IIt’s hard to believe we’re only weeks away from 2022. Most people are getting ready for the holidays right now, but that’s not the only thing that should be on your mind. You only have a few weeks left to make some key investments that could set you up for a better future and maybe even lower your tax bill a bit. Here are a few that you might want to keep in mind.
1. Make a Roth IRA conversion
A Roth IRA Conversion allows you to convert a portion of your tax-deferred savings into Roth savings to reduce your taxes in retirement. Tax-deferred retirement accounts, like traditional accounts 401 (k) s and IRA, gives you tax relief this year, but you have to pay tax on your withdrawals at retirement. To change that to Roth Savings, which offers tax-free withdrawals, you have to pay tax on the amount you convert that year.
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For example, if you had $ 5,000 in a traditional IRA and wanted to put that money into a Roth IRA, you could do that, but the government would add that $ 5,000 to your taxable income for 2021.
Most people wait until the end of the year to take these steps so they have a better idea of where they will fall in their tax bracket. If converting all of the $ 5,000 in our example above moved you to the next tax bracket, it might not be a wise move. You could end up paying a lot more to the government than if you had stayed in your current tax bracket.
Those who plan to convert large sums of money are generally better off making smaller conversions over several years. Convert only as much as you can this year without moving to the next tax bracket. Then the next year, do the same, and so on, until you’ve converted everything.
But a Roth IRA conversion is not the right decision for everyone. If you think you are in a lower tax bracket when you retire, it might be better to leave your money in a tax-deferred account. This way you will lose a smaller percentage of your income to the government when you pay taxes.
2. Sell underperforming investments
The end of the year is also the rush hour for harvest of tax losses. This is where you sell off some of your underperforming investments to offset any capital gains you have made throughout the year. It can help you avoid paying more taxes.
For example, if you sold a stock for a capital gain of $ 100, you would normally have to pay tax on that extra $ 100 that year, unless that money is in a retirement account. But if you sell another stock with a capital loss of $ 100, the two cancel out and you won’t have to worry about paying taxes on your investment income at all.
If you plan to do this, you must be sure that you actually want to get rid of the stock in question. You are not allowed to sell a stock to claim a capital loss and then buy it back immediately. This is called a wash sale and it will put you in hot water with the IRS. You should wait at least 30 days after selling your stock at a loss before buying it back if you want to claim the loss on your taxes.
3. Review your retirement plan
Everyone should review their pension plan at least once a year to see if they need to make any changes to stay on track. While you can do this at any time, the end of the year is a great time to reflect and develop your plan for the next year.
If you’re not happy with how much you’ve been able to contribute to your retirement accounts this year, you may be able to set aside a little more in the final weeks of 2021. Or if that’s not possible, you can determine how much you need to save per month in 2022 to reach your retirement savings goal. Making small changes like these each year will increase your chances of saving enough for the retirement you want.
All of these investment steps may not apply to you, but prioritize those that will in the coming weeks. You don’t need to spend a ton of time on them. Just set aside an hour or two to take another look at your finances to make sure you don’t miss out on any opportunity to save money.
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