The end of the year can be a busy time with presents to buy and travel plans to make. But be sure to leave room on your to-do list for key tax moves — some of which can lower next year’s tax bill.
That might mean funneling more money into tax-advantaged accounts or figuring out how to best balance your stock sales. No matter your financial changes, the sooner you can get to it, the better.
“Anecdotally, I’ve seen that customer service wait times and processing timelines have been much slower lately,” said Justin Pritchard, a certified financial planner with Approach Financial. “If you need to get something done by the end of the year, start now.”
Here are six smart tax moves to consider.
Boost your retirement funds
The last few weeks of the year are a great time to toss some extra cash into your retirement accounts. Not only does that give you more money for retirement, but you also lower your taxable income.
You have until Dec. 31 to contribute to a 401(k) and until April 15 to contribute to an IRA for it to count toward the 2021 tax year. The most you can contribute to a 401(k) for 2021 is $19,500 if you’re under 50 and $26,000 if you’re 50 or older. For an IRA, those numbers are $6,000 and $7,000. If you’re not maxed out on your contribution, see if you can kick in a few extra bucks now.
Consider converting your IRA
If you expect your income taxes to go up because you're earning more, converting a traditional IRA into a Roth IRA might make sense, Pritchard said. A word of caution: The move would actually increase your taxes this year — potentially by a lot. That’s because any money you convert is taxed as ordinary income and could even push you into a higher tax bracket.
But the upside is that a Roth IRA doesn’t have required minimum distributions when you turn 72 like a traditional IRA. That allows you to keep more money in your retirement account. And if you use that money during retirement, you can withdraw it tax-free since you already prepaid the taxes — and potentially at a lower rate.
If you’re interested in making the switch, consider doing it soon, especially if you’re a higher-income earner. Technically you’re not allowed to open or contribute to a Roth IRA if you earn too much money. Right now you can get around that by converting a traditional IRA into a Roth IRA, but there’s been talk in Congress about eliminating that option.
“Consider the possibility that 2021 might be your last opportunity to make that happen,” Pritchard said.
Sell winners and losers
Now is the perfect time to sell off stocks that aren’t performing as well as you expected. That’s because you can lower your tax burden by selling stocks at a loss, meaning they’re worth less now than what you paid for them. You can also offset capital gains from profitable stocks you sold by up to $3,000 in losses.