Financial Planning for a Better New Year

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If you consistently wait until after the New Year to manage your money, you will lose access to numerous financial planning techniques.

To properly manage your money, you should examine your financial condition at the end of the year and before the start of the new year. Before the new year, examine these three important financial planning approaches:

  • Make a 401(k) contribution.
  • Make a Roth conversion.
  • Stocks that are underperforming and overperforming stocks that should be sold.

How do you know if these planning methods are for you?

At the end of the year, you will need to take account of your finances. It will be too late if you wait until the new year and tax season!

It’s important to know how much money you made. In addition, you need to know whether or not you’re going to claim any deductions.

Most people will take the standard deduction. However, if you have already made contributions to a retirement account or a health savings account, you should be aware of this.

You’ll also want to know how well your non-tax-sheltered investments, such as a 401k or an IRA, have performed. Once you have that information, you can calculate your tax bracket and begin planning. If you need assistance, speak with a tax specialist about your specific circumstances.

Why should your financial planning include increasing your 401(k) contribution?

Saving as much as possible is a good idea. However,  you may not be allowed to contribute to a standard IRA due to your high salary. That means that, unlike a typical IRA, where you can contribute until April 15th, you must make your contributions by December 31.

Contributions to a 401(k) plan reduce your taxable income. Therefore, this makes them an effective tax management tool. You have the option to avoid paying greater taxes if you find yourself at a high tax rate.

Do you want to understand how to get these deductions while paying little or no tax in the future? One possible strategy is to defer your taxes. This becomes a highly appealing alternative if you find yourself in a high tax rate, such as 22% or more. For every $1,000 invested in a 401k, a person in the 22 percent tax bracket can save up to $220 in taxes.

What is the purpose of a Roth conversion in your financial planning?

What makes Roth accounts so appealing is that the eligible withdrawals you make in retirement are tax-free. This provides you with a stream of income in retirement that will not raise your taxable income. In addition, it allows you to stay at a lower tax rate throughout your retirement years.

A Roth conversion is when you take money from a traditional IRA and transfer it to a Roth account. When you do this, you will have to pay taxes on the money you convert. As a result, it’s crucial to figure out what tax rate you’ll be in before converting.

This is an excellent financial planning alternative for folks who are between jobs. In addition, it’s great for those who didn’t make as much money this year for whatever reason. Remember that you’ll have to pay taxes on whatever you convert. Therefore, make sure you have enough cash on hand to cover the increase in your tax liability.

One possible real-life example might help.

Sarah, for example, was normally taxed at a rate of 22%. She didn’t work for a few months this year since she was between jobs. As a result, she will now be taxed at a rate of 12 percent.

What Sarah can do is use this as an opportunity to transfer the money she has in her traditional IRA. This will help her if she converts it to a Roth IRA because her tax bracket is low.

However, you must exercise caution and refrain from converting excessively. Let’s imagine Sarah had $200,000 in an IRA and decided to convert it all. She’d be in the 32 percent tax rate or higher in no time. The financial tax burden would be massive. Alternatively, she could convert just enough money to maintain her in the 12 percent tax bracket, which would be a few thousand dollars.

Applying these strategies may appear difficult at first. However, once you understand the foundations, they become incredibly simple. Before making any decisions, be sure that you consult with a financial and tax specialist.

Why Should You Sell Your Under- and Over-Performers?

You’ll have to sell some shares at some point to maintain your investment portfolio balance. You’ll have to realize a gain or loss on your stock when you sell it. Additionally, you’ll have to deal with the tax consequences.

Let’s imagine you had a terrific year with one stock and needed to sell a number of shares to rebalance your investment portfolio. This results in a hefty tax bill. As a result, you look for ways to try to avoid paying excessive taxes if at all possible.

What options do you have? To manage the capital gains you have, you can sell underperforming stocks.

For example, suppose you made a $10,000 capital gain this year from the sale of stock. You own a number of other equities that have underperformed over time. However, you’ve kept them for this specific reason. You decide to sell those investments and take a $10,000 loss. On your taxes, these two realized sums cancel out. This leaves you with a net gain of $0 in capital gains.

Managing investments in this manner is an advanced method that takes a great deal of planning and strategy. Always consult your financial advisor and tax specialist when making these important decisions.

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