3 Financial Planning Tips to Check-Off Before the Year Ends

Before starting the countdown that turns 2023 into 2024, we reflect on what this year has been. We look back on the ups and downs and, most importantly, start setting intentions for the upcoming one. As New Year’s day approaches, you think about where you want to travel, what you want to leave behind, and of course, how you will avoid the financial stress of it all. The year-end provides a unique opportunity to evaluate what has happened over the past 12 months. It’s also a way to understand how these events may have impacted your finances, especially your portfolio. 

Let the Count Down Begin

With less than a week remaining of this eventful year, think about what final opportunities you can take advantage of before December 31st. What will make the most significant impact on your wealth goals? Start by focusing on these three core areas of your financial plan: tax, retirement, and estate. 

3: Tax Planning 

As we all undoubtedly know, taxes are inevitable. Every year we have to report amounts owed to the IRS. However, with proper planning, there are ways to reduce the amount we ultimately have to hand over.

Strategy 1: Tax-Loss Harvesting 

Tax-loss harvesting is selling an investment with a lower fair market value today than when you purchased it. Then, you can use the proceeds to reinvest into a similar fund quickly. Tax-loss harvesting provides you with the same diversified portfolio while offering the added benefit of a realized loss. More specifically, the added benefit offsets a realized gain you incurred when you sold an investment that had been appreciated. If you do not have any improvements to compensate in the current year, you can use up to $3,000 of your loss to offset ordinary income. Any realized losses left over from offsetting gains or income, can be carried forward indefinitely until they are fully utilized.  

One of the added benefits of this strategy is that it isn’t just a year-end tactic but rather a strategy that we should utilize year-round. 

2023 has provided abundant opportunities for year-round and year-end harvesting. When it comes to tax planning, the time to harvest losses in your portfolio is when the market is most volatile.

Strategy 2: Charitable Giving 

While you could donate cash directly to a charity, there are other ways to contribute that will provide additional tax benefits. 

Option 1: Donor Advised Fund (DAF) 

A Donor Advised Fund allows donors to make a charitable contribution directly to the DAF account, receive an immediate tax deduction, and then gift to various charities of their choice. A DAF can accept cash or securities, with the most advantaged opportunity being highly appreciated securities. For example, if you have an investment with a high embedded gain, you can donate to that position. You would get a tax deduction for the total market value of the securities gifted. 

It’s important to note that utilizing a DAF is only beneficial if you itemize your tax return during the year you donate. However, for taxpayers that have opted out of itemizing in favor of the larger standard deduction, you can lump your DAF contributions into a single year in which you 1) itemize, 2) receive the full tax deduction up front, and 3) then gift the funds over many years. 

Option 2: Qualified Charitable Distribution (QCD), Excluded from Taxable Income

Although we all strive to build up a large nest egg for retirement, the larger the tax-deferred retirement account, the larger the Required Minimum Distributions (RMD) upon reaching age 72. Since RMDs are taxable as ordinary income, an extensive distribution can easily bump you into a higher tax bracket, amplifying your ultimate tax bill. 

A Qualified Charitable Distribution is a direct transfer from your IRA to a qualified charity that satisfies up to $100,000 of your annual Required Minimum Distribution. Unlike a standard RMD, the amount used to fund the QCD is excluded from your taxable income. Reducing your taxable income not only reduces your tax burden for the year, but may also reduce the impact that higher income levels have on certain tax credits and/or deductions. For example, reducing your taxable income can help reduce your Medicare premiums and reduce the taxable portion of your Social Security. 

Unlike a gift made to a Donor Advised Fund, you don’t need to itemize on your tax return to take advantage of a QCD. This allows you to take the higher standard deduction while also meeting your annual charitable goals. To utilize this strategy, you must be 70 ½ or older, the QCD may not exceed the Required Minimum Distribution amount for the year, and funds must be distributed directly to a charity.

2: Retirement Planning 

Approaching year-end also presents an opportunity to review what you have contributed to your retirement accounts. A lot can change in your life in a given year, impacting how much you can save for the future.  

If you had hoped to max out your allowable contribution, this is the time to check if you’re on track. Conversely, if you are projected to be under the maximum, now is the time to bump up your contribution to making a difference.  

If you or your spouse have access to an employer-sponsored retirement plan but would also like to contribute to a traditional or Roth IRA, you must check your income-based eligibility. For those of us with variable compensation, it can be challenging to know at the start of the year which type of IRA you are eligible to contribute to. However, year-end is a great time to evaluate your income and make any available contributions. 

While you technically have until April 15th to make IRA contributions, conversions from a traditional IRA to a Roth IRA must be done by December 31st. Conversions could be particularly beneficial if your income were lower than usual for the year, thus allowing you to convert a portion of your IRA at a lower tax rate. Another valuable time to convert is when the market is down, allowing you to convert funds at a lower fair market value. Once your account is converted to a Roth IRA, the funds grow tax-free, and you never have to worry about taking Required Minimum Distributions. 

If you are 72 or older, confirm that you have taken your Required Minimum Distribution for the year before converting any funds to a Roth IRA. 

1: Estate Planning 

The IRS allows each person to gift up to $17,000 (2023) per year per recipient before qualifying it as a “taxable gift.” If you gift over $17,000, then you must file a gift tax return, and the excess gift will count towards your lifetime exemption. By gifting the maximum allowable annual gift per year, per person, you can decrease your taxable estate without impacting your available lifetime gift exemption. If married, you may jointly gift $34,000 (2023) per year per recipient. 

529 plans offer an enhanced gifting opportunity for those looking to assist with education funding. You may gift up to five times the annual limit in a lump sum per 529 plan beneficiary. However, you may only gift this lump sum once every five years.

Ready to Welcome the New Year

To sum up, there are many great planning opportunities to consider at year-end. Of course, these strategies are not reserved for just year-end, but let’s not miss our final chance to make an impact. Carefully evaluating your tax, retirement, and estate planning before the start of the next year allows you to have financial peace of mind.