It’s always smart to take time to evaluate your personal finances, especially towards the end of the year. These include aspects such as your taxes, investments, retirement, savings and estate planning. Here are some key year-end financial checklist items to make sure you’re well-prepared.
1. Maximize Retirement Savings
If there’s still room to grow your retirement savings before the year ends, it’s worth considering fully utilizing your retirement savings options. The first place to look is to maximize your employer-sponsored accounts.
First, review how much money you contributed to your employer retirement plan this year. If you are financially able, consider maxing out your 401(k) or 403(b) if you haven’t done so already. In 2023, contribution limits are $22,500 before any company matches or $30,000 if you are 50 or older.
And if you’re enrolled in employer-sponsored retirement plans, such as a 401(k), Roth 401(k) or 401(b) plan, maximizing contributions should be a top priority. In 2023, the maximum contribution limit is $22,500, with a higher limit of $30,000 for those aged 50 and above. Contributions made by December 31st will be part of your 2023 tax return. Keep in mind that contributions made towards these plans are deducted from your pre-tax income, effectively lowering your taxable income for the current year, which can potentially mean a lower tax bill.
Many employers also offer matching contributions, which I like to call “free money”. So, making sure you contribute enough to get those employer matches is a no brainer in terms of building up your retirement funds.
If you’re not enrolled in an employer-sponsored plan, Individual Retirement Accounts (IRAs) provide another way to build up tax-advantaged retirement savings. The 2023 contribution limit for IRAs is $6,500, with an increased limit of $7,500 for those 50 and above. Unlike employer plans, IRA contributions have a more flexible deadline — April 15th of the following year.
While employer sponsored plans are great, they’re not the only vehicle available for retirement savings, which is why we suggest contributing to an IRA, even if you’re already contributing to your company’s retirement plan.
Also, employer plans can often have limited investment options, determined by your employer. However, IRAs allow for a much broader range of investments such as individual stocks, bonds and ETFs, which can help in diversifying your investments and potentially improve your returns.
Traditional IRAs offer immediate tax deductions on contributions, lowering your taxable income for the current year. Roth IRAs, on the other hand, let your contributions grow tax-free, meaning you pay no taxes on your withdrawals in retirement. This flexibility allows you to optimize your tax strategy based on your current and future income brackets.
Conversely, Roth IRAs allow for tax-free growth and qualified withdrawals in retirement, which is ideal if you anticipate lower tax brackets in the future. However, contributions are made with after-tax dollars, so there’s no upfront tax benefits. Also, Roth IRA contributions have income limits for eligibility, unlike Traditional IRAs.
2. HSAs
A Health Savings Account (HSA), also known as a “Medical IRA,” provides triple tax benefits. Your contributions are tax-deductible, your earnings grow tax-deferred, and your withdrawals for qualified medical expenses are tax-free. You can maximize your savings by contributing up to the annual limit, which is $3,850 for individuals and $7,750 for families in 2023, with an extra $1,000 allowed for those aged 55 and above.
These limits increase to $4,150 for individuals and $8,300 for families in 2024. Plus, you have until the tax filing deadline of the following year to make your contributions.
3. Consider a Roth Conversion
Roth IRAs offer many advantages, including tax-free growth and distributions, provided you’re at least 59½ years old and have held the account for a minimum of 5 years. The absence of required minimum distributions (RMDs) simplifies the process of leaving a tax-free inheritance. For these reasons, we favor Roth IRAs over traditional IRAs.
A Roth conversion is done when transferring assets from a traditional IRA to a Roth IRA. The converted amount is added to your gross income for the tax year, and you pay your ordinary tax rate on the conversion. If you anticipate that your tax rate will be higher when you start taking withdrawals than it is currently, a conversion could make sense.
If your tax rate is lower now than what you project it to be when you start taking withdrawals, a conversion may be beneficial. You’ll pay conversion income taxes now, at a lower tax bracket, and then enjoy tax-free Roth IRA withdrawals later.
But you need to be aware that converting assets from a traditional IRA to a Roth IRA is a taxable event. You’ll owe ordinary income taxes on any pre-tax amounts. However, opting for partial conversions can distribute your tax payments over several years. To avoid being bumped up to a higher tax bracket, consider converting an amount that maintains your current tax bracket. Depending on your residence, state income taxes may also apply. Also, the IRS mandates the aggregation of all your IRAs for the purpose of calculating the taxable basis.
4. Tax-Loss Harvesting
When markets fluctuate, as they do most years, your portfolio can veer off target. Rebalancing means adjusting your portfolio to realign with your investment goals. If your portfolio suffered losses this year, you could use those losses to offset gains, reducing your tax bill. This strategy is known as tax-loss harvesting.
Tax-loss harvesting involves selling investments at a loss to counterbalance capital gains tax. Review your portfolio for opportunities to strategically incur losses to balance out your gains.
One area to consider is minimizing short-term capital gains, which are typically taxed at a higher rate than long-term gains. A smart move to lower your taxable income is to sell investments that have dropped in value since you bought them. The losses can offset any gains from other investments during the year, improving your tax position.
5. Charitable Giving
Charitable giving offers a way to support your favorite charities while enjoying tax benefits, especially for high-earners. If you give to charity every year, there are a few things to know and the end of the year is a good time to carefully review your charitable giving strategies.
For the 2023 tax year, you can only deduct charitable contributions if you itemize your tax deductions. The special rules that were in place for 2021 which allowed taxpayers to deduct up to $300 ($600 for married couples) even if they didn’t itemize, were not extended.
Cash donations typically are not the most effective form of charitable giving. It’s common for investors to have long held or concentrated stock positions with large embedded unrealized capital gains. If this applies to you, it’s worth considering donating these highly appreciated securities directly to charity, which helps avoid paying capital gains tax. The other benefit is that it allows you to trim a large position, which can help de-risk your portfolio. This means you can donate the full value of the asset, rather than getting a reduced, after-tax amount benefit.
The traditional strategy is to donate cash proceeds from the sale of stocks that are at a loss. This could be relevant in a year like 2023 when some areas of the stock market dropped value during the early part of the year. By using this strategy, investors benefit from recognizing a loss by selling a stock that went down in value. The loss can be used to offset any capital gains for the year, or it can be used to offset up to $3,000 of your ordinary income. Unused capital loss amounts can be carried into future years to reduce taxable income.
6. 529 College Savings Accounts
A 529 is a tax advantaged college savings account that may provide an opportunity for immediate tax savings if you live in one of the 30 or more states offering a full, or partial, deduction for your contributions to the home-state 529 plan. Most states require you to invest in the in-state plan to receive the deduction for your contributions. Though there are several states that are considered tax parity states, meaning you can use any state’s 529 plan to receive the deduction.
It’s also important to note that you can give up to $17,000 a year gift tax free per person, which can be a good way to tax efficiently contribute to a loved one’s 529 account. The annual exclusion recycles on January 1.
7. Take Required Minimum Distributions (RMD)
If you are 73 years old or older, don’t forget that you must take RMDs from your IRA. However, if you don’t need your RMDs to pay your living expenses, it’s worth exploring other options.
If you turned 73 this year and are taking an RMD for the first time, you have until April 1 of 2024 to withdraw your RMD. After that, you’ll need to take it before the end of each calendar year.
8. Review Your Estate Plan
As the year draws to a close, it’s an opportune time to review your estate plan and account beneficiaries. Start by reviewing your will, health care power of attorney, advanced medical directive, and general power of attorney. You’ll want to make sure all names are up-to-date and accurately reflect your wishes.
Beneficiary designations on retirement accounts and insurance policies pass outside of your will. Even if you’ve done your estate planning, it’s important to review your various beneficiary designations to ensure that your money is passing to those people based on your wishes and your assets won’t inadvertently pass to someone you didn’t intend, like an ex-spouse.
9. Re-assess Your Cash
You should also review your current savings see whether you have too little or too much cash sitting on the sidelines, based on your anticipated spending needs. Many money market accounts are now yielding around 3.3% to over 5% as of this writing. Assess your cash holdings to make sure your that your cash is earning a competitive yield. Why leave extra money on the table?
Some of these strategies require careful planning and analysis, so you should seek guidance from your trusted financial professional.
