Traditionally, the end of the year is a time to take stock of your finances and make a few last-minute moves that can save you money and set you up well for the 12 months to come. That’s still true in 2020 but with a darker twist: The looming expiration of critical financial-relief programs under the CARES Act for Americans hit hard by the pandemic economy means that, for some people, their year-end money to-do list will include moves to ensure they’ll still be able to pay their basic bills and keep the roof over their heads as 2021 begins.
In fact, over half of Americans say that their finances have been impacted by the pandemic and more than three in four are worried about their ability to pay their bills and loans, according to a recent report by the credit-rating agency TransUnion. Meanwhile, roughly one in four worry that someone in their household will suffer a loss of income in the next month, a Census Bureau Household Pulse survey recently found.
Some help may come soon if Congress can agree on a new stimulus plan with bipartisan support currently being debated on Capitol Hill. But you don’t need to wait for politicians to act before making some smart financial moves of your own—steps that will help you prepare for what’s to come, take full advantage of some CARES Act provisions before they disappear and enable you to cut your tax and healthcare bills before year end.
Ending a very tough 2020 with a little more money in your pocket seems like an especially good way to usher in a New Year. These 10 moves will help you do just that.
Prep for the End of Unemployment Benefits
More than 12 million out-of-work Americans stand to lose federal financial support when extended unemployment benefits under the CARES Act—which tacked on an extra 13 weeks of benefits to state limits—expire on December 26, along with benefits for people who are self-employed, according to The Century Foundation. Put another way: Nearly half (47 percent) of those currently receiving benefits expect to be cut off at the end of the month, a Morning Consult poll found. If you’re among them, you’ll want to figure out other forms of financial support now to help tide you over until another pandemic relief program is enacted or you find a new job.
Your state is your first line of defense. According to the Center on Budget and Policy Priorities, some 31 states, plus the District of Columbia, Puerto Rico and the U.S. Virgin Islands, offer extended benefits—13 or 20 additional weeks, depending on the state—to workers who’ve exhausted regular unemployment insurance during periods of high unemployment. If you’re eligible, your state should notify you or you can contact your state agency to enquire directly (the “Unemployment Benefits Finder” tool at Careeronestop.org has info on each state program). The Century Foundation estimates that about one in four Americans currently on unemployment, or roughly 2.9 million people, will receive help from these state-level programs.
Other steps worth taking: Consider enrolling in assistance programs offered by credit card or other lenders as well as utility companies to defer payments until you’re back on your feet. Look into other federal programs, such as the Supplemental Nutrition Assistance Program, better known as SNAP, for food assistance, or the Low Income Home Energy Assistance Program (LIHEAP) for help with energy bills (find out what’s available at 211.org). And through Feeding America, you can search its network of 200 food banks and 60,000 food pantries to find your local service.
You might also be able to bring in some extra income with a freelance gig. Find opportunities at SideHusl.com, SideHustleNation.com and similar sites. Bear in mind, though, that if you are still eligible for unemployment, earning any kind of paycheck will reduce your benefits commensurately.
Lend Yourself a Hand
December is your last chance under the CARES Act to make a penalty-free withdrawal from your 401(k), IRA or any other retirement savings plan—and be able to postpone some of the taxes due or repay the money at no cost if your financial situation improves soon. That would essentially turn the funds you take out into an interest-free loan.
“Early withdrawals from your retirement accounts should generally be avoided,” says Stillwater, Minnesota financial planner Jesse Sell. But if you’re struggling financially because you or a family member has lost a job or taken a pay cut during the pandemic, the planner adds, “Taking advantage of the waived penalty before it expires at the end of 2020 can make sense.”
Here’s how the program works: People who are diagnosed with COVID-19 or who have lost income because of the pandemic can withdraw up to $100,000 from their retirement account without paying the 10 percent penalty that savers younger than 591/2 are usually hit with. You’ll still owe income taxes on any money you pull out, but you can spread the payments over a three-year period to make them more affordable.
If you don’t end up needing the full amount you withdraw, you can return the unused money anytime within the three-year period and file an amended return to get a refund of any taxes you paid on that amount. If your finances improve enough, you can also repay some or all of the money you withdraw over the next three years, get a refund on the taxes paid, and the amount won’t count toward your annual contribution limit for the account.
Lower Your Student Loan Payments
Nearly 60 percent of borrowers say they’ll find it difficult to come up with the money they owe when payments on federal student loans resume early next year, according to a recent Pew survey.
Payments, which have been suspended since March due to the pandemic, were scheduled to pick up again on January 1 but that deadline on Friday was extended through the end of the month to January 31 by Education Secretary Betsy DeVos. An additional two-month reprieve, extending deferral through March of 2021, is reportedly part of the bipartisan $908 billion stimulus package being discussed in Congress, says Betsy Mayotte, president of the Institute of Student Loan Advisors. But given the financial crunch these payments represent for tens of millions of student borrowers, don’t wait on a deal coming through before taking steps to ensure your loan payments won’t be a burden for you in 2021—no matter when the deferral ends.
Fortunately, you have options. If you’re on a standard 10-year repayment plan, you can switch to one that bases the amount you owe each month on how much you currently earn, limiting payments to 10 or 15 percent of your income after living expenses. In some cases, that can be as low as $0. The tradeoff: You’ll make payments over a longer period of time, up to 25 years, and shell out more in interest over the life of the loan. If you’re already on an income-based payment plan but you’ve lost your job or seen your income drop during the pandemic, re-enter your financial information at studentaid.gov to see if you qualify for lower payments or an economic hardship deferment.
A bonus to lowering or further postponing your loans now if you owe less than $10,000: You may not have to pay back what you borrowed at all. President-elect Joe Biden has said he supports immediately forgiving $10,000 of an economically distressed borrower’s student debt, which would be huge as nearly a third of all people with outstanding education debt owe less than $10,000, according to the College Board.
Get Ahead of Your Landlord
Yet another economic relief provision due to expire at year end: an eviction moratorium that prevented renters who earn less than $99,000 a year, or $198,000 for couples, from being kicked out if they were behind on payments. Plus, come January 1, renters will be on the hook for the outstanding back payments as well as late fees.
If you’re not able to resume payments or pay back rent, try working out a deal with your landlord or leasing agency—asking for, say, a reduced payment schedule initially or the option to spread the next six month’s payments out over a year. If that doesn’t work, your state may be able to help. A few, like California and New Jersey, have extended protections into early next year. Some states and cities also have expanded financial assistance programs. The National Low Income Housing Coalition maintains a list of them that you can filter by state to find help.
You can reach out to a tenant’s organization in your area or nonprofits like JustShelter.org that can help you understand your rights, deal with the eviction and, hopefully, remain in your home.
If you need immediate shelter or emergency housing, check the federal Department of Housing and Urban Development’s database of housing organizations in each state that could help.
Use It or Lose It
If you stashed money in a Flexible Spending Account, or FSA, this year to help pay for out-of-pocket healthcare expenses and still have money left in the account, it’s time to go on a spending spree. That’s because funds held in an FSA—$2,750 is the annual limit—typically must be used by year end if you don’t want to lose them. Wageworks, which administers such plans, says that about 8 percent of its FSA participants forfeit an average of $172 a year.
Since many Americans put off doctor visits and elective procedures this year due to the pandemic, you may have more money at risk than usual. In addition to health insurance deductibles and copayments, FSA funds can be used to pay for prescription medications, eyeglasses and contact lenses and medical equipment like crutches and blood sugar test kits. This year, thanks to the CARES Act, you can also tap the account for over-the-counter drugs and medications and menstrual products.
If you won’t be able to use up your account in time, check with your company to see if it offers a grace period, typically up until March 15, to spend the unused funds or allows up to $550 of unused money to be rolled over for use the following year, says Paramus, N.J., financial planner James Shagawat.
Save for the Next Healthcare Emergency
A COVID-19 diagnosis or other medical crisis can deplete your rainy day fund and knock your finances off course. A good option for “just in case” saving that can also cut your 2020 tax bill: a health savings account, available to anyone who has health coverage through a high-deductible plan, as almost half of private workers do.
“We are always telling people to contribute to their HSA prior to year end. The triple-tax advantages are too great to pass up—pre-tax contributions, tax-free growth, tax-free distributions for health related needs,” says Boston financial planner Nick Hofer.
Unlike with an FSA, money stored in an HSA can remain there for as long you like. Contributions reduce your taxable income and then can be invested and grow tax-free, as with a 401(k) or traditional IRA. You won’t owe any taxes on money taken out of the account to pay for qualified medical expenses. And, if you’re over age 65, the funds can be tapped for any non-medical reason without incurring the 20 percent penalty younger users would, though you’ll still have to pay income tax.
In 2020, you can stash up to $3,550 in the account if you have health coverage for yourself only or up to $7,100 if you have family coverage. Those over age 55 can put in an additional $1,000.
See Your Doctor, Pronto
If you’ve already met your health insurance deductible for 2020—that is, the amount you must spend on healthcare out of pocket before your insurance kicks in—try to schedule any doctor visits or medical services you need in the remaining days of December. And while you’re at it, stock up on any prescription medicine you need as well.
That way you’ll only be on the hook for the copay or coinsurance portion of the bill. Once January rolls around, you’ll have to pay the whole bill on your own until you’ve met the deductible again. In 2020, the average deductible for single coverage was $1,418 at large companies and $2,295 at smaller employers, according to a Kaiser Family Foundation study.
Those facing heavy medical bills this year may also benefit from grouping their healthcare appointments into a single year. That’s because you can only deduct medical expenses from your taxes if they exceed 7.5 percent of your adjusted gross income.
Give a Little, Get a Little
This holiday season consider incorporating a little charitable gifting into your annual traditions, if you can afford it. That’s because under the CARES Act, you can deduct up to $300 in cash donations from your taxable income, if you give to a qualified charity before year end—without needing to itemize deductions on your tax return.
That might not seem like a big deal, but since the passage of the Tax Cuts and Jobs Act in 2017, you can only get a tax benefit from donating if you itemize and forgo taking the annual standard deduction, something only about 13 percent of Amercians actually do.
Postpone Your Take
The IRS usually mandates that anyone who has money saved in an IRA or 401(k)-type retirement plan must begin withdrawing a certain amount each year once he or she turns 72, or 70-1/2 for anyone who reached that age before January 1, 2020 of this year. Otherwise, you get hit with a hefty 50 percent tax penalty.
However, the CARES Act does away with this requirement for 2020. This means you can skip taking this year’s annual required minimum distribution, or RMD, leaving the money invested to grow tax-deferred for another year and save yourself the income tax owed on such a payout.
While it might seem like a no-brainer to pass on your RMD this year, Plymouth, Minnesota financial planner Mike Miller warns it might not produce the best tax outcome for some people. That’s because passing this year will likely mean you’ll need to take a larger distribution in future years and that extra income could push you into a higher tax bracket. An accountant or financial planner can help you determine whether skipping or taking your RMD is the best move for you.
Make the Most of a Low-Income Year
The pandemic has caused millions of Americans to lose some money this year, be it through job loss, early retirement or a career break to care for an ill loved one. But that dip in income can offer a small silver lining in the form of greater tax savings down the road by switching some of your savings from a traditional IRA to a Roth IRA.
That’s because your contributions to a traditional IRA are made with money you haven’t been taxed on yet; instead, you pay income tax when you withdraw money from the account. A Roth IRA uses after-tax dollars, so when it comes time to take money out of the account, those distributions are tax free—a boon for retirees on a fixed income. So while you will owe income tax on any money you move to a Roth IRA, if you’re in a lower tax bracket this year than you expect to be in retirement, it can be a huge tax saver down the line. For instance, paying 12 percent on a $20,000 conversion now vs. 22 percent in retirement equals $2,000 in tax savings.
Year end is typically the best time to consider this move “because you’ve already earned the majority of your income in the current calendar year and can better ballpark the tax liability,” says Atlanta financial planner Serina Shyu.
Newsweek contributor Kerri Anne Renzulli is personal finance journalist based in London; she’s written for Money, Financial Planning magazine and CNBC.