The final days of the year are here, which means it’s time to make sure you’ve checked some important items off your year-end financial checklist. Here are seven year-end financial planning tips to take action on before the ball drops.
1. Review and, if necessary, update your beneficiaries: Did anything significant happen in your life this past year that may impact your estate plan and how you want your beneficiaries designated? If you conducted any account transfers this year – like employer-sponsored retirement plan rollovers or transferring accounts to new advisors – make sure your beneficiaries carried over or you properly elect them through the new system. Additionally, take this time to reflect on updates to any other estate planning documents like your will or power of attorney (POA).
2. Look into Roth IRA conversions: Roth IRA conversions involve transferring retirement funds from a traditional IRA, SIMPLE IRA, SEP IRA, or a traditional employer-based retirement plan into a Roth account. Because traditional retirement accounts are tax-deferred and a Roth IRA is tax-exempt, the deferred income taxes due on the traditional funds must be paid on the funds you convert to a Roth. A Roth conversion is advantageous if you have large traditional retirement accounts and expect to maintain your current tax bracket or anticipate being in a higher tax bracket when you plan to begin withdrawing your retirement funds. This strategy is beneficial because it allows you to pay taxes on all or a portion of your funds now to avoid a deferred and higher tax liability in the future. Although anyone can convert eligible retirement assets to a Roth, the strategy is not always the preferred option for all investors. Consider taxes, time, and costs when deciding if a Roth conversion is right for you.
3. Evaluate your asset allocation: Market movements throughout the year have likely impacted your portfolio’s balance. Review your portfolio and rebalance your allocation to your desired risk exposure, trimming some of the assets that have outperformed and bolstering your exposure to asset classes that have underperformed. Reflect on your risk tolerance and note any changes that may impact how you would like your portfolio to be allocated, and consider any significant forthcoming purchases in the new year that you may wish to withdraw funds for.
4. Consider tax-loss harvesting: Tax-loss harvesting involves selling securities at a loss to offset a capital gains tax liability. This strategy is typically leveraged to limit the realization of short-term capital gains that are taxed at a higher rate than long-term capital gains. As you review your portfolio for the year, note your over- and under-performers to see if you would benefit from tax-loss harvesting. Keep in mind that selling an investment exclusively for tax reasons tends not to be the most prudent reasoning, so make sure this strategy fits your overall financial and investment plan before taking action. Read more about tax-loss harvesting here.
5. Take your required minimum distributions (RMDs): The temporary reprieve Congress instituted for RMDs in 2020 ended at the beginning of 2021, bringing the return to the usual RMD rules, meaning your RMDs must be taken by December 31 of each year or you risk paying a hefty penalty. RMDs apply to traditional IRAs and employer-based retirement plans – traditional and Roth – including 401(k) plans, 403(b) plans, 457(b) plans, and pension and profit-sharing plans. Roth IRAs are exempt from distributions unless the Roth IRA is inherited. As of 2020, the SECURE Act pushed the beginning date for taking RMDs to age 72, and you always have until April 1 of the year after you reach your RMD age to take your first distribution. If you turned 72 in 2022, you had until April 1, 2023, to take your first RMD; however, that means you still need to take your 2023 RMD by December 31. Consult with your advisor regarding how you would like to receive or use your RMD – via a check, by reinvesting the RMD into a taxable account (you cannot reinvest the RMD into a tax-advantaged account), or by using your RMD as a QCD (see tip seven).
6. Gift assets to loved ones: For 2023, you can gift up to $17,000 – and up to $34,000 for married couples filing jointly – to any number of recipients without having to pay a gift tax. With this gifting strategy, you can transfer wealth to your loved ones tax-free without cutting into your life-time gift and estate tax exemption, and the recipients will not owe any federal taxes on the gifts. These gifts can include helping a loved one make a down payment on a home or funding a grandchild’s 529 account for education savings. Note that if your gift per an individual exceeds $17,000 (or $34,000 for married couples filing jointly), you must report it on a gift tax return. If you gift more than the annual gift tax exclusion, you begin to eat into your lifetime gift and estate tax exemption. If you wish to make a gift to loved ones but have already exceeded the annual gifting limit, you may consider contributing directly to qualified education and medical costs, as there is no limit on the dollar amount for these tax-free gifts. Such qualified expenses include tuition payments made directly to the educational institution and medical costs paid directly to the medical care provider.
7. Optimize your charitable giving: If you are planning to make year-end donations in light of the holiday season, there are several ways to maximize your philanthropy. If you plan to itemize deductions for your 2023 taxes, you may earn a charitable write-off depending on the type of asset donated. Donating cash may not offer the biggest write-off, and you may want to consider donating appreciated securities, which allows you to skip the capital gains tax owed if you were to sell these investments. If you have assets in a taxable account, you may consider leveraging a donor-advised fund (DAF), which allows you to bundle several years of donations into one big donation to exceed the standard deduction for that year. This allows the money in the DAF to grow over time, and you can make future gifts from the fund as you wish. If you are of RMD age, you can donate all or a portion of your RMD directly to charity via what is called a qualified charitable distribution (QCD). QCDs are capped at $100,000 annually per taxpayer.
Keep in mind that this list is not exhaustive, and there are additional important year-end items that may factor into your unique financial life. Overall, the end of the year serves as a fantastic time to reflect on and evaluate your annual finances and savings goals and identify any adjustments you may want to make in the new year. Most importantly, consult with your financial advisor before the 31st to ensure you – and your finances – are ready to welcome 2024.
Originally published on December 21, 2021.
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