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Joy Velasco for Fatherly

An End-of Year Financial Checklist for Parents: 10 Moves to Make Before 2020 Ends

2020 was a hellish ride. Failing to clean up your finances and make smart tax moves will only make it worse.  

The end of December is, of course, the time of year for sharing good tidings and catching up with loved ones – even if it requires logging into your Zoom account. With time off from work and the conclusion of the tax year, it also happens to be a fantastic opportunity to give your finances a once-over. While it’s certainly not a fun holiday activity, taking steps to reduce your IRS liability and increase savings might just be the best gift you can give yourself this season. 

To make sure you start 2021 off on the right foot, here are 10 financial tips to help you ensure that your finances are buttoned up before the end of year arrives.

1. Perform a cash-flow analysis

The end of the year is a great time to give your finances a thorough check-up, says Jonathan Drubner a Los Angeles-based wealth advisor with Intersect Capital. He recommends pouring over your past few bank statements and credit card bills to discover how much you’re spending in a typical month. 

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A good way to grade your spending performance? Compare your annual income to your fixed expenses. If you find that a lot of your cash is being diverted toward discretionary purchases, it’s time to take action. “Upon reflection, you might not be entirely impressed with your decision-making,” says Drubner. “Maybe you should allocate more to your retirement and less to your favorite sushi chef.”

2. Review your investment strategy

While you’re doing some self-examination, you might also want to log into your retirement accounts – especially if you’re not the type to glance at your 401(k) balance every week. Typically, some asset classes perform better than others throughout the course of the year. So if your asset mix is starting to go out of whack, you’ll want to make some corrections. 

“Should you have any positions that overachieved in 2020, don’t be afraid to sell high, realize some of those gains and rotate your new-found cash into stocks you think might be ready to break out in 2021,” says Drubner.

3. Use stock losses to your advantage

The one downside of being a skilled stock-picker: you’ll likely end up with a bigger capital gains bill when tax season arrives. You can mitigate that side-effect by looking for any clunkers in your portfolio and selling them before January rolls around, says Michael Repak, a senior estate planner with Janney Montgomery Scott in Philadelphia. You can then use those losses to offset some of your taxable gains. 

Just be careful about repurchasing any of the securities that you claimed a loss on to avoid running afoul of the “wash sale” rule, cautions Repak. The provision disallows tax harvesting on any stock that you sell and then subsequently repurchase either 30 days before or after the date that you sell the shares.

4. Make a Roth conversion

If you have some time between hanging Christmas knickknacks and watching The Grinch for the tenth time, you might just want to glance at your retirement accounts. Repak says converting some of them to a Roth variant, where you contribute post-tax income in exchange for tax-free withdrawals in retirement.  

Roth accounts can be a great way to hedge against future tax rate increases, especially if you’re a younger parent with your highest-earning years still ahead of you. If you’re in a lower tax bracket this year because of a layoff, you’ll further minimize the one-time tax hit from making the conversion. “The year’s end is typically the best time to look at this because the overall tax picture for the current year is generally pretty clear,” says Repak.

5. Bone up on the CARES Act

If you’re not familiar with some of the main provisions of the CARES Act, which was passed at the beginning of the pandemic, now’s the time to do a little homework. The stimulus bill allows special tax treatment for certain retirement plan activity that occurred in 2020, which can make a big difference when you settle your tab with Uncle Sam in the spring. 

For example, anyone who took a “COVID-related” distribution from a tax-deferred retirement plan of $100,000 or less, the 10-percent penalty on early distributions is waived, says Repak. What’s more, you can cushion the tax impact by evenly spreading the distribution over three years on your return. So if you made a $15,000 distribution this year, you could report $5,000 each in years 2020, 2021 and 2022.

And if you want to postpone the tax hit altogether (or at least until you retire), the legislation allows you to return the distribution to your plan within three years.  Be careful, though – these special CARES Act exceptions are limited to withdrawals taken in 2020.

6. Increase your savings rate

Was there ever a holiday party where you added just a touch more bourbon than the eggnog recipe called for – just enough to get a benefit, but not enough that anyone picks up on it? That’s the same basic philosophy you want to apply to your investment accounts. 

Even increasing your contribution by a single percent a year can make a big difference in the long run, says Jimmy Lee, CEO of The Wealth Consulting Group in Las Vegas. Then repeat those incremental adjustments until you reach your target savings rate. “You won’t notice the difference in your take-home pay,” says Lee. “And if you do, it will be in your financial interest to budget accordingly.”

7. Protect yourself from a worst-case scenario

The start of a new year is usually a good occasion to reassess your complete financial picture, including any gaps in your insurance coverage. Unless you have the extremely deep pockets necessary to withstand a tragic event, any breadwinners in the household should carry sufficient life and disability insurance. “It’s always very unfortunate when I learn how a spouse and children will be left behind without enough assets to continue their current lifestyles,” says Lee. 

8. Review your college savings strategy

Another financial housekeeping necessity this time of year: making sure that you’re on track to help your kids pay for college. The venerable 529 savings plans, which have the potential to grow over time based on market performance, are certainly a good option for a lot of families. But Lee also suggests looking at prepaid tuition programs if you live in one of the 12 states that offers one. (L1) “I use a 529 for my daughter’s expenses, and it’s worked great,” he says. 

9. Consolidate your debt

‘Tis the season for … debt management? With mortgage rates hovering near historic lows this month, the cost of doing a cash-out refinance or tapping a home equity line of credit are hard to beat. If you have high-interest rate debt – perhaps from splurging on Amazon this holiday season – Repak suggests using those funds to pay it down. “Anybody interested in this would want to take advantage before rates rise,” he says.

10. Use FSA funds before you lose them

Flexible spending arrangements are a great way to reduce your overall tax bill for the year. But the IRS can be downright Scrooge-like to folks who aren’t careful, erasing any funds left in your account after December 31.

Repak advises parents to check whether they still have a balance. If you do, figure out if there are any qualified medical expenses you can put that money toward. “Year-end can be the right time to get new eyeglasses or take care of some deferred dental work,” he says.