As the end of the year draws near, it’s a great time to revisit your finances and implement some year-end strategies to optimize your financial plan. In this guide, we’ll explore some key ways to effectively fine-tune your finances, potentially reduce your tax liability, and maximize your charitable contributions to finish the year strong and plan for the year ahead with clarity and confidence.
Make sure that you’re on track to meet your goals for contributions to your retirement accounts, while being mindful not to exceed the contribution limits. This is also a good time to review contribution limits for the next year and plan for any adjustments. The IRS recently announced increased limits for 2024:
If you’re unable to maximize your contributions, we recommend contributing enough to your employer-sponsored account to maximize any employer matching contribution. This is free money for you!
When you hear about “Roth” vs. “pre-tax” (or “traditional”) accounts, one of the key differences is how the two are taxed. In general, when it comes to Roth contributions, you do not receive any tax deductions on those contributions at the time they are made. Instead, the contributions grow tax-free, and you won’t owe any taxes on the distributions in retirement. With pre-tax retirement contributions, you receive an immediate tax deduction. Those contributions are tax-deferred, meaning that you will pay taxes on the distributions in retirement.
When eligible, we generally recommend prioritizing Roth contributions over pre-tax contributions if you’re in a lower tax bracket now than you expect to be in the future. This will mean you pay more taxes now, but you’ll likely end up paying less taxes over the course of your lifetime. That’s because you’ll have a long period of tax-free growth from Roth contributions. This also gives you additional flexibility in retirement with multiple tax planning levers to pull among your tax-free, tax-deferred, and tax-managed accounts.
You can change this strategy at any time. For most people, there’s a tipping point in your career when pre-tax contributions make more sense. That’s because you’ve reached a point where you have a higher income than you expect to have in the future (i.e., in retirement). To determine if now’s the right time for you to make the switch, evaluate any recent or anticipated changes in your income. Keep in mind that there are income limits for Roth and pre-tax IRAs.
Another tax planning strategy you may consider is a Roth conversion, which allows you to convert some assets in your pre-tax accounts to your Roth account. When doing a Roth conversion analysis, consider your total earned income for the year. If you believe you’re in a lower tax bracket than you expect to be in the future and you’re not approaching the top of your current tax bracket, you might consider moving money from your IRA to your Roth IRA.
You will have to pay tax on the converted amount now, but the funds will begin to grow tax-free. Because you’re in a lower tax bracket now than you expect to be in the future, you’ll end up paying less taxes if you pay them now vs. later. Plus, Roth IRAs are not subject to Required Minimum Distributions (RMDs), so this can also reduce your RMD amount (more on those later!). The benefits are further enhanced during years when there’s a drop in the market, since your tax liability on the converted assets is likely to be lower than in years when there’s an increase in market value.
When paying the taxes on the converted assets, you will have the option to either withhold the tax immediately or pay the taxes from a separate account, like a tax-managed brokerage account or a savings account. When possible, we generally recommend paying the taxes from an outside account because it allows you to maximize the amount of funds remaining in the Roth IRA that will grow tax-free.
If you have an HSA-eligible high deductible health plan, make sure you’re on track to meet your contribution goals for 2023 (without exceeding the contribution limit), and set your contribution goals for 2024. We generally recommend maxing out your HSA contribution, if possible, because HSAs have triple tax advantages: tax-deductible contributions, tax-free growth on invested assets, and tax-free distributions for qualified medical expenses.
If you receive a bonus or some other form of compensation outside of your normal paycheck, you can make HSA contributions in a lump sum amount separate from your paycheck. For planning purposes, it is typically easier to keep record of contributions by making them before the end of the year. However, you can make contributions toward the 2023 limit until April 15, 2024.
If you have education funding goals for yourself or a loved one — whether it be for college or private K-12 education — you can save toward a 529 Plan to receive a deduction on your state income taxes. A 529 Plan is a type of investment account, and the contributions are tax-sheltered. That means you won’t have to pay any taxes on the growth of the invested assets, as long as those assets are used for qualified education expenses. In Georgia, a married couple can deduct up to $8,000 per beneficiary on their state tax return for 529 Plan contributions.
If you didn’t know about a 529 Plan but have been paying out-of-pocket for qualified education expenses, it’s not too late to take advantage of the tax benefits a 529 Plan offers. You can open a 529 Plan, make a contribution, and take a distribution to reimburse yourself for the qualified education expenses you’ve already incurred this year (up to $8,000 for married couples in Georgia).
Take a close look at your portfolio to see if there are any tax-loss or tax-gain harvesting opportunities based on market movement that could save you money on taxes.
If you have any securities in a taxable brokerage account (non-retirement account) that are currently at a loss, you may be able to sell the security and immediately purchase a similar (but not identical) security to offset current (or future) gains. Capital losses offset capital gains, and any losses in excess of gains can be deducted from your ordinary income up to $3,000 per year. Plus, any losses above $3,000 can be carried forward to future years.
The reason we recommend immediately purchasing a similar security is so that you remain invested in the market, maintain your target asset allocation, and avoid permanently “locking in” the losses.
Based on your current financial situation, you may have the opportunity to take advantage of some tax benefits through tax-gain harvesting. If you’re in the 10% or 12% tax bracket, and you have long-term securities in a taxable brokerage account that are currently at a gain, you can sell the security and avoid paying federal capital gains taxes. That means you can permanently lock in the gains and permanently avoid paying any federal capital gains taxes on them.
Be sure to double-check your current tax bracket and make sure the securities are subject to long-term (vs. short-term) capital gains (that is, you’ve held the security for more than a year). You’ll also want to consider and plan for any state income tax consequences.
For many workplaces, open enrollment takes place toward the end of the year. Your employer benefits can make up a significant portion of your total compensation package. Take the time to closely review your benefits options, and identify which choices are best for you and your family.
As we approach the end of the year, keep a close eye on your health insurance deductible and out-of-pocket maximum. If you’ve met (or are close to meeting) your healthcare plan deductible, you may consider scheduling any foreseeable medical procedures or appointments before the end of the year. For most, your deductible resets at the beginning of the year, so take advantage of this additional coverage while you can.
On the other hand, if you’re nowhere near meeting your deductible, you may consider postponing any procedures or appointments that aren’t time-sensitive to the early part of next year.
Pro tip: Start booking these appointments as soon as possible, as many providers book up quickly toward the end of the year.
If your healthcare plan includes a Flexible Spending Account (FSA), and you’ve contributed to it this year, make sure you are on track to spend any unused funds by the end of the year. FSAs have a use-it-or-lose-it rule, and you typically have to spend any FSA dollars by year-end. Check your specific plan rules, as some plans provide a grace period for reimbursement or allow for a limited amount of funds to be rolled over to the next year.
If you don’t have any medical procedures or appointments scheduled before the end of the year, you may consider using your FSA to stock up on contact lenses, buy new glasses, or restock your home’s first aid kit. Check out FSAstore.com for a full list of eligible items.
If you’re 73 or older, you may be subject to a required minimum distribution from your pre-tax retirement accounts, like an IRA or 401(k). The government requires RMDs so that they can start collecting taxes from tax-deferred accounts. Your exact RMD amount is calculated based on the balance of your accounts and other factors determined by the IRS. It’s important to plan for these because RMDs increase your total taxable income, and if you fail to take your required amount by the end of the year, there’s a costly 25% penalty!
If you are older than 73 and still employed, you are exempt from taking your RMDs for any accounts tied to your current employer, so long as you do not own 5% or more of the company.
Qualified charitable distributions are closely related to RMDs (see above). As mentioned, RMDs increase your taxable income, and you must satisfy your RMD to avoid costly penalties — even if you don’t need the full RMD amount to pay your living expenses!
That’s where QCDs come in. If you’re charitably inclined and don’t actually need income from your IRA to pay for living expenses, you can satisfy all or part of your RMD (up to $100,000 per year) by making a QCD, which is a direct transfer of funds (i.e., a donation) from your taxable IRA to an eligible nonprofit. The great thing about a QCD is that it helps satisfy your RMD requirement but, unlike an RMD, the QCD amount does not count as taxable income. This helps fulfill your charitable giving aspirations while also reducing your taxable income.
If you aren’t at RMD age but you’re still charitably inclined, there are other strategies to help you fulfill your charitable goals while minimizing your tax liability.
One such strategy is charitable bunching. A lot of people take the standard deduction when filing their taxes, meaning they don’t have enough deductions to benefit from itemizing their tax return. If you’re approaching the top-end of the standard deduction, and you’re charitably inclined, it might be beneficial for you to “bunch” your charitable contributions to exceed the standard deduction. That is, instead of making one year’s worth of contributions, you might make two or more years’ worth of contributions this year to maximize your tax benefit.
One vehicle to further enhance your charitable bunching is a donor-advised fund. A donor-advised fund is a type of investment account. When you make a contribution to a donor-advised fund, you get the tax deduction immediately (i.e., in that tax year), but you can spread out your charitable distributions from the DAF over multiple years. All the while, your assets are invested and can grow. You still have full control over where the funds go and when they are distributed.
This can be particularly useful in years where you experience a financial windfall (e.g., sold a business or received a large bonus). You get a tax deduction for the full amount of the contribution immediately (up to 60% of your AGI), but you can satisfy your charitable giving over time. You can also use the DAF to give to multiple charities, bringing greater organization and efficiency to your charitable giving. You’ll get a single tax document from your donor-advised fund contributions, which will be helpful when preparing your taxes.
If you’re an investor and charitably inclined, you might also consider directly donating appreciated stocks instead of donating cash. This allows you to fulfill your charitable giving goals, potentially reduce your taxable income (up to 30% AGI), and avoid paying capital gains taxes on the growth of an appreciated security. The receiving nonprofit organization won’t have to pay any capital gains tax either, allowing you to truly maximize the impact of your gift.
This strategy may also be helpful if you’re overly concentrated in a specific security that has appreciated. Donating these stocks will prevent you from paying capital gains taxes, allow you to make your charitable contributions, and help derisk any concentrated positions.
It’s not uncommon for your earnings, spending, and savings to change throughout any given year. Maybe you got a new job, got a raise, or added a new recurring expense. The end of the year is a great time to revisit your spending and savings plan and map out any necessary adjustments to stay on track or accomplish new goals.
Is it possible to increase your planned savings? Can you increase your standard of living? Or do you need to pull back in certain areas to meet your top priorities?
You might also use this opportunity to shop around for savings on monthly expenses like internet, streaming services, mobile phone plans, and even insurance policies.
We always recommend our clients have an emergency savings plan for unexpected expenses. We also typically recommend saving cash for any short-term goals (1-2 years) since market performance over a short period of time is unpredictable and can be volatile. The exact amount varies from client to client based on their specific situation.
If you’re holding onto some cash for your own goals or in case of emergency, make sure you’re keeping it in the right place to maximize your return. A lot of checking (and even savings) accounts pay little to no interest, but there are plenty of good options for your cash to earn 4% or more. Based on your liquidity needs, you may consider a high yield savings account (do some research to find the best rates), a Certificate of Deposit (CD), a money market fund, or various U.S. Treasury notes.
Additionally, if you’ve accumulated a large sum of cash in your bank account and don’t necessarily need it in the near-term (that is, it’s above and beyond what you need for an emergency fund and your short-term goals), you may consider moving the cash into your portfolio by contributing to your IRA, Roth IRA, Health Savings Account (HSA), 529 Plan, or tax-managed brokerage account.
Take this time to look back on the past year and celebrate your progress. Some steps may seem relatively tiny today, but they’re inching you closer and closer to your lifelong goals. Here’s just a short list of some financial wins worth celebrating:
As we often tell our clients, your financial plan is always evolving and never etched in stone. As your situation changes and your life progresses, you’ll face new challenges, meet milestones, reach your goals, and set new ones. But just as it’s important to plan for the future, it’s also important to celebrate what you’ve already accomplished. Don’t forget to find the balance between preparing for tomorrow and living fully today.
Effective year-end financial and tax planning can help you close out the current year strong and prepare for the year ahead. Using the guidance above, create a checklist that’s relevant to your situation, and see if there are ways to strengthen your financial footing, progress toward your goals, and potentially minimize your tax liability. Remember, year-end planning requires some timely decisions. So start early, try to stay organized, and reach out to professional advisors whenever appropriate.
If you’re looking for a holistic financial planning team to help you find and stay on the right path, reach out to us to request a no-cost consultation. As a fee-only financial planner, we’ll work with you to maximize your financial outcomes and secure your future.
Fully Financial is a registered investment advisor offering advisory services in the State of Georgia and in other jurisdictions where exempt. This article is provided for educational, general information, and illustration purposes only and does not constitute specific investment advice. Registration with the United States Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training. We encourage you to consult a professional financial planner, accountant, and/or legal counsel for advice specific to your situation.
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