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2021 Year-End Financial Checklist



Between the holiday shopping and family and friend get-togethers, it might be difficult to find the time to sit down and focus on your finances. For some, this season sparks a motivation to revaluate their budgets or create financial goals for the new year. For others, it feels like the worst possible time to be focusing on next year—they’re just trying to make it through next week.


The truth is that budgeting and financial goal-setting for next year can wait.


However, there are decisions around investments and reducing your tax liability that you should take care of in December, as they are time-sensitive. In this article, we’ll outline a must-do end-of-the-year checklist to help you optimize your finances for maximum savings.


1) Spend your Flexible Spending Account (FSA) dollars and contribute to your Health Savings Account (HSA)


Taking advantage of what an FSA or HSA account offers is often one of the most impactful financial decisions you can make from year to year. We’ve placed this as number one on our list because it is an easy way to kickstart a financial strategy that can save you money. Below we’ll tell you why.


What is a Flexible Spending Account (FSA)?


A flexible spending account (FSA) allows you to save for two types of expenses tax-free through your employer. One type of account allows you to save for dependent care-related expenses such as daycare, babysitters, summer camps, and even expenses related to the care of an elderly member of your family.


The other type of account allows you to save for healthcare-related expenses such as hospital visit co-pays, out-of-pocket costs, prescription drugs, over-the-counter medications, and hundreds of other items — even sunscreen and Band-Aids! You can find the full list of qualifying expenses here.


For 2021, you can contribute up to $2,750 to a health-related FSA account and $5,000 toward a dependent care FSA but there is a clock running on reimbursement. We discuss the time-sensitivity of the account

What is a Health Savings Account (HSA)?


A Health Savings Accounts (HSA) offers similar tax benefits to the FSA for saving towards health-related expenses but is not created through your employer. In order to qualify to have an HSA, you must have a qualifying high deductible health insurance plan. The idea is that since you have a high deductible on your health insurance, the HSA helps meet those out-of-pocket expenses.


For 2021, you can contribute up to $3,600 as an individual or $7,200 for a family to an HSA each year. Some companies adopted a provision for a COVID-related bill that allowed you to contribute double that amount, but this was not the majority of employers. Call your HR department to confirm your maximum contribution amount.


Why should you consider an HSA/FSA a vital part of your investment strategy?


The average American household spends $5,000 on healthcare each year, according to the data company Clever. For many years you may spend less providing a false sense of security or what lies ahead. This includes hospital visit co-pays and out-of-pocket costs, prescription drugs, medical services, and medical supplies.


Even if you are young, healthy, and running marathons now, you will need money for healthcare in retirement. A 65-year-old couple in good health will need $387,644 to pay for healthcare costs for the remainder of their lives, according to HealthView Services (a provider of healthcare cost projection software).


It’s easy to brush these numbers off — especially if you’re relatively healthy at the moment. But the truth is that healthcare costs cannot be avoided. Considering that medical bills are the number-one reason people file for bankruptcy in the U.S., providing for your healthcare costs deserves your attention.

If you are not saving for healthcare-related expenses in an HSA or an FSA account, you pay for those expenses with after-tax money. Because you miss out on the tax savings of these accounts, the buying power of your healthcare dollars has been unnecessarily reduced by up to 30%, depending on your tax bracket. You may even end up using a credit card with a high-interest rate that takes months to pay off.


Every dollar you contribute to your FSA is a dollar that reduces your taxable income. That’s like a coupon for 30 percent off all healthcare- and childcare-related expenses;30 percent off is no small potatoes.


HSAs have even more tax benefits for contributions. HSAs are the only account that I am aware of that offer three separate tax breaks. First, your money is deposited into the account pre-tax, reducing your taxable income. Second, you can then invest the money in the stock market, and the interest on that money will grow tax-free. Finally, you can withdraw the funds for qualified health-related expenses tax-free. The triple tax advantage that HSAs offer is extremely rare in the investment world.


A full list of qualifying medical expenses that can be used with an HSA can be found here.


Why are these accounts often overlooked?

Perhaps one reason many of us ignore the benefits of HAS/FSA accounts is that the tax savings occur before the money even hits your account. You never really see it. It would be a lot easier to appreciate the savings if every time you paid for a prescription drug, a doctor’s visit, or your contact lenses, the person at the checkout counter informed you that you’d saved 30 percent on your purchase. That would feel pretty good. Although the discount is not on the sales tax, the real benefit comes from not having to pay income tax on the money allocated to these expenses.


The key is to remember that even though you pay the same as everybody else at the counter, you’ve had to earn 30% less from your paycheck than those not using HSA/FSA accounts.

Why are FSAs and HSAs time-sensitive?

FSAs are use-it-or-lose-it accounts: the money in these accounts needs to be spent by the end of the year, or you lose that money for good. Depending on your employer’s plan, you may be given a few months the following year as a grace period to spend this money, but that is not always the case. The other hard lesson we’ve learned in the past is that you must reelect your FSA contributions every year through your HR office during the benefits enrollment period.


The government created COVID-related exceptions for FSA accounts. You actually have till December 31st, 2022 to spend the money in your FSA account for 2021. That exception is unlikely to last past 2022. You’ll want to check with your HR department to confirm the deadline to contribute to your specific plan.


On the other hand, with an HSA, you do not have to worry about losing those funds at the end of every year since they continue to roll over from year to year. Still, if you want to contribute to your HSA in order to reduce your taxable income, you have until April 15th of the following year to do so. So for 2021 HSA contributions, you have until April 15th, 2022.


2) Employment Retirement Plan


Nobody requires you to spend a few hours every year reviewing your retirement account options and fees, but those that do are part of an exceptional group. Once you understand your options, contributing as much as you can towards tax-advantaged retirement accounts should be top of the list of your financial goals each year.


What retirement accounts are available through an employer?

Most retirement accounts will come in the form of a 401(k), a 403(b), or a 457(b). All three are employer-sponsored retirement plans that offer workers a tax break when they invest toward retirement. The main difference between 401(k) and 403(b) boils down to what kind of business your employer is. Private companies typically offer 401(k)s, while non-profit organizations only provide 403(b)s. Hospitals and educational institutions are examples of companies that offer 403(b)s.


There is a third, less-common retirement plan provided by state and local governments (as well as non-profits) known as a 457(b). All three of these plans can only be offered by an employer, so you can’t sign up for them as an individual. If you are self-employed, similar retirement accounts are available to you, such as Simple IRAs, solo 401(k)s, and SEP IRAs.


Why is it important to contribute to a retirement account?

Many employers will offer to match a part of what you contribute to your retirement plan. If your employer offers you a matching contribution, it should be one of your top priorities to participate at least up to the match.


Here’s why.


Let’s assume your employer offers you a match on the first 5 percent of your salary that you contribute to a 401k. We will also assume your salary is $100,000 a year to make the numbers easy. If you contribute 5 percent of your paycheck over a year, that would be $5,000. With your contribution match, your employer provides an additional $5,000 in your 401k.


Before we even talk about earnings (growth) from your investments, you have made a 100% return on your investment with this match.

Another critical benefit to retirement plans is the tax breaks. With both a 401(k) and a 403(b), your tax break can either take place at the time you contribute money (with a traditional account), or the tax break occurs when you withdraw funds in retirement (with a Roth account). Whether your tax break is on the front end or the back end, it represents a substantial opportunity to keep more of your earnings in your pocket. Once again, we are talking about saving up to 30% in taxes. On top of that, your contributions to retirement accounts will grow tax-free over time.


So if you’re trying to save $10,000 to invest in the stock market and you are not using a tax-advantaged retirement account, you will have to earn closer to $13,000 before the IRS takes its cut and leaves you with the $10,000 to invest.


Why are retirement accounts essential to your financial strategy and what makes them time-sensitive?


The infographic below shows retirement contributions and deadlines for 2021.


(The amounts listed exclude any company match that your employer may contribute.)


Remember that the more money you save for retirement in these accounts, the less taxable income you’ll have for the year. Let’s say you are a W2 employee under 50 years of age, and your employer offers a 403(b) and a 457 retirement plan. You also have an individual IRA independent of your employer. With this configuration, you can max out all these accounts and reduce your taxable income by $45,000. If you’re 50 or older, that number would be $59,000 with the catch-up contributions.


Not only are you investing toward your retirement, but you’re saving gobs of money in taxes.

In the example above, despite having a salary of $100,000, you only made a taxable income of $41,000 as far as the IRS is concerned. You can for save for retirement in even contributions throughout the year, or (now that we’re in December) you can adjust your final paychecks for the year to increase your retirement contributions. Your HR office can walk you through the details of your employer’s plan.


3) Complete open enrollment and select your employer benefits


While we’re on the subject of employer benefits, the open enrollment period for healthcare, life insurance, and other benefits is toward the end of the year for many people. Take time to review your benefits and select plans such as an FSA, HSA, retirement contributions, and insurance that is best for you and your family. These windows of time are typically limited to 2 to 4 weeks. Once they’re closed, many of these choices cannot be changed for the upcoming year.


4) Make charitable donations


If there are charities that you would like to donate to and you haven’t gotten around to it, the end of the year is your final opportunity to donate and receive a tax benefit for 2021.


You usually have to itemize your deductions if you want to include a charitable donation during your tax filing. However, as part of the Cares Act, you do not have to itemize to take advantage of the tax benefit in 2021. Single taxpayers can claim a deduction for cash donations of up to $300, and married couples filing together can claim up to $600. This is a temporary opportunity that may not be available next year.


5) Consider Roth IRA Conversions to maximize retirement contributions


What is a Roth IRA Conversion?


A Roth IRA conversion is the process of transferring retirement funds from a traditional 401(k), IRA, or SEP-IRA into a Roth account.


If you make too much money to contribute to a Roth IRA, you can still invest in what is referred to as a backdoor Roth IRA or rollover. This may sound a little sketchy, but is entirely legal and frequently recommended for high-income individuals. The IRS will even walk you through how to do it here.

With a backdoor IRA, you first contribute to a traditional IRA, then transfer those investments into a Roth IRA without the usual income limitations. You can perform this conversion every year.


If you feel like you have to unnecessarily jump through hoops just to put money into a Roth IRA, then join the club.


If it is your first time converting a traditional IRA to a Roth IRA, it is a good idea to discuss how a conversion will affect your tax situation with a professional tax advisor. You don’t want to convert too much so that the conversion moves that contribution to the next tax bracket or convert too little where you are not taking full advantage of the conversion. Make sure to dot your i’s and cross your t’s.


What is the benefit of a ROTH conversion?

It’s another opportunity to reduce your future tax liability.


Since the Roth grows tax-free, you have to pay taxes on the money before it goes in, whether it comes from a traditional IRA or your own pocket. Timing on your backdoor conversion is also important.


There will be few if any taxes if you contribute first to the traditional IRA, and then (once the funds settle) immediately turn around and roll over those funds into a Roth IRA. Since the funds haven’t had long to grow, there will not be any significant gains to tax if you transfer those funds within a short period of time.


Why are ROTH conversions time-sensitive?


As I mentioned a little earlier, you have until April 15th, 2022 to contribute to an IRA for 2021, BUT you only have until the end of the year to make the conversion from a traditional IRA to a Roth IRA.


6) Contribute towards your family's education


What are 529 Plans?


In a nutshell, a 529 plan is designed to save for education expenses through an investment account that provides significant tax breaks. Many people don’t know that these savings can be given to any member of the original beneficiary’s family. This includes siblings, cousins, parents, aunts, uncles, nieces, nephews, stepchildren, and even yourself. These plans usually also include the spouses of any of the family members listed.


Why is saving for education important?


This is yet another type of account that provides tax benefits on the contributions and growth of investments over time.

In most states, your 529 contributions reduce your taxable income in the year you make the contribution. This can help to reduce the amount of taxes owed at the state level.


Be aware that the federal tax benefits and the state tax benefits differ, as 529 plan rules vary from state to state. In many states, there are tax benefits when you contribute money into a 529 plan and benefits when you withdraw funds.


Below is an example to illustrate the difference between saving for college for 18 years inside versus outside a tax-advantaged 529 plan.



What about 529 plans are time-sensitive?


The deadline in most states to contribute to a 529 plan and have it positively impact your state taxes for the current year is December 31st. However, some states like Georgia, Iowa, Mississippi, Oklahoma, South Carolina, and Wisconsin extend their deadline until April of the following year. With legislation constantly changing, make sure to verify your state’s deadline to see if any changes have occurred.


7) End of year tax-loss harvesting


The benefits of tax-loss harvesting


This strategy can help you reduce your taxes on capital gains. You accomplish this by selling securities (such as stocks, bonds, or mutual funds) that are currently below your original purchase price. Selling a stock at a loss can help you offset a capital gain you’ve sold for a profit to reduce your taxable income.


If you have a capital loss, you can use up to $3,000 a year to reduce your tax liability and carry over any remaining amount to future years.


In order to utilize this strategy, you will need to know what your taxes will look like come tax season. That is why most people wait until the end of the year to get a full picture of their tax liability.


Why is tax-loss harvesting time-sensitive?


You have until December 31st to utilize this strategy for the current tax year and sell investments at a loss.



In the list above, we focused on actionable financial steps with a timer on them. It’s worth noting that a review of whether or not you met your financial goals this year and planning for next year’s strategy will involve a deeper dive. This overview includes things like budgeting, portfolio allocation and rebalancing, and goal setting. We’ll be discussing our approach to these additional topics in an upcoming post.


Now is the time to start gathering all the information you need and meeting with a tax professional to see what strategies you can implement before the end of the year to optimize your finances. Reviewing an end-of-year checklist may seem daunting at first, but it can reduce your stress and provide added confidence going into the new year with a solid plan.


Happy holidays from Nick & the family!


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