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Easy Wins

Jonathan Clements  |  January 9, 2021

IF YOU SAW $20 on the sidewalk, you’d pick it up, right? Unfortunately, when we buy stocks and stock funds, there are no guarantees we’ll emerge a winner. But elsewhere in our financial life, $20 bills abound—and it often takes little effort and scant risk to grab this free money.

Looking for some easy financial wins? Here are 15 of them:

  1. If you’re eligible for a Roth IRA and you have the spare cash to fund the account, there’s almost no downside. The money will grow tax-free once it’s in the Roth, plus you can withdraw your contributions at any time for any reason, with no taxes or penalties owed. The one modest disadvantage: It’ll be at least five years, and likely far longer, before you can get access to the account’s investment earnings without triggering taxes or penalties.
  2. If your employer offers a 401(k) with an employer match, contributing enough to earn the full match is perhaps the greatest free lunch available. Yes, your money will be effectively locked up until age 59½ because of the 10% tax penalty on early withdrawals. But that’s a small price to pay to get free money from your employer—plus, even if you ended up tapping the account early and paying the 10% penalty, there’s a good chance you’d still come out ahead.
  3. Got bonds or cash investments sitting in a regular taxable account? You can almost certainly improve your overall financial return by selling these investments and using the proceeds to pay down debt. Why? The interest you’re earning on these investments is likely less than the interest rate you’re paying on the money you borrowed. But there are two caveats. First, if you sell bonds, you may trigger capital gains taxes. Second, by selling investments to reduce debt, you’ll have less ready access to cash.
  4. If you have money languishing in your checking account or a savings account at your local brick-and-mortar bank, you might be able to earn an extra 0.5% over the next 12 months by moving that money into a high-yield online savings account.
  5. Want to give to charity, but doubt you’ll have enough deductions to itemize and thereby get a tax break for your generosity? Consider bunching two or three years of donations into a single year. If you aren’t sure which charities to support, you can always park the money in a donor-advised fund for now. A digression: In last month’s coronavirus relief legislation, Congress extended the tax break to 2021 for those who give to charity and don’t itemize. In 2021, the deduction is capped at $300 for individuals and $600 for couples.
  6. Want to give to charity and you’re in your 70s or older? Consider making a qualified charitable distribution from your IRA directly to your favorite charity. While you won’t get a tax deduction for your donation, the distribution counts toward the required minimum distribution from your retirement accounts. Result: You’ll have less taxable income to report—which is as good as, and often better than, getting a tax deduction—plus you could enjoy a few other key financial benefits, including lower Medicare premiums.
  7. Thanks to the standard deduction, single individuals can have taxable income of $12,550 in 2021 and pay zero federal income taxes, while married couples can pull in $25,100 without worrying about taxes. If you’re on track to have a year with no taxable income, you should find some way to generate at least enough income to take advantage of this freebie. What if you overshoot by a little? That wouldn’t be so terrible: The additional income would be taxed at just 10%.
  8. Got investments in your regular taxable account that have climbed in value? In 2021, if your total taxable income is below $52,950 and you’re single, your realized long-term capital gains would be taxed at 0%. If you’re married, the threshold is $105,900. These sums assume you claim the standard deduction. If you have enough deductions to itemize, the figures would be somewhat higher.
  9. Got losing investments in your taxable account? You could sell those, and then use the realized losses to offset realized capital gains and up to $3,000 in ordinary income. Be warned: If you plan to buy back the losing position you sold, you’ll need to wait more than 30 days or you risk running afoul of the wash-sale rule, thereby invalidating the loss.
  10. If you have children still living at home or in college, and who would normally be subject to the so-called kiddie tax, they can have up to $1,100 in investment gains and pay no tax. But there’s a potential downside: The money you invest for your children will be considered their asset and will count heavily against them in the college financial-aid formulas, so you shouldn’t stash dollars in their name if you think they’ll be eligible for aid.
  11. If you’re self-employed or run a small business, think carefully about when you incur costs and when you ask customers to pay. If 2021 will be a good year but you expect 2022 to be leaner, you might buy that new computer equipment this year, so you can offset the cost against this year’s higher income. Meanwhile, toward year-end, you might hold off billing clients until 2022, so the income gets pushed into next year—when you’re potentially in a lower tax bracket. The risk with this strategy: You misjudge 2022 and have a better year than you expect.
  12. In 2021, you can give up to $15,000 to as many folks as you wish, without triggering the gift tax. Making regular gifts is a great way to shrink the size of your taxable estate. That might not seem like much of a worry with the federal estate tax exemption now at $11.7 million. But remember, 17 states, plus Washington, DC, have their own estate or inheritance tax. Those state taxes often kick in at much lower asset levels, which means making regular gifts can be a smart idea even for those with moderate amounts of wealth. Such gifts may also help should you need assistance from Medicaid in paying nursing home costs.
  13. If you regularly get a big tax refund, reduce your tax withholding—and stash the extra money in an online savings account, where you’ll earn a little interest. Yes, I know folks like receiving a large tax refund, because it feels like a financial windfall. Yes, you’ll have to restrain yourself from spending the money that accumulates in your savings account. But if you have the necessary self-discipline, reducing your withholding is the rational thing to do—and a way to make a little extra money.
  14. Whenever you buy something, use a rewards credit card. Thanks to the card, you could get 1% to 5% of your money back. The danger: That small bonus might encourage you to overspend.
  15. Go through your checking account and credit card statements, looking at all regular deductions, including those for gym memberships, streaming services, magazine subscriptions and so on. Not using some of these services? Cancelling them is an easy financial win.

Here’s one that doesn’t quite fit the list—but I figured I ought to mention: You might have heard financial experts refer to diversification as the financial market’s “only free lunch.” What do they mean by that? By diversifying more broadly, you can potentially earn the same long-run return, but with less volatility in your portfolio’s performance. The danger: This broader diversification could hurt your investment results in the short term.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan’s most recent articles include Our Report Card, What Money Can Buy and Time Limited.

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stelea99
stelea99
5 months ago

RE: Broader Diversification…
When I retired in 2001 I was using Charles Schwab’s book for guidance in which he said that you could skip the international market because large cap US companies all had foreign business interests. Then in 2006 I was handling my in-laws affairs and had to consult a financial advisor to comply with the CA Probate rules. This person advised that I was missing something when I skipped international. So, I added that segment. Now, 14 years later the only dogs I have are the international index funds. I would have been much better off had I stayed with a US only asset allocation. When looking at overall results which are very good, the poor international results have been a drag, but not enough to keep me from enjoying my retirement.

Jonathan Clements
Jonathan Clements
5 months ago
Reply to  stelea99

We diversify because we don’t know what the future will bring. International stocks may have been disappointing performers in recent years. It doesn’t mean they’ll be disappointing performers in the years to come.

CJ
CJ
5 months ago
Reply to  stelea99

If at least one portion of your portfolio isn’t underperforming, it’s not well diversified. The whole point of diversification is not to score the biggest gains – it’s to ensure a healthy balance of risk and reward- and that requires investments that work in opposition to each other – or at least not in lockstep together.

A big loss is more painful to most people than the thrill of a big gain…particularly those nearing or in retirement.

It could just as easily shifted the other way – international could have skyrocketed and US could have lagged.

Dan Jamieson
Dan Jamieson
5 months ago

Great post Jonathan!

Ellen C
Ellen C
5 months ago

I believe the total charitable donation credit is 300 dollars for single and married filers. My tax software capped ours at 300 and several articles I googled confirmed this. Could you please clarify?

Jonathan Clements
Jonathan Clements
5 months ago
Reply to  Ellen C

The $300 limit applies to all 2020 tax returns. For 2021, it’s $300 for single filers and $600 for joint filers.

Ellen C
Ellen C
5 months ago

Thank you! That is good news.

Carl Rasmussen
Carl Rasmussen
5 months ago

2021 Charitable Contributions at $300 or $600 is no longer “above the line.” But still useful.

BenefitJack
BenefitJack
5 months ago

When it comes to clocks, consider the HSA. Once the account is opened, all eligible expenses you incur after that date qualify for tax free treatment – no matter when you make contributions, or achieve investment gains on past contributions. So, a healthy worker investing in a HSA at age 30, can generally make pre-tax contributions (pre-tax for federal and state income taxes at the top marginal rate, and pre-tax for FICA and FICA-Med), accumulate earnings, then have them available when needed. And, if never needed, the monies are passed to the account owner’s named beneficiary.

401k and employer match. Most plans don’t “lock up” contributions – neither your contributions nor the employer match. Avoid withdrawals, subject to penalty taxes. Keep the deferred withholding tax working for you. Time payouts when marginal rates (federal and state) are lower. If you need liquidity, most plans offer loans. Never borrow unless you need to. Avoid borrowing as a means of increasing or sustaining a higher level of consumption than is necessary. However, in almost every plan, the interest you pay on the loan goes back to your own account. So, upon taking a loan, be sure that the loan principal is recognized as part of the fixed income allocation. Then, if the interest rate on the loan is greater than the interest rate on fixed income investments in the plan, and less than the interest rate on a loan from a commercial source (generally true for the past 13+ years and the foreseeable future), a plan loan can improve both your retirement preparation and your household wealth.

a2scott
a2scott
5 months ago

Retirees on Medicare with a small business can deduct their Medicare premiums as a business expense under health insurance.

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