If 2020 has left you feeling like the fabled Sisyphus, forever pushing a boulder up a steep hill, you’re not alone. Thankfully, with two newly approved coronavirus vaccines and others in the works, there’s hope that our load will be lightened in 2021. In the meantime, it’s always best to focus on the things we can control, one of which being our financial habits. As you prepare for a fresh start in the new year, you can set yourself up for success with these 6 financial best practices (no heavy lifting necessary).
Financial Best Practice #1: Give What You Can To Get A Little Back
What the 2017 Tax Cuts and Jobs Act (TCJA) took from charitable giving, this year’s CARES Act partially gives back—at least for 2020. Not only will giving to charity have increased tax benefits this year, donating even a small amount of money always has the added benefit of helping someone in need.
- A $300 “Gift”: Under the TCJA, it became much harder to realize itemized tax deductions beyond what the increased standard deductions already allow. But this year, the CARES Act lets you donate up to $300 to a qualified charity and deduct it “above the line.” In other words, even if you’re taking the standard deduction, this year you can benefit from a small charitable deduction as well, without having to itemize.
- Giving Large: If you are itemizing deductions, the CARES Act also temporarily suspends the usual “60% of your AGI” limit on qualified cash contributions. The exception does not apply to Donor Advised Fund contributions, and a few other restrictions also apply. However, if you’ve already been thinking about making a large donation, 2020 might be an especially timely and mutually beneficial year to give to your favorite charity or cause.
Financial Best Practice #2: Revisit Life’s Risks
As the pandemic—and 2020 in general—continues to remind us, life is full of surprises. That’s why it’s imperative to build wealth and protect it against inevitable unexpected setbacks. Now is a good time to check in and make sure your current insurance coverage is still aligned with your lifestyle, which may be temporarily or even permanently altered because of the pandemic.
For example, you may be driving less and now have lower coverage requirements. Or maybe growing health and career risks warrant a stronger disability insurance policy. It may even be a good time to look ahead to the future and decide whether long-term care or umbrella coverage makes sense. No matter your personal situation, there’s no time like the present to make sure you and your family are adequately protected.
Financial Best Practice #3: Leverage Lower Tax Rates
Though we can never predict the future, federal income tax rates seem more likely to rise than fall in the coming years. Even before this year’s massive relief spending, the TCJA’s reduced individual income tax rates were set to expire after 2025, reverting to their prior, elevated levels.
As such, it may be worth deliberately incurring some lower-rate income taxes today, since it could spare you from paying higher taxes on the same income later on. A prime example of such a strategy would be to consider converting or contributing to a Roth IRA. You’ll pay income taxes today on the conversions or contributions, but then the assets can grow tax-free—and will remain tax-free when you withdraw them in retirement.
Financial Best Practice #4: Harness an HSA
Often overlooked, Health Savings Accounts (HSAs) are also effective tax-planning tools. Instead of paying for a traditional lower-deductible/higher-cost healthcare plan, you may benefit from a higher-deductible/lower-cost plan plus an HSA.
If a high-deductible plan/HSA combination is available to you, it may be worth considering – especially if a career change, early retirement, or some other triggering event has altered your healthcare coverage. HSA assets receive generous “triple tax-free” treatment. Meaning, you can contribute pre-tax dollars, grow your contributions tax-free, and withdraw your money tax-free if you’re using it for qualifying medical expenses.
Financial Best Practice #5: Read a Great Book (Or Few)
As social distancing seems more than likely to persist through the winter, you may have more time than usual to curl up with a good book. So, why not add a financial book or two to the list?
As good timing would have it, The Wall Street Journal personal financial columnist Jason Zweig recently shared an excellent “short shelf” list of his top picks. As Zweig reflects, “they all will help teach you how to think more clearly, which is the only way to become a wiser and better investor.”
Bonus: Want to know our favorite financial books, here at Oak Capital Advisors? Get in touch.
Financial Best Practice #6: Live a Little More
It’s always a best practice to ensure your financial priorities are driven by your life’s greatest goals—and not the other way around. Perhaps our greatest purpose as a wealth advisor is to assist you and your family in achieving a satisfying work-life balance, come what may.
What does this balance look like for you? In his new book, “The Coffeehouse Investor’s Ground Rules,” Bill Schultheis offers his take:
“When you … have everything you need materially, how do you honor that part of your DNA that will forever yearn for more? It seems to me that the challenge is to turn this pursuit of ‘more’ away from material consumption and toward a ‘more’ that fosters more family, more community, more connections, more art, more creativity, more beauty.”
And with that, we wish you and yours a happy, healthy, and financially prosperous 2021. If we can help you and your family pursue your “more” in the new year and beyond, please feel free to schedule a call.