10 Tax-Planning Questions to Ask your Financial Advisor in 2021

The year 2020 has been one of the most disruptive in the recent past with the coronavirus-led pandemic pushing the world economy to plunge. There were national lockdowns enforced around the globe and massive layoffs announced across companies – big and small. Many countries undertook stimulus measures to prevent their economy from going into a recession or to kickstart their growth. The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by the US Congress in March 2020 is said to be the largest ever economic relief package in history, aimed at delivering critical assistance to the US economy.

However, while citizens rejoice the money the government is putting in their hands, there is also increased concern and confusion about taxation and tax filing for the year. Clarifying your concerns with a trusted financial advisor on changes in tax filing for this year can go a long way in relieving your burdens and can ease your tax filing process. If 2020 taught us anything, it’s that we must always be prepared. Keeping this in mind, review your progress toward your financial goals at the beginning of the year, starting with your taxes.

Here are ten tax-planning questions you must ask your financial advisor in 2021 to help you align with the changing economic and market conditions, as well as emerging opportunities:

1. Will Roth IRA withdrawals be taxed in the future?

A Roth IRA is a type of individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis, provided certain conditions are satisfied. While it functions similar to traditional IRAs, the differentiator is how the two are taxed.

Roth IRAs are funded by after-tax dollars, i.e., the contributions to the Roth IRA are not tax-deductible. However, the money you withdraw is tax-free, again subject to certain conditions. Meanwhile, traditional IRA deposits are generally made with pre-tax dollars. You get a tax deduction on your contribution and pay income tax when you withdraw the money during retirement.

Today, Roth IRA accounts offer us some of the best tax advantages of any retirement account. Despite this, a perpetual fear exists amongst citizens that Roth IRA withdrawals might be taxed in the future. This fear, fueled by the government’s budget deficit problems back in early 2010, worsened after the tax reform legislation of 2018 eliminated various itemized deductions and the ability to undo traditional-to-Roth-IRA conversions.

As of now, the Roth IRA lets you contribute money that will grow tax-free in your account. And, most importantly, when you withdraw your funds, you will be able to do so tax-free. The appeal for the product comes from comparing this scenario with a future where income tax rates are going to be higher than they are today. In conclusion, under current tax law, you can withdraw Roth contributions and earnings tax-free as long as you’re at least 59½ years old and as long as it has been at least five years since you first contributed to a Roth IRA.

2. Will charitable contributions still be deductible under the new law?

A common practice amongst high networth individuals (HNIs), gifts to charity are a great tax saving tool with the added bonus of doing something good for the society. Taxpayers may enjoy tax savings by deducting a part or all of their qualified contributions on their tax returns. The tax treatment of a charitable contribution varies according to the type of contributed asset, and the tax-exempt status of the recipient organization. Rules also differ for individuals, businesses, and corporate donors. Also, the amount of the deduction is subject to standards and limitations.

For 2021, special rules provide more generous tax treatment for cash contributions. Temporary rules have been put in place to increase allowable deductions and remove limits on contributions for charitable gifts made in cash.

Here’s an outline of the rules for deducting charitable contributions, including the temporary allowances for 2021:

  • To avail deductions from contributions serving a charitable purpose, a recipient must qualify for tax-exempt status as required by the tax code and the Internal Revenue Service (IRS).
  • The list of eligible organizations includes those operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Non-profit veterans’ organizations, cemetery and burial companies, and certain legal corporations also qualify based on the nature of the donations.
  • A quick way to determine if an organization qualifies is to use the IRS Tax Exempt Organization Search Tool. It helps verify an organization’s tax-exempt status and determines its eligibility for deductible contributions.
  • The CARES Act (the coronavirus relief bill) allows taxpayers to take a deduction of up to $300 in charitable cash donations. As a result, even if you take the standard deduction, you can still claim up to $300 in donations when you file your taxes in 2021.

3. Will it matter when I withdraw RMD amounts?

An RMD, or required minimum distribution, is the minimum amount of money that must be withdrawn from a company retirement plan, traditional IRA, SEP, or SIMPLE IRAs by the account holders. It serves as a safeguard against people using retirement accounts to avoid paying taxes.

Most recently, in 2020, the age threshold for withdrawing from retirement accounts was changed. According to the new law, you must begin withdrawing from a retirement account by April 1 following the year you reach age 72. Before this, the minimum age to withdraw from your RMD was 70½ years old.

Some qualified plans allow certain participants to defer the start of RMDs until they actually retire, even if they are older than age 72. Qualified plan participants should check with their employers to find out if they are eligible for the deferral.

In March 2020, the CARES Act – the  $2 trillion coronavirus stimulus package – suspended RMDs from retirement accounts. However, this exemption on RMDs hasn’t been extended to 2021 (yet). For now, people who are currently 72 or older must resume or start RMDs by year-end or face a penalty.

4. Should I contribute to my company’s Health Savings Account (HSA)?

A Health Savings Account (HSA) is like a personal savings account that can only be used for healthcare expenses. You must be enrolled in a High-Deductible Health Plan (HDHP) to be eligible for an HSA. HSAs have some tax advantages, but also some disadvantages.

One of the advantages of HSA is that the eligible expenses include a wide range of medical, dental, and mental health services. Also, because of the CARES Act passed in 2020, over-the-counter medications and menstrual products are now qualified HSA expenses.

Another advantage is that contributions can come from you, your employer, a relative, or anyone who wants to add to your HSA. There are, however, limits set by the IRS. In the tax year 2020, the limit was $3,550 for individuals and $7,100 for families, plus an additional $1,000 contribution for those aged 55 or older by the end of the tax year. For 2021, the limit has been upped to $3600 for self-contribution and $7200 for families. The $1000 cap for the elderly remains unchanged.

The contributions to your HSA are usually pre-tax dollars made through payroll deductions by your employer. Hence, they are not included in your gross income and are not subject to federal income taxes. Also, in most states, contributions are not subject to state income taxes. When it comes to withdrawals, these are not subject to federal (or, in most cases, state) taxes when used for qualified medical expenses. Besides this, HSAs can also be used as investment accounts to purchase stocks and other securities. Additionally, any interest or earnings on the money is tax-free.

Your money in your HSA stays available for future medical expenses despite changing health insurance plans, employers, or during retirement. Basically, HSA is a bank account in your name, and you decide how and when to use the money.

One disadvantage of HSA is that a High-Deductible Health Plan (HDHP), which is mandatory to qualify for an HSA, can increase the financial burden on investors. Although you pay less in premiums, it could be difficult to meet the deductible for a costly medical procedure. Also, if you withdraw money for non-qualified expenses before turning 65, you’ll owe income taxes on the money plus a 20% penalty. After 65, you’ll owe taxes but not the penalty.

In conclusion, if you have an HDHP, you can avail yourself of the tax advantages. However, HDHPs aren’t the best option if you have large healthcare expenses.

5. Should I continue holding retirement savings in tax-deferred accounts such as IRAs?

An Individual Retirement Account, or IRA, is a tax-advantaged account used to save and invest for retirement. There are different types of IRAs – traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs, with different rules for eligibility, taxation, and withdrawals.

Read our article on What is an IRA? to know all about IRAs.

IRA investments cover a range of financial products, like stocks, bonds, ETFs, and mutual funds. A traditional or Roth IRA is a self-directed IRA that lets investors make all decisions. It also provides access to a wide selection of investments, like real estate, and commodities.

Individual taxpayers can have either traditional and Roth IRAs while small-business owners and self-employed individuals generally open SEP and SIMPLE IRAs. These IRAs are meant for retirement savings, and there is a penalty of 10% levied for early withdrawal before the age 59½.

Contributions to traditional IRAs are tax-deductible. If you put $5,000 into an IRA, your taxable income decreases by the same amount. However, when you withdraw money from the account during retirement, those withdrawals are taxed at their ordinary income tax rate. For 2021, individual contributions to traditional IRAs must not exceed $6,000 in a year unless you are 50 or older, in which case, you can contribute up to $7,000 per year. Also, the IRS changed the income phase-out range for deducting contributions to a traditional IRA for investors with retirement plans at work. A phase out refers to the gradual reduction of a tax credit that a taxpayer is eligible for as their income approaches the upper limit to qualify for that credit.The phaseout range changed from $104,000–$124,000 in 2020 to $105,000–$125,000 for married couples in 2021 and from $65,000–$75,000 to $66,000–$76,000 for individuals.

Roth IRA contribution limits for 2021 are the same as traditional IRAs. There are, however, income limitations for contributing to a Roth IRA. The phase-out range for single filers is between $125,000 and $140,000 in 2021 and, for married couples filing joint taxes, the phase-out range is between $108,000 and $198,000.

A SIMPLE IRA, meant for small businesses and self-employed individuals, stands for “savings incentive match plan for employees.” It follows the same rules for withdrawals as a traditional IRA. The SIMPLE IRA employee contribution limit in 2021 is $13,500, and the catch-up limit (for workers aged 50 and above) is $3,000.

The self-employed, like independent contractors, freelancers, and small-business owners, can set up SEP IRAs. SEP stands for “simplified employee pension,” and follows the same taxation rules for withdrawals as a traditional IRA. For 2021, SEP IRA contributions are limited to 25% of compensation, or $58,000, whichever is less.

In conclusion, for 2021, an IRA is a safe option to hold your retirement savings in, especially because of the checks and measures involved to make sure money before retirement is not withdrawn.


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6. How do I proactively manage the tax rate associated with my portfolio?

There are ways you can lower your tax bill in your retirement years if you think ahead of time. For instance, converting some of your IRA balances into a Roth IRA will be helpful in the future. There might be a current tax cost associated with a Roth conversion, but, even if that’s the case, if your current tax rate is lower than your tax rate in the future, a Roth conversion is beneficial. It also reduces your future taxable income and limits the tax you pay on Social Security benefits. It can also limit the size of your future RMDs further benefiting your tax rate.

Read our article on Should I Roll my 401k Into an IRA? to assess the pros and cons and make an informed decision.

Taxes can impact the size of your invaluable savings. A well thought-out financial plan takes taxes into account. Even while making investments, it is possible to proactively create a tax-efficient portfolio that will minimize tax outgo even as your money grows into a sizable corpus. Talk to your financial advisor to establish a suitable plan in line with your financial goals.

To connect with a financial fiduciary, use Paladin Registry’s matching tool. Answer a few simple questions and match up with qualified financial advisors whom you may interview before engaging. This is a free service.

7. Can I still have the retirement I want?

If you’re unsure whether the financial repercussion of the coronavirus-led pandemic has had any impact on your retirement plans, speak with your advisor to estimate your expected expenses and compare them with your assumption about the retirement income you’ll be able to draw upon. If your expected income doesn’t match your estimated expenses, you’ll need to find ways to boost your savings.

This can be achieved by increasing your 401(k) contributions at least enough to take advantage of any company match, and consider making “catch-up” contributions to your 401(k) and IRA if you’re 50 or older.

If you’re already retired, take the time to evaluate income streams along with your investment portfolio and real asset holdings. Practice a disciplined, goals-focused approach that involves a commitment to staying invested, properly diversifying, and thoughtfully re-balancing to suit current situations.

You may also re-prioritize or make trade-offs, even looking for ways to reduce spending or delay certain goals, all of which a financial advisor can help you with.

8. Are there any steps I can take to minimize 2020 taxes?

Your 2020 taxes could be trickier than usual. One thing you won’t need to worry about is the stimulus money, also called Economic Impact Payments by the IRS that you might have received from the federal government this year. It will not be taxed nor impact the refund you may be due. However, because the stimulus money is classified as an advance tax credit, you may be required to include it on your 2020 tax return for documentation purposes.

Note that the government has also added some breaks for charitable giving that we have covered in section 2 where we addressed the question, “Will charitable contributions still be deductible under the new law?” In summary, for the 2020 returns, taxpayers who do not itemize can still deduct up to $300 in cash donations to certain qualifying charities from their taxable income. If you do itemize, and if you make cash contributions to qualifying charities, you can deduct those contributions up to 100% of your adjusted gross income.

In conclusion, to answer the question, yes, there are ways the government has taken steps to prevent the pandemic from having further financial implications. Do ask your financial advisor for ways to minimize your tax outgo in the year and find out the deferment options available to you.

9. What are my options for managing rising health-care costs?

Tax-advantaged savings accounts such as flexible spending accounts (FSAs) and health savings accounts (HSAs) are options worth exploring. Both are offered by employers and funded with pre-tax contributions. They are not taxed on withdrawal and can be used to meet expenses incurred towards a wide range of medical situations.

To open an HSA, you need to enroll in a qualifying high-deductible health plan (HDHP). Other key differences between the two: an HSA permits you to roll over unused funds into future years—and even to another HSA if you change jobs down the line. Self-employed workers can also open an HSA to fund medical expenses now and in the future, as long as they enroll in a qualifying HDHP. Post-retirement, your HSA can be used to pay for Medicare and long-term care insurance premiums or other eligible expenses.

Did you know that about 15% of a retiree’s annual expenses will go towards meeting healthcare expenses? Read our article on Planning for Rising Healthcare Costs in Retirement for a complete picture and explore options on how you can meet this ever increasing requirement.

10. How can I be better prepared financially for emergencies?

The greatest realization from this coronavirus-led pandemic has been how quickly unexpected events can throw our plans off the track. After you’ve reviewed your current plans to make sure they’re still on track, it’s a good idea to check your level of preparedness for future financial shocks, or unexpected personal expenses, with your advisor. Together, you can figure out how much you need to save up and discuss ways to invest the cash you’ve earmarked for emergencies. We would like to bring it up here that on average, about six months of pay is ideally supposed to be set apart for creation of an emergency fund.

Your advisor can review with you how much liquidity there is in your portfolio and suggest strategies to help you fund future needs – scheduled as well as unanticipated – without potentially jeopardizing your investment assets. You might also want to make sure you have an updated will and documents that state who would be in charge of your finances in case of an unforeseen emergency.

To sum it up

The past year has been tough on the entire world. We are all in it together to rebuild and revive, lend hope and support. A financial advisor’s role is more relevant than ever, as we try to assess the impact of the pandemic, re-evaluate our goals, reposition our portfolio and restart investments for a safer future. Ask your trusted financial advisor the tough questions and clear all your tax-planning doubts before you head into a new tomorrow.

To get in touch with a fiduciary advisor who may provide you with wise investment strategies, use Paladin Registry’s Free Search Tool. Based on your requirements, our platform scans through our registered and qualified advisors to match you with a financial advisor that is suited to your needs and goals. Use our additional resources such as the credential verification tool to learn more about the certifications your advisor holds.

To learn more about the author William Hayslett view his short bio.

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