Your financial wrap-up: 4 savvy money moves to make before year-end

As you’re wrapping up your finances this year, you may want to take advantage of a few investment and tax strategies that could become more expensive or go away altogether in 2022.

Financial advisors, retirement consultants and tax experts recommend these savvy money moves to make now — or at least by Dec. 31 — that could benefit your retirement and investment portfolios.    

You may have an extra chance to put more money into your 401(k) or other workplace retirement savings plan this year. Some employers have an additional pay period for 2021. With 27 weeks instead of 26, if you’re paid biweekly, some employees will get three paychecks this month. That’s another opportunity to add more money to your 401(k).

For those who are able, financial advisors recommend contributing the maximum amount of funds to retirement accounts before the end of the year.

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You can contribute up to $19,500 in 2021, whether that’s in a traditional 401(k), a Roth 401(k) or a combination of the two. If you’re 50 years old or older, you can put in an additional $6,500, for a total of $26,000.

If you’re self-employed, make sure to set up and fund your “solo 401(k)” by Dec. 31. For 2021, self-employed workers can contribute up to $58,000 into a solo 401(k) —  plus an additional $6,500 if you’re 50 or older, for a total of $64,500.

Unlike traditional individual retirement accounts and 401(k) plans that are funded with pre-tax dollars and taxed at your ordinary income 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 take out the money.

“A Roth IRA is pretty much 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 in on the Roth IRA game now?” 

The ability to do what’s known as a  “backdoor” Roth IRA conversion may cease if the federal Build Back Better Act passes. A backdoor Roth IRA conversion typically involves making a non-deductible, after-tax IRA contribution and then converting those dollars to a Roth account. Proposed legislation would end the conversion. 

Many financial advisors are recommending clients 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 older — right up until your tax-filing due date next April, but that does not apply to a Roth conversion.

“If you want to do a Roth conversion you have to get it done by year-end,” Appleby said. “There’s no tax filing due date that applies to a Roth conversion.

“You’ve got to get it done now.”

Converting traditional IRA or 401(k) money in existing accounts to Roth accounts by Dec. 31 also makes sense if you want to pay the tax hit at your current tax rate, experts say.

“If your tax rates are going to go up in 2022, then it makes sense to do it in 2021 so you pay income taxes at the lower tax rate,” Appleby said. “It doesn’t mean that you have to convert your entire account balance.

“You can do micro conversions — a little bit this year, a little bit next year.”

If proposed tax changes in the Build Back Better Act are passed, crypto investors could be hit with the “wash sale rule” next year. That rule says that if you sell an investment at a loss and buy back an asset that is the same or substantially identical within a 30-day period, you are not allowed to claim that loss. 

“It would begin to apply to cryptocurrencies, foreign currencies as well as commodities,” said certified financial planner Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Long Island, New York. “So if anyone has positions in those investments that are currently at a loss, selling them and then buying them back shortly 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 of other income,” Levine said.

If you’re worried about inflation, another move to make now is to consider buying I bonds. These are inflation-protected and nearly risk-free assets that are paying a 7.12% annual rate through April. You generally can’t buy more than $10,000 a year and you’ll need to make that purchase by Dec. 31.

You could buy another $10,000 early next year to still take advantage of the current rate, experts say.  It’s a relatively safe option for your portfolio, although Levine says to keep in mind that I bonds are not redeemable for the first year. 

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