Here's How to Finish Your Financial Year Strong
These are the important year-end financial steps you can take to close the year strong and set a solid foundation for the year to come.
November 11, 2021
Another year is drawing to a close. You may be thinking about New Year’s resolutions — but why wait for the new year to make a positive change?
One of the most impactful steps you can take before the year ends is to optimize your financial situation. Year-end financial planning can help close this year out strong while setting up a great foundation for the year to come.
But where do you even start? This guide will show you the most important steps you can take now to finish your financial year on a high note.
Maximize 401(k) matching
If your employer offers a 401(k) retirement plan, you should contribute to it each year to build wealth and prepare for retirement.
This is especially true if your work provides “employer matching.” Speak to the company’s human resource team to see if matching is offered.
Want to take advantage of employer matching 401(k)? Here’s how it works:
Typically, the employer will match up to XX% of your contributions, up to XX% of your salary
For example, an employer may match 50% of your contributions, up to 6% of your salary
In this case, if you earn $50,000 per year and contribute $3,000 to your 401(k), your employer will add $1,500 to your 401(k) for you
This is essentially free money, so if you have the means to take advantage of this perk, you should consider doing so.
Many employers offer 401(k) plans, but only about 50% of companies offer matching. What should you do if there is no employer match?
Max out 401(k)
Even if your employer doesn’t offer matching, you should still aim to contribute as much as possible or max out your 401(k).
There are several reasons for this:
Contributing to your 401(k) will earn you a valuable tax deduction, meaning you will pay less in income tax (or get a bigger refund)
Funds in your 401(k) can be invested and grow tax-deferred until you reach retirement age
The more you save for retirement, the easier it will be to retire comfortably (or even retire early)
While it’s possible to play catch-up on your retirement savings, it’s way easier if you plan and start saving early
$19,500 for the 2021 tax year will max out your 401(k). The deadline is the final day of the year (December 31st, 2021).
Of course, not everyone has a 401(k) at work. Fortunately, there are other options.
Max out IRAs and other retirement accounts
If you don’t have a 401(k), or you’re a super-saver with multiple retirement plans, it pays to know your options. There are many ways to save for retirement beyond the traditional 401(k) plan, and many of these accounts offer generous tax benefits.
For instance, many people choose to open a Roth IRA to save for retirement. You can max out a Roth IRA with up to $6,000 in contributions each year (or $7,000 for those over 50 years old). And you can contribute to a Roth IRA even if you already contribute to a 401(k).
Another perk of IRA accounts is the contribution deadline isn’t until the tax filing deadline (April 15th). So you have until April 15th, 2022, to contribute for the 2021 tax year.
Utilize flexible spending accounts (FSAs)
Another perk that your employer may offer is a flexible spending account or FSA. These accounts allow you to contribute a portion of your earnings each year, and those earnings are not subject to income tax.
The funds in the FSA can then be used to pay for qualifying medical or dental expenses tax-free.
You can contribute up to $2,750 per year, and this amount isn’t subject to income tax. If you’re in the 22% tax bracket, this could save you around $600 on your income tax bill.
However, funds must be spent in the same plan year to qualify as tax-exempt.
So, as the year draws to a close, you should ensure that you’ve used up any FSA funds on qualified medical/dental expenses.
If you’d like to support a charity or nonprofit organization, now is a good time. You may be eligible for some tax benefits for donating to a charity in 2021.
If you itemize your deductions, you can always use charitable contributions to lower your taxable income.
But even if you don’t itemize, you can deduct up to $300 in charitable donations from your income tax, but only for the 2021 tax year.
This is a temporary tax perk that was put in place as part of the IRS’ response to the COVID-19 pandemic. For the 2020 and 2021 tax years, even non-itemizers can save on taxes by donating up to $300 to a charity of their choice.
Review your finances
The end of the year is a time for reflection, and it’s no different when it comes to our finances.
It can be very helpful to sit down and review your overall year-end financial statement, answering these questions:
How much do you have saved for retirement? Are you on track?
What is your net worth?
What was your income for the year, and what is your expected income next year?
Do you know your monthly expenses? Do you have a budget?
How much debt do you have? Do you have a plan to pay it off?
It may even be helpful to prepare a formal year-end financial statement, which lists all your assets, debts, income, taxes, etc.
Then, make a plan for next year.
What went well last year, and what could be improved on? What are your goals for the coming year, and how can you achieve them?
If paying off debt is among your goals, check out Tally†. Tally is a personal finance app that helps Americans pay off their credit card debt faster while enabling them to save money on interest along the way.
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