As the weather takes a turn for the cold, it’s not unexpected to see leaves of all colors drop to the ground. Fittingly, this includes green leaves, and that can be a subtle reminder to complete financial tasks before our own “green” falls through our hands and it’s too late to benefit (or avoid problems) after year end.
Why is there a limited timeframe? Nearly all financial topics relate to the tax code, which means that you’ll likely have to act before December 31st.
Here are several topics you’ll want to be sure to address:
Capital gains – Investment gains (or losses) are one of the few big tax items where we can control timing. And towards the end of the year, we’ll have clarity on all the other items over which we don’t have control. That’s why it’s an opportune time to see if it makes sense to harvest capital gains.
Especially in cases where an investment position has grown too large, people often make the mistake of selling it all at once (and landing in a much higher tax bracket), or selling none solely to avoid taxes (and then selling at an attractive price is not a consideration).
Employer stock options, restricted stock (RSU) – Depending upon the type(s) of employer stock that you receive, you may encounter taxable events which are controllable (exercising stock options, or selling any type of employer stock) and/or those which you cannot control (when restricted stock vests and it is taxed as income).
Many people don’t realize until after the fact that exercising stock options (and buying your shares) on its own can trigger an out-of-pocket tax bill, even without selling any shares. Ideally, you’ll want to have a financial plan in place before you exercise stock options, and certainly engage with an advisor if you’ve already begun.
Also, if taxes were withheld by your employer, don’t assume it will fully cover your tax bill. That’s because they know what they pay you, but nothing else related to the financial situation of your household.
401(k) contributions – Not only are these are great way to save for retirement, but they can defer taxes on any income you contributed until retirement when people are often in a lower tax bracket than during years when they are building wealth.
In 2021, 401(k) contribution limits are $19,500 per person, so if you changed jobs and contributed to more than one plan, be sure the total amount doesn’t exceed the limit to avoid a tax penalty. If you did, ask an advisor about the process of withdrawing excess contributions, along with any earnings attributable to those deposits.
Flexible Spending Account (FSA) – Participants need to be aware that contributions made to an employer FSA plan are “use-it-or-lose-it,” so make note of deadlines. Employers may allow participants to rollover a portion of unused contributions to the following year, or a 2.5-month grace period beyond the plan year end (or neither, but not both).
If you’ve got questions about how to finish the year in the best way you can, or want to know what you could do differently next year, contact Paceline for a no-obligation phone consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.