How you can enhance your fiscal health in 2021.

Many of us are happy to see 2020 come to end. One way you can improve the new year is by making financial plans for 2021.

For many of us, the pandemic has reduced our active lives to a fraction of their former selves. That can wreak havoc on our psyches. Think about how you would like next year to be different and make a plan to enhance your fiscal prospects next year.

Required Minimum Distribution (RMD). 

Your retirement savings are available for withdrawal without penalty any time after age 59½, but will be treated as income and taxed as such. There are even circumstances where you can start withdrawals earlier. If you’re stretched thin or have a foreshortened life expectancy, by all means, start drawing on the money you’ve saved. Otherwise, your best bet financially is to wait until you must start removing the funds, which is age 72. 

At that magic age, a formula determines how much you must withdraw each year (RMD). The CARES act waived RMDs for 2020, but check your situation carefully. The penalty for under-withdrawing is 50 percent!

Health Savings Account (HSA). 

Working seniors may still have an HSA, as long as they are not already signed up for Medicare. Max out your contribution. If your employer contributes to your HSA but that contribution zeros out at the end of the year, consider whether non-emergency medical procedures can be scheduled sooner rather than later.

Flexible Spending Account (FSA). 

FSAs are another option for establishing a reserve for medical expenses. Any pretax dollars remaining in your account at year-end will be taxed, so determine if you have an upcoming medical expense that can be pulled forward, such as prescriptions, eyewear and so forth. Understand your FSA’s rules, especially concerning details on rolling over funds into the next year. 

W-4. 

Year end is a good time for workers to review their W-4, the document that instructs employers how much of your paycheck to withhold for income taxes. The Government Accountability Office says about 21 percent of taxpayers don’t withhold enough, resulting in bigger tax bills in April. 

You can use the IRS withholding calculator to help estimate the right number of allowances to claim. Another alternative is to choose “0” allowances, which will result in you paying a larger chunk of taxes early on. Late each year you can file a new W-4 if the calculator suggests you’ve withheld too much. Siphon that “raise” into retirement savings.

Medicare Part D. 

The Open Enrollment period for switching drug coverage plans ends December 7. Until then, you can visit www.medicare.gov, enter your complete list of prescriptions and find the drug plan that best meets your needs. This same time period serves as open enrollment for various Affordable Care Act and Medicare plans with differing rules. 

Individual Retirement Account (IRA). 

For those still working, delay paying taxes on more of your paycheck by contributing more to your IRAs, 401(k)s, 403(b)s, 457s, and so on. If you’re confused by the rules, contact your HR department to review how this applies to you. If you find yourself cash-strapped but wishing you’d set aside more, establish a 2021 budget that allows you to put your best foot forward in the new year. 

Roth. 

For folks still earning, your goal when you reach retirement is to have a mixture of retirement assets: tax-deferred accounts, non-taxable Roth accounts and individual savings (gains are taxed). That way, as the tax weather changes throughout retirement, you can draw differently from each retirement asset to minimize your annual taxes. If you have an existing Roth account and earned less this year than typical, you may want to consider moving savings from a tax-deferred to a Roth account. Note: The amount you move will be added to your taxable income.

Losses. 

The pandemic can be blamed for many types of losses. If you sold stocks at a loss this year, remember that you can deduct up to $3,000 in losses beyond your realized gains each year. Additional losses are pushed to future years. 

Giving. 

The end of the year—particularly this year—is the time to take a look at how you can help others with your largesse. For those able to make or even increase charitable donations amidst the difficulties of this era, give gratefully. 

A great time to support Colorado nonprofits is on Colorado Gives Day, which is set for Tuesday, December 8. Donations are accepted online at www.ColoradoGivesDay.org. Donors can schedule a donation now that will benefit from a $1 million incentive fund, shared among all nonprofits receiving Colorado Gives Day donations.

Giving smarter. 

Give tax-efficiently by donating your RMD to a 501(c)3 of your choice, lowering your taxable income. 

Another possibility is taking advantage of tax code changes in the last couple of years. One change increased the standard deduction while instituting a limit on the total deductions allowed on an itemized return. Some folks now bunch their charitable giving into every other year. That is, one year they double up their contributions and the next year they take the standard deduction. However, this strategy may be more troublesome and awkward than its value.