Financial Planning Items to Start 2021

Published 01/07/2021

By Mary Pat Wesche, CPA, PFS, CDFA®, CFP®


One of the many lessons we learned in 2020 was to be ready for anything! We have highlighted several financial planning topics you should know about as you begin the new year.


Item #1: Review How Much You Keep in Your Cash Reserves


What to Consider: In 2020, many people used their cash reserves to weather the storm. If your cash reserves were depleted, you should work on rebuilding those reserves to a level equal to 6–9 months of spending. On the flip side, it is not a good idea to have too much cash as extremely low interest rates mean you are losing to inflation every year. Consult with your advisor to determine a level appropriate for your situation.


Item #2: The Window Is Still Open to Refinance a Mortgage


What Stayed the Same: With interest rates still at historic lows, 2021 could be a great time to refinance your mortgage. You may be able to obtain a no-cost refinance at a rate under 3%.


What to Consider: Think about cutting the term of your loan or planning to pay it off over a shorter period for the biggest impact. Mortgage providers are extremely busy, so it could take some time to get this done.


Item #3: No Increase for Retirement Plan Contribution Limits


What Stayed the Same: With continuing low inflation, there has been no increase in contribution limits for employer retirement plans or IRAs for 2021.


Contribution limits remain as follows:

·        Employees under 50 can contribute $19,500 to their employer retirement plans, and those over 50 can add an extra $6,500 for a total of $26,000.

·        IRA contributions remain at $6,000 for those under 50 and $7,000 for those 50 and over.


What to Consider: Contributions may be limited if you are in a top-heavy plan, so check with your employer. There are income phaseouts associated with IRA contributions for those covered by a workplace plan (including spouses) so check those limits before you contribute.


Item #4: Required Minimum Distributions Are Back


What Has Changed: In the span of one year, a lot has changed for required minimum distributions (RMDs). Although the Internal Revenue Service waived all RMDs in 2020, they must be taken in 2021.


There have also been some changes in timing of distributions. Note the following changes:

·        If you were 70 1/2 by December 31, 2019, you need to start your distributions based on the current IRS life expectancy table in 2021.

·        If you turned 70 1/2 in 2020, your start date is deferred until you reach age 72.

·        There is a new life expectancy table that will allow you to take slightly smaller distributions every year. The table goes into effect in 2022.


What Stayed the Same: Roth IRAs do not have a distribution requirement during your lifetime.


What to Consider: Inherited IRA accounts have different rules and depend on when the original owner of the account passed away. You should consult your advisor for inherited IRA situations.


Item #5: Estate and Gift Tax Limits


What Stayed the Same: The annual gift exclusion limit remains at $15,000 per individual, which is the amount you can gift without reducing your estate exemption.


What Has Changed: The federal estate tax exemption has been increased to $11.7 million per person. If your assets are above this amount at your passing, estate taxes will be paid on excess.


What to Consider: There is a lot of discussion on this exemption amount being reduced by the new administration, so gifting strategies may make sense. Currently, your assets at death are stepped up in value, avoiding capital gains taxes for your heirs. Consideration is also being given to eliminating this step-up. Consult your advisor or estate attorney for planning strategies that may work for your situation. Many states have separate exemption amounts, so be sure to check those amounts as well to see how they could affect your plan.


Item #6: Tax Planning Opportunities


What to Consider: While we do not know what the tax landscape will look like this year, we are confident that those who are prepared will be in a better position to take appropriate action, if required. One step you can take is to begin making preparations for your 2020 tax return to allow you and your financial advisor more time to help you navigate potential changes.



With the long-awaited arrival of a new year, we are encouraged by what will be possible in 2021. To help you set new personal goals, we enthusiastically recommend the action-driven, goal-setting article by Forum Financial Advisor Juan Ros: How to Achieve Your Goals in 5 Steps.