Many of us will be eager to see 2020 come to an end.
The COVID-19 pandemic has killed over 275,000 Americans. Many families are grief-stricken.
Many businesses have shut down, and others are hanging on by a thread. Countless workers have lost their jobs, leaving them uncertain how they will pay their bills or feed their families. Health care workers have suffered immensely, and persons living in long-term care facilities are suffering from isolation. The education system has been upended, with many concerned that students may lose a full year of education.
To make matters worse, the November presidential election reflected deep divisions among Americans. Yet we are cautiously optimistic that 2021 may bring back a sense of normalcy, allowing our country to start to heal physically, mentally and financially.
Through it all, many have embarked on tasks that will leave a positive impact on their lives. Some people are cleaning out closets and garages; decluttering feels good on many levels. Some are reading more, exercising more (at home), or exploring TV shows and documentaries about nature, travel and science. Many have reached out to family and friends via Zoom or phone calls, and the extra effort to keep in touch can actually deepen relationships. Some have tackled enormous projects such as organizing decades of family photos.
As the year winds down, making progress with your finances will feel good. The two financial ideas below can be done quickly – before Dec. 31, 2020.
Consolidate and simplify
It is common for people who are good at saving and investing to have multiple accounts. Typically, people open a new account but never close the old account. Combining redundant accounts is an important step in taking control of your finances.
Banks and Credit Union Accounts: If you have four or more bank or credit union accounts, close some and reduce the total to one or two. Even though bank lobbies may be closed to customers, closing checking and savings accounts can often be done with just a phone call. It is common for people to have multiple bank and investment accounts at a bank, a credit union and possibly at an internet bank.
Determine which account(s) serve you best and close the rest. Each bank account triggers a 2020 tax document, which you will receive in January of 2021. However, if you close all of the excess accounts in December of 2020, you will receive fewer tax documents in January of 2022. Reducing the number of bank accounts (and tax documents) will simplify your taxes and your life.
Retirement Accounts: If you have redundant retirement accounts, consolidate them. If you have several 401(k)s or 403(b)s from past employers, these can be rolled into a traditional IRA. If you have several traditional IRAs, those too can be combined. Typically, contributory and rollover IRAs can be combined. Note that you always want to request a “rollover” when combining retirement accounts. You do not want to ask for a distribution, which would trigger taxes. Talk with your financial adviser or tax adviser for details.
If you have retirement accounts with several different brokerage firms, decide which brokerage firm you like best, and consolidate the other accounts into a traditional IRA at that firm.
Roth IRAs: Because Roth IRAs have only been available since 1997, I rarely see situations where people have multiple Roth IRAs. However, if you do, they can be combined. This would be termed a “rollover.”
Because I consider Roth IRAs to be the most valuable type of investment account, my January 2021 article will be devoted to funding Roth IRAs.
Taxable Investment Accounts: Similar to retirement accounts, multiple taxable investment accounts can be combined. Keep in mind that tax ramifications are extremely important with taxable accounts, so you will need to pay close attention to cost basis for the investments in the taxable accounts. However, it is common that some holdings may have losses and others may have gains, thereby allowing the investor to “net” the gains and losses when simplifying or consolidating accounts.
Capital gains taxes – which are triggered by investments held over 12 months – are at a preferential tax rate that includes rates of 0, 15%, 20% and 23.8%. Most people pay 15%. There is discussion in Congress about whether the capital gain rates may increase to be the same as regular income tax rates. This could occur in 2021 or 2022. A potential increase in future taxes should provide an additional nudge to cleaning up accounts now.
Give generously
Most people who donate to charities do not do it for the tax deduction.
However, a tax deduction is an added benefit. Changes to the tax code in 2017 increased the standard deduction, thereby eliminating charitable tax deductions unless a taxpayer itemized on their taxes. The 2020 CARES Act is allowing a $300 charitable deduction in 2020 even for filers who do not itemize. The $300 must be donated via cash, check, or credit card, and it must go to a qualified, 501(c)(3) public charity. Keep clear records, such as receipts, an acknowledgement letter, or a photocopy of your check or credit card statement.
Many local, national and international charities are serving people who desperately need our help. Your gifts can far exceed $300 if you can afford it. Maya Angelou captured the spirit of giving when she wrote:
“The charitable say in effect, ‘I seem to have more than I need, and you seem to have less than you need. I would like to share my excess with you.’”
Being generous by helping others is a great way to end 2020 and welcome in 2021!