intentions and consider approaching this as an opportunity to share your goals and wishes.
With all financial planning, it’s important to make sure to think and plan for the long term. It can help to consult with a financial planner and a tax professional for support in assessing your own future needs and setting the right course, even if taxes do rise.
Article above from: Fidelity's What To Do About Tax Uncertainty