Review Your Finances Now to Keep on Track in 2021

A year-end review helps you cut taxes, build retirement savings, rebalance your portfolio, and earn more interest.

It’s time to do a year-end financial review and set your path for 2021. You’ll make sure your savings and investments are aligned with your goals, reduce income taxes, and ensure you’ve dotted your i’s and crossed your t’s.

Review IRA, 401(k), and other retirement-plan contributions. If you haven’t fully funded your retirement plan(s) this year, consider what you can afford to salt away. Contributions to 401(k) plans reduce your taxable wages. They are due by December 31, and many employers will let you make an additional one-time contribution up to the IRS limit.

You may be able to save on 2020 taxes by making deductible contributions to an IRA by April 15, 2021. If your income is too high to get a deduction because you or your spouse are also covered by a retirement plan at work, consider socking away money in a Roth IRA, which has more liberal income limits.

People 72 or older won’t need to take required minimum distributions (RMDs) this year. Congress waived them for all types of retirement plans in 2020.

Review your asset allocation and rebalance if needed. Confounding expectations, the stock market has boomed this year. As a result, you may find that your asset allocation has gotten out of whack.

Suppose a few years ago you set your allocation as 50% equities (stocks and stock funds) and 50% in fixed-income (bonds, CDs, fixed annuities, money markets and similar instruments). Thanks to strong market performance, you’re now 65% in equities and 35% in fixed income.

You’ve done well! Now it’s time to start reallocating to get back to 50-50. Reallocating money in retirement plans as well as annuities and life insurance policies takes less planning because gains here are not taxed until withdrawn.

Some people have enough money in their retirement plans so that they can accomplish their overall rebalancing using only them. Remember, it’s your overall asset allocation that counts, not the allocation in any one account.

If you do need to rebalance your taxable investments, be aware of tax strategy. For instance, if you have unrealized losses, you can sell off losing investments to offset gains from selling your winners. If you’re rebalancing a lot of taxable money, you may want to consult a CFP or CPA for help.

When rebalancing or reinvesting money coming due from maturing CDs or bonds, consider all your options. You may be able to get a much better rate than you expect. To boost the economy, the Federal Reserve has slashed short-term interest rates close to zero. Today, most savings instruments like money market accounts, CDs, and bonds pay very low rates, even if you’re willing to tie up your money for a few or several years. If you’ve got CDs or bonds that are about to mature, it pays to consider other options.

If you can afford to tie up your money till age 59½ or are already that old, there’s another choice that typically pays a higher rate: a fixed-rate annuity. Your age is important because If you withdraw money from your annuity before age 59½, you’ll owe the IRS a 10% penalty on the interest earnings you’ve withdrawn.

Also known as a multi-year guarantee annuity or a CD-type annuity, a fixed-rate annuity behaves a lot like a bank certificate of deposit, with some notable differences.

Like a CD, it pays a guaranteed interest rate for a set period, usually 3-10 years. Unlike a CD, the interest credited to the annuity is tax-deferred until you withdraw it.

While CDs today pay less than 1%, a 3-year fixed annuity pays up to 2.40% and a 5-year contract up to 3.00% annually. Annuities are not FDIC-insured but are covered by state guaranty associations, up to certain limits, that vary by state.

A fixed indexed annuity is another choice if you don’t mind a fluctuating interest rate. It credits interest based on the growth of a market index, such as the S&P 500.

In up years, you’ll profit. In down years, you’ll lose nothing but won’t earn anything. Indexed annuities are suited for people who want to save for the long term while limiting risk without precluding growth.

Make sure your beneficiaries are up to date. The listed beneficiaries on annuities, life insurance policies, and retirement plans will receive the proceeds on your death. Check that they’re up to date. Life changes such as marriage, divorce, the birth of children or grandchildren, and the death of a loved one may require updating your beneficiaries.

If you’re married, your spouse is normally your primary beneficiary and your child or children are contingent. If you’ve been divorced and remarried, make sure your ex-spouse isn’t still the beneficiary.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites. 

A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.