4 Financial Moves to Make Before Year-End – There’s Still Time

As we near the end of the year, many people start evaluating their finances and thinking about how to prepare for the coming year. If you still haven’t made any financial moves, don’t worry – there’s still time. But you’ve got to move fast.

And with the unique economic circumstances – post-pandemic supply chain issues, headline inflation numbers peaking, and impending tax changes – it is important to evaluate how you can be set up for financial success. So how can you best prepare your finances to come out ahead?

Here are 4 things you can do to help you prepare financially for the end of the year and heading into 2022.

1. Focus on tax-advantaged investments

With taxes possibly rising next year, it’s a good time to not only be thinking about your investment strategy and the asset classes you think will perform well over the next several years, but also paying attention to an investments’ tax-advantages.

Tax-favorable investments can help lower your tax liability come tax season, which allows you to keep more of your wealth. And if you can deploy cash into certain investment vehicles before the end of the year, you may be able to apply those tax write-offs to your 2021 income.

One of the main tax advantages to look for is depreciation. When your investment portfolio includes assets that depreciate, whether something tangible like a property or intangible like a patent, that depreciation can reduce your taxable income or allow you to defer income taxes into future years. One of the best ways to get depreciation is by investing in private real estate syndications or funds. These have the advantage of being passive and many are still available to invest in before year-end. The best options are often available for accredited investors only, but if you aren’t, there are still some great choices available in Reg A+ funds.

Another tax-advantage to look out for is one where the earnings of the underlying investment are taxed as long-term capital gains, which can save you significantly on your tax bill compared to investments generating short term capital gains. Long-term capital gains taxes are on a graduated scale for taxable income at 0%, 15% or 20%. Capital gains tax rates may increase in the coming year, but they’ll still be lower than ordinary income tax rates.

And finally (my personal favorite), look for investments that can take advantage of opportunity zones. These zones are geographic areas designated as economically distressed, where investment is encouraged to spur economic growth and job creation. Money invested in these areas for certain lengths of times can reduce your cap gains to 0%, and also defer your taxes on previously earned capital gains. Again, many are available as passive syndications fundable this year.

It should be apparent, but never make an investment based solely on its tax advantages. That should only be one factor among many to consider. Also, it is important to discuss with a CPA how these tax advantages can work in your favor. There are certain rules and limitations on how these can be utilized in your personal situation.

2. Max out your IRA or solo 401K

If you have not yet maxed out your IRA or solo 401K account for the year, now is the perfect time to do it.

There are a few reasons to do this. Firstly, with traditional retirement accounts, you’re contributing pre-tax money, which means you’re investing more upfront than if you invested after-tax dollars. This gives your account a greater chance to grow over time.

The other primary benefit is that, because these are tax-deferred investments, you can reduce your taxable income by the same amount you contribute.

You can contribute up to $6,000 per year, or $7,000 if you’re over 50. If you’re a business owner with no employees, you can create a solo 401K and contribute up to $58,000 in 2021.

We would also recommend opening a self-directed IRA or 401K which provides much greater flexibility and options for investment.

3. Refinance your mortgage and take out your equity

We know many people find this topic controversial. Some people don’t feel comfortable with this strategy and would rather pay off their housing debt. But with inflation running at 6% and mortgage rates at 3%, “real” interest rates are below zero, meaning you are essentially being paid to borrow. This is one of the best strategies to make inflation work for you.

Inflation has a two-fold impact here. First, inflation works in favor of borrowers by deflating the value of your mortgage debt. Over the course of 15 or 30 years, as you pay back your mortgage, you are paying it with dollars that are worth less than dollars today. For example, if you take out a 30-year fixed-rate loan for $300,000, and inflation continues at 6%, you will pay only $120,000 in today’s inflation-adjusted dollars. See this fun inflation mortgage calculator here. Second, inflation generally increases asset prices, meaning your home may be worth more today than it was even a year ago. A cash-out refinance allows you to capture that extra equity and put it to use.

The key here is to invest the equity you pulled out into something that is stable and that can generate additional growth or income. And if the income or earnings from that investment are higher than the interest fees you’re paying on your mortgage, it’s a net positive.

It’s important to mention that before you embark on a change like this, you need to understand the additional risk you create by increasing your leverage. But as long as you have additional income coming in to cover your higher expenses, your risk is significantly reduced.

4. Deploy cash into inflation-protected assets

Last year we recommended that you keep some cash on hand, as the looming economic recovery post-pandemic and political transition added much uncertainty to the market.

This year, we’re recommending you deploy your cash (including the cash you pull from your home equity) into assets that provide protection against inflation. Those who lose the most in a high-inflation environment are those with hordes of cash, as the value of cash continues to decrease as inflation increases. 

Assets that provide protection against inflation are assets whose value continues to grow over time, like real estate, which is our personal favorite. Others can include gold, cryptocurrencies, commodities, and even much of the stock market.

So, to wrap up…

Whether you are already fairly protected against future unknowns or plan to take action, the end of the year is always a great time to reevaluate your portfolio, current exposure to risk, and make changes heading into the new year.

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