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It’s hard to believe that we’re just a few weeks away from 2022. Most people are preparing for the holidays right about now, but that’s not the only thing that should be on your mind. There are only a few weeks left to make some key investing moves that could set you up for a brighter future and maybe even shave a little off your tax bill. Here are a few you may want to keep in mind.
1. Do a Roth IRA conversion
A Roth IRA conversion enables you to change some of your tax-deferred savings into Roth savings in order to reduce your tax bills in retirement. Tax-deferred retirement accounts, like traditional 401(k)s and IRAs, give you a tax break this year, but you have to pay taxes on your withdrawals in retirement. To change this to Roth savings, which offers tax-free withdrawals, you have to pay taxes on the amount you’re converting this year.
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For example, if you had $5,000 in a traditional IRA and you wanted to put that money in a Roth IRA, you could do so, but the government would add that $5,000 to your taxable income for 2021.
Most people wait until the end of the year to make these moves so they can get a better idea of where they’ll fall in their tax bracket. If converting the full $5,000 in our example above would bump you up into the next tax bracket, it might not be a wise move. You could end up paying a lot more to the government than you would’ve had to if you’d stayed in your current tax bracket.
Those who plan to convert large sums are usually better off doing smaller conversions over several years. Convert only as much as you can this year without jumping up to the next tax bracket. Then, next year do the same, and so on, until you’ve converted everything.
But a Roth IRA conversion isn’t the right move for everyone. If you think you’ll be in a lower tax bracket when you retire, it might make more sense to leave your money in a tax-deferred account. This way, you’ll lose a smaller percentage of your income to the government when you do pay taxes.
2. Sell off poorly performing investments
The end of the year is also prime time for tax loss harvesting. This is where you sell some of your poorly performing investments at a loss in order to offset the capital gains you’ve earned throughout the year. This can help you avoid paying more in taxes.
For example, if you sold a stock for a $100 capital gain, you would normally owe taxes on that extra $100 this year, unless that money was in a retirement account. But if you sell another stock at a $100 capital loss, the two cancel each other out and you won’t have to worry about paying taxes on your investment earnings at all.
If you’re going to do this, you have to be sure you actually want to get rid of the stock in question. You’re not allowed to sell a stock to claim a capital loss and then buy it back again right away. That’s known as a wash sale and it’ll land you in hot water with the IRS. You must wait at least 30 days after selling your stock at a loss before you rebuy it if you want to claim the loss on your taxes.
3. Review your retirement plan
Everyone should review their retirement plan at least once per year to see if they need to make any changes to keep themselves on track. While you can do this at any time, the end of the year is a great time to reflect and map out your plan for the next year.
If you’re not happy with how much you were able to contribute to your retirement accounts this year, you may be able to stash a little extra away over the last weeks of 2021. Or if that’s not possible, you can figure out how much you need to save per month in 2022 to meet your retirement savings goal. Making small changes like these annually will increase your odds of saving enough for the retirement you want.
Not all of these investing moves may apply to you, but prioritize the ones that do over the next few weeks. You don’t need to set aside a ton of time for them. Just carve out an hour or two where you can look over your finances again to make sure you’re not missing out on any opportunities to save yourself money.
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