Your annual financial to-do list
By Mark McGahee
What financial, business or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:
- Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.
Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10-percent federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
- Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement or written communication from the charity with the date and amount.
- See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.
- Open an HSA. A Health Savings Account works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.
If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20-percent penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
- Review your withholding status. It may need to be adjusted due to any of the following factors: You tend to pay a great deal of income tax each year; You tend to get a big federal tax refund each year; You recently married or divorced; A family member recently passed away; You have a new job and you are earning much more than you previously did; You started a business venture or became self-employed.
- Are you marrying in 2020? If so, why not review the beneficiaries of your retirement accounts and other assets? When considering your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2020, you will need a new Social Security card. Additionally, the two of you may have retirement accounts and investment strategies. Will they need to be revised or adjusted with marriage?
- Are you coming home from active duty? If so, check the status of your credit as well as the state of any tax and legal proceedings that might have been pre-empted by your orders. Make sure any employee health insurance is still there and revoke any power of attorney you may have granted to another person.
- Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way in 2020? Do you anticipate selling an investment that is held outside of a tax-deferred account?
- If you are retired, and in your 70s, remember your Required Minimum Distributions from traditional retirement accounts. There is a new development to report on this, as the Setting Every Community Up for Retirement Enhancement (SECURE) Act just altered a key rule pertaining to these mandatory withdrawals. Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts. The previous “starting age” was 70½. This new RMD rule applies only to those who will turn 70½ in 2020 or later. If you were 70½ when 2019 ended, you must take your initial RMD(s) by April 1, 2020, at the latest. If you have already begun taking RMDs, your annual deadline for them becomes Dec. 31 of each year. The IRS penalty for failing to take an RMD can be as much as 50 percent of the RMD amount that is not withdrawn.
These are general guidelines and are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.
Mark McGahee can be reached at 539-9465 or firstname.lastname@example.org.