2023 End-of-Year Financial Checklist

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It’s that time of year again, so before the holiday season takes over, let’s pause to ensure that your financial well-being is on solid ground. This end-of-year financial checklist is designed to help you safeguard your financial present and fortify your financial future.

1. Maximize 401(k) Contributions

Your employer-sponsored retirement plan is perhaps one of the most powerful financial tools at your disposal. Maximize your contributions as much as possible and take full advantage of any employer match, if available. For 2023, you can contribute $22,500, or $30,000 if you’re over 50 years old. Check with your 401(k) service provider to see that you are on track to maximize your contributions by year-end or if you need to make additional contributions.

2. Take your RMD

When you turn 73 the IRS insists that you take a minimum distribution each year from your IRAs and 401(k). This is because money in these accounts has not yet been taxed, so in turn the IRS imposes this Required Minimum Distribution, or “RMD”, to commence collecting taxes on these monies. A specific calculation involving the year-end balance in the account relative to your life expectancy is used to determine the amount you must take. You may distribute more if needed, but you must at least distribute the minimum amount required, otherwise a penalty may be imposed. If you are 73 or older with an IRA, SEP IRA, SIMPLE IRA, or current 401(k) Plan and aren’t sure if you’re in compliance with this rule, contact your CPA or plan sponsor for guidance.

3. Harvest Investment Losses

We have experienced some fluctuations in the market this year. That being said, you should always look across your investment lineup in accounts where you may realize capital gains to see if you have any investments with losses. Where there are investment losses in non-retirement brokerage accounts, there might be an opportunity to use those losses to reduce your capital gains tax liability for the year. If you sell these investments, you capture losses for tax purposes. These losses offset an investment gain you may have incurred throughout the year and can produce an additional $3,000 tax deduction.

It is generally not wise to sell low, particularly if you sell low and leave that money uninvested and in cash. But if you sell low and simultaneously buy low, there is no investment damage. In order for this strategy to be honored by the IRS, you can’t re-invest in the same investment, or even a substantially similar investment for 30 days. However, you can invest in something altogether different. Consult your investment professional and CPA regarding this strategy. For a complete list of tax deductions, visit the IRS website.

4. Roth Conversions

If you do not owe much in taxes this year, consider converting some or all of your IRA to a Roth IRA. You will pay taxes on the amount you convert (or transfer) today as ordinary income, but all future earnings will be tax-free. Roth conversions must be completed by December 31st. Speak with your CPA and investment professional to see if this strategy is appropriate for you.

5. Spend Down Flexible Spending Accounts

Don’t forget to have your teeth cleaned, eyes checked, and prescriptions refilled before year end. You want to use all of the money in your Flexible Spending Account (FSA) since it is a “use-it-or-lose-it” account. If you have the opportunity to make a change, consider using a Health Savings Account (HSA) instead. Unlike FSAs, unused balances in HSAs roll over from year-to-year.

6. Make Donations

Charitable giving is a great way to give back to causes you care about. For your donations to be tax deductible, you must itemize your deductions, which means your total deductions are more than the standard deduction. For 2023, this is $27,700 for married filing jointly or $13,850 for single filers. To deduct your charitable donations in any given year, they must be made by December 31st.

Alternatively, you can consider a qualified charitable donation (QCD) which is paid directly from your IRA to a qualified charitable organization. A gift made in this manner will not be counted as a taxable distribution. This is an ideal strategy especially when you are subject to required minimum distributions (RMDs).

7. Consider Gifting

The 2023 annual gifting limit is $17,000 per taxpayer, or $34,000 per couple. This is the amount that you can gift to as many individuals as you would like without having to complete a gift tax return. Just to be clear, it isn’t that anyone would have to pay tax if the gift exceeds these amounts, but rather you will not have to file formal documentation to be referenced at your death for your estate tax calculation.

This strategy of gifting no more than the annual gifting limit has typically been used to transfer wealth to others during life to reduce estate tax upon death. However, your estate would have to exceed $12,920,000 for a single person, or $25,840,000 for a couple, for the estate tax to be applied. In any case, the gift needs to be made before the end of the year.

8. Review Medicare Elections

If you are currently covered by Medicare, it’s wise to review your elections each year. Whether you have Traditional Medicare with Supplemental Insurance or a Medicare Advantage policy, review changes in these policies to ensure they are still meeting your needs. Annual Open Enrollment begins October 15th and goes until December 7th. Any changes you make will take effect on the first day of the new year.

9. Prepare for Tax Impact

Meet with your CPA or tax professional before the year is over for a preliminary tax projection. This can greatly reduce any unwanted surprises when you file your taxes. Certain tax deductions, like charitable contributions, can still be made by year end. If you do your own taxes, we suggest using the IRS Withholding Calculator to help create your own tax projection. This can help you estimate if you will owe this year or receive a refund. For best results, use this at the beginning and middle of each year.

10. Prepare Next Year’s Budget

Starting a new year in control of your finances is like starting the morning with exercise and a healthy breakfast—it leads to other good decisions and increases your general health. Understand where your money is spent and how it is working for you. Be intentional about how you use money this year and be sure you’re on the right track for a better financial future. Please see our article on budgeting, which includes a cash flow spreadsheet, for more information.

Written by: Whelan Financial

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