Year-End Financial Planning Reminders

1. Social Security Cost of Living Adjustment (COLA) for 2022. The SSA announced the 2022 Cost of Living Adjustment of 5.9%, the largest increase in 40 years. The increase will be effective on December 30, 2021.

2. Take your Required Minimum Distribution (RMD) for qualified accounts and inherited IRAs.  In 2019, the SECURE Act changed the RMD age to 72 from 70 ½. In 2020, RMDs were not required with passage of the CARES Act. So this year if you will be 72 or older by December 31, you may be required to take a distribution from your qualified retirement accounts. Failing to do so will cost you 50% in penalty of the RMD that you didn’t take.  The initial withdrawal can be deferred until April 1 in the year following the year you turned 72 — for example, by April 2022 if you turn 72 in 2021. Subsequent withdrawals must be made annually by December 31. This requirement applies to money in IRAs, 401(k) plans, and most other retirement accounts, but not to Roth IRAs.

3. Spend Flexible Savings Accounts (FSA). Unlike HSAs, FSAs do not carry over year-to-year. The funds in these accounts must be spent in the year they are deposited. Use it or lose it. 

4. Make a charitable donation. Of all the year-end actions on this list, donating money to charity may be the most satisfying. Research services such as and list free information that can help you evaluate a non-profit organization, including whether or not it’s legitimate. Talk to your tax advisor to find out if a charitable donation might be deductible for tax purposes.

5. Consider converting to a Roth. With retirement income, it often makes sense to have a good mix of traditional and Roth IRAs. (Money you take from traditional accounts is taxable in retirement, while Roth withdrawals are tax-free as long as you meet certain criteria.)

You can manage income in a way that keeps you in the lowest possible tax bracket. One way to boost your tax-free savings is to “convert” some money in traditional accounts (either within your workplace plan or an IRA) to a Roth. Just keep in mind that doing so will trigger income taxes. Money you convert to a Roth is treated as a normal distribution, so you’ll need cash to cover tax on that amount. You may need to crunch the numbers to see if a Roth conversion makes sense this year. That might be the case if, say, you’re in a lower tax bracket, perhaps due to a gap in employment or other life event.

6. Offset capital gains with capital losses.“Tax-loss harvesting” is a complex name for a simple idea: selling stocks and funds that have lost value to offset taxes on profits from sales of those that have gained If you hold investments outside your tax-favored retirement accounts, and you’ve made money by selling some this year, see if you can lower your tax burden by selling some poor performers.

Even if you haven’t “realized” capital gains by selling winners, you can still use realized capital losses to lower your (taxable) ordinary income by up to $3,000. Bottom line: If you have capital gains this year, talk with your financial advisor or accountant to help you narrow down the best investments to unload to take advantage of tax-loss harvesting.

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