New Year’s Resolution: Three Planning Items to Review January 1st

Filbrandt & Company Reports
Volume 20, Issue 12

The New Year is upon us and for most people not a moment too soon.  2020 was the most challenging year in modern history in many ways.  As we look forward to 2021 there are many reasons for optimism.  Vaccines being distributed; we are just a few weeks away from swearing in a new president; and we can see the “light at the end of the tunnel.”   While there are reasons for optimism, do not let your guard down too quickly as there are still many hazards ahead in 2021. Here are three planning ideas that need to be at on the top of your list as you start the new year.


1. Manage risk in your retirement accounts

The distribution of vaccines and moving past the 2020 presidential election will help calm the economic waters, but we are not out of the woods yet. It will take several more months to return to pre-pandemic economic activity, and it is unclear what the post-pandemic economy will look like.  Some industries and aspects of our life will be altered forever, and these changes will take time to be fully reflected in the stock market and within your retirement savings plans.  

What is a practical step you can take?  Take the most recent statements from all your retirement and investment accounts, then add up the total amount of equities (stocks) and fixed income (bonds, stable value, cash) between the various accounts.  Next, answer this series of questions: 

  • Am I within 5 years of retirement? 
  • Do I have more than 50% of my total investments in stocks? 
  • Am I surprised or am I uncomfortable with my percentage of investments in equities?

If the answer is yes to one or more of these questions, use the current opportunity when markets are relatively stable to make appropriate changes to your asset allocation. If you have a portfolio that is 70% in stocks and you experience a 15% drop during a market correction, you will need the market to recover by 18% just to get back to even. Imagine if that happens at the same time you start retirement and are drawing income from your retirement accounts. Speak with a Certified Financial Planner® if you need help evaluating the appropriate model for you. Having this process established ahead of market volatility will keep you from getting caught off-guard and reacting emotionally at the first sign of turbulence.


2. Reevaluate your retirement plan contributions

Take time to assess how your budget has changed and if you have any additional discretionary income that is not being put to good use. In addition to a 403b retirement plan, many universities offer a 457b for additional voluntary savings.  It is very important to make sure you are taking advantage of all the options available.

This can also be an opportunity to do proactive tax planning. If your income has increased, or you are expecting additional consulting or other income from outside the university, making additional contributions to your university retirement plans can offset this increased income and reduce your tax liability.

However, that might not be the best plan for everyone.  Paying the income taxes now may well make more sense.  This is especially true if your retirement income is likely to remain near your current income, or if you have very little saved in brokerage or bank accounts where the income tax has already been paid.

Many universities are also offering the option to make Roth contributions to your 403b plans. This is attractive for university professionals because there are no income restrictions like there are with a Roth IRA.  In addition, the amount you can contribute to the Roth 403b is significantly higher than in an IRA account.


3. Get proactive with your taxes

As you begin preparations to file your 2020 taxes, it is not too late for some last-minute planning to reduce your tax liability for 2020 and become more tax efficient in 2021.

If you earned any consulting or other self-employment income in 2020, consider the use of a SEP IRA. SEP’s are easy to administrate and you can use them even if you are also maximizing your university retirement plan contributions. You can also make this contribution until the April 15 tax deadline to reduce your 2020 tax liability.

Another tax planning consideration is using Qualified Charitable Distributions (QCD) for your Required Minimum Distributions (RMD’s).  RMD’s were eliminated in 2020 but will return in 2021. If you do not need all your RMD income, consider gifting your RMD’s from an IRA directly to a qualified charity. This QCD will not count towards your taxable income for the year and will help lower your taxes. This strategy will work even if you take the standard deduction.

If you do not have RMD’s that qualify for a QCD, bunching two or more years’ worth of your charitable gifting into a donor advised fund can help increase your deductions and lower your tax liability. This is especially true if you normally gift an annual amount each year that is less than your standard deduction.

Review how close you were above or below the marginal income tax bracket where you ended up last year and the tax bracket you will be in for 2021. Look at other income on your return besides your salary. There might be ways to reduce or defer the extra income. Look for opportunities with your retirement savings plans to either defer current taxes, or proactively lock in current tax rates with Roth contributions or Roth conversions. Most importantly, take this time to envision what your taxes and the overall tax environment will look like in the future.  Then make decisions in 2021 that will give you the most future flexibility to help reach your future goals.  


Disclaimer The information provided is not, nor is it intended to be, tax advice. You should consult your tax adviser for advice regarding your individual circumstances. 

Circular 230 Disclosure  We are required by Treasury Regulations (Circular 230) to inform the readers of this material that, to the extent that the information contained herein concerns federal or state tax issues, such information was not written or intended to be used, an cannot be used, for (1) avoiding federal or state tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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