What end of year cash moves should I make

December 27, 2021 6:07 AM

I've recently inherited a medium sized chunk of money and just parked it in the bank while sorting out all the other stuff that comes with deaths in the family. In addition our household income just jumped up 25%. It's clearly too late to connect with a financial advisor and tax planner for this year (on the todo for Jan. I guess) but are there any easy and safe financial moves I can quickly make today for tax or retirement optimization (like i-Bonds or something like that)?
posted by srboisvert to Work & Money (8 answers total)

For what it is worth, here is an end-of-year checklist from Vanguard, for example. However, other than potentially the reminder about RMDs (in case you received an inherited IRA, say), not much is specific to your situation of having incomes go up and receiving an inheritance.
posted by Dip Flash at 6:17 AM on December 27, 2021 [1 favorite]

Contribute to whatever form of tax-deferred retirement plans are available to you: 401k, IRA, etc. Generally, these contributions reduce your income for the year. You don't have to actually invest the money now if you are not comfortable doing that, you can just put the cash in the plan and invest it later. The important thing is maxing out the contribution limit for 2021, because after 12/31 (or possibly 4/15/22), you won't be able to make a 2021 contribution. If you don't have a 401k or IRA, open one up this week! Fidelity, Schwab, and Vanguard (among others) make it easy to do online.

The only reason to rush to buy I-bonds this year is that there is a $10k/year limit on I-bond purchases, so if you know you want to buy more than $10k in the near term, it would make sense to get that rolling now. But that's not a tax thing - it's a limit-per-year-on-purchases thing.
posted by Mid at 6:21 AM on December 27, 2021 [4 favorites]

I-Bonds are about the only investment I would say you should make literally today because of the $10k calendar year limit. They are effectively a "free lunch" in investing terms because large institutional investors don't have access to them. They will only keep pace with inflation, but that's still not bad for a "risk-free" investment.

Caveats:

• $10k calendar year limit per investor.
• Can't cash out for 1 year.
• If you cash out within the first 5 years you forfeit the last 6 months of interest.
• Only keep pace with inflation, specifically the CPI. Your personal inflation may differ.
• Can only be bought through the TreasuryDirect.gov website.

Even if inflation goes down in the future, you probably won't regret buying an inflation indexed asset like I-Bonds.

Other retirement investments like IRAs you can invest in before April after talking to a fee-only financial planner.
posted by justkevin at 6:26 AM on December 27, 2021 [4 favorites]

If you qualify for an HSA, make sure it has been fully funded this year. You can contribute for 2021 until April 15th, 2022.
posted by soelo at 6:41 AM on December 27, 2021 [2 favorites]

Now is a great time to contribute to charity, as it can help reduce your tax burden a bit and help others right now. If you tend to contribute a bit each year, you may want to double up this year (and keep receipts)
posted by JZig at 7:11 AM on December 27, 2021 [5 favorites]

You should figure out how to maximize your tax-advantaged savings accounts. If you are a typical American, that means an IRA and a 401(k), although if you work for a non-profit or a school, that may be a 403(b) instead. Because you are over 50, you will be able to contribute additional "catch-up" contributions to each account. The strategy for each is slightly different:

• IRA: will depend on your income (your new 25% increased income). There are roughly ways to contribute to an IRA - a traditional IRA, a "front door" Roth IRA, and a "back door" Roth IRA. The traditional IRA and "front door" Roth IRA both have income limitations that may or may not apply to you. If the income limitations do apply to you, you will need to do a "back door" Roth IRA conversion, which has effectively no income limit - but is somewhat confusing to do. For the majority of people, a Traditional account is preferable to a Roth account. For whatever path you pick, you will be able to contribute $7,000 for yourself. If you are married, your spouse can contribute to their own account with $6,000 (under 50), or $7,000 (over 50).
• 401(k)/403(b): the most common way to contribute to a 401(k)/403(b) is through your paycheck. If you happen to have an end of the year paycheck, you should find out if your employer will allow you to change your contributions for it right now. The maximum you can contribute will typically be 50%-100% of your paycheck, although that number may vary based on "highly compensated employee" rules (which your employer should inform you of). Some 401(k)s/403(b)s allow you to contribute via a check, which you could use to max out your account. You will be able to contribute up to $27,000. If you are married, your spouse can contribute to their own account with $19,500 (under 50) or $27,000 (over 50)

I will also emphasize that I Bonds are a heck of a deal right now for reasons stated above. You can buy $10,000 for yourself, $10,000 for your spouse, and $10,000 for each kid you may have. If you are particularly motivated, you can get an additional $5,000 through paper I Bonds through your tax return refund. If you do not expect a tax return refund, you can deliberately overpay your taxes in order to get a refund (through I Bonds).

Some corrections:

The important thing is maxing out the contribution limit for 2021, because after 12/31 (or possibly 4/15/22), you won't be able to make a 2021 contribution.

Contributions to IRAs are allowed up to 15 April 2022 for the 2021 tax year for the "front door" IRA contributions. Conversions for the "back door" IRA are only allowed up to the end of the year - 31 December 2021.

[I Bonds] will only keep pace with inflation

I Bonds grow at the rate of inflation. In other words, their real return is the rate of inflation. They do not just keep up with inflation.

Now is a great time to contribute to charity

Charitable contributions are only deductible up to $300 (single) or $600 (married) if the taxpayer doesn't itemize. Most taxpayers don't itemize. Charitable contributions are not useful for tax purposes for most taxpayers (beyond $300/$600).
posted by saeculorum at 9:16 AM on December 27, 2021 [5 favorites]

If you cash out within the first 5 years you forfeit the last 6 months of interest.

Last 3.
posted by praemunire at 2:38 PM on December 27, 2021 [2 favorites]

At least in my experience, very few companies would allow you to alter 401(k) type contributions this close to the end of the year in time to make a difference. So unless you have good reason to believe you could affect your last paycheck for the year, I wouldn't worry about that.

IRAs can be contributed to up until tax day so there's no rush there. Depending on how much your income went up and how much you already made, you may no longer be eligible for conventional or Roth IRAs so double-check ahead of time before assuming that you can use them.

As has been noted, charitable donations can be made up until the end of the year to affect this year's taxes.
posted by Candleman at 1:54 AM on December 28, 2021