Your 2021 Financial Checklist: 5 Steps to Jumpstart Success

Each year begins with countless resolutions of travel, fitness, and finance, but many are quickly abandoned when they evolve from exciting to daunting. While a financial advisor may not be able to get you back on the exercise bike, we can help steer you towards financial success. Motivation and accountability are two key ingredients in accomplishing any goal, so start the year off on the right track by reviewing these five key financial topics.

401(k)'s and Other Employer Plans

Retirement plans have been designed to reduce maintenance needs. Target date funds, automated rebalancing, and contribution rate increases were all implemented to allow an account owner to be as hands off as possible. These tools were built to set you up for success, as we've written before, but unfortunately they're no Auto-Pilot. Set up a schedule for when you will review your accounts, and stick to it. While this can be anywhere from weekly to annually, we suggest checking in at least quarterly to ensure the ship is on course. If there has been a change in compensation, should contributions be moved from Roth to pre-tax or vice-versa? As a majority of employer sponsored plans are funded through paycheck deductions, it is recommended that any changes be made early in the year to avoid playing catch up in the final months.

IRA Contributions

IRA contributions remain unchanged in 2021. Individuals may save $6,000 into Roth or Traditional IRAs or $7,000 for those over the age of 50. If income or employment changed, be sure to verify how those changes impact your ability to make IRA contributions. Another layer of consideration is added for those who have access to an employer plan or a spouse who has access to an employer plan. Carefully review income to determine how that may impact IRA deduction eligibility. Contributions to IRAs can be made for the prior year until April 15th or your tax filing date whichever comes first.

If you are no longer eligible to make Roth IRA contributions due to income limits, consider utilizing the backdoor Roth or the mega backdoor strategy. Each of these options allow investors to side-step savings limitations leading to more tax-advantaged retirement funds.

Health Savings Accounts

Employers are continuously changing their benefits packages and the Health Savings Account (HSA) is a prime example of why. Due to the rapid rise in healthcare costs more employers are offering HSAs as an option in their healthcare plan. Check to see if this is a new offering within your company's benefits package. Whether a new or existing option, prioritize saving into an HSA to see the full benefits of its three tax-advantages.

Charitable Giving

Is it advantageous to make donations now or should they be delayed later in the year? While most charitable giving is done in November and December, there may be compelling reasons to gift earlier. Gifting appreciated stock is an excellent method for satisfying charitable intent while also realizing several tax benefits, but it does not come without risk. If appreciated assets are likely to be gifted, doing so at the beginning of the year removes the risk of market volatility and may also serve as a method of portfolio rebalancing. We wrote extensively on this topic here.

Additionally, "bunching" charitable gifts could prove advantageous for donors. This is done by making donations both early and late in the same calendar year. Donations are then skipped the following year, allowing for a higher deduction during years of gifting.

Required Minimum Distributions

Required minimum distributions (RMDs) were suspended for 2020, but investors should plan on resuming the RMD for 2021. For those who did not take distributions in 2020, there is a high probability that the required distribution will be substantially larger than in previous years. All required minimum distributions can now be calculated for 2021, and it is important to know and plan around that value early in the year. Should the RMD be divided into 12 monthly distributions or would it be more advantageous to delay the entire amount to the end of the year? The answer depends on cash flow needs and additional investment assets, but be sure to have a plan in place as missing the RMD comes with substantial IRS penalties.

Start Now

Financial health all too often takes a back seat during the critical first months of a year. While the world has come a long way in automation, there are still many actions investors must take. Pour some coffee, pull up this article, and set aside an hour or two to verify you've set yourself up for a successful year. Postponement frequently leads to missed opportunity and added stress which is certainly something we call all use less of.

Joe Crowley, CFP® is an Investment Advisor at Exchange Capital Management.  The opinions expressed in this article are his own.