The end of the year is a crucial time to review your finances, as there are time-sensitive financial planning strategies to consider before the clock strikes midnight on December 31. We want to share an end-of-year financial checklist to help you get a head start.
In this two-part series, we will first address key considerations for investment accounts, tax planning, and savings & contributions. In part two, we will cover insurance planning, estate planning, and other considerations to help guide your end-of-year planning.
Investment Accounts
Do you have unrealized investment losses in your taxable accounts?
If so, consider realizing losses to offset any gains and/or write off up to $3,000 against ordinary income.
Do you have investments in taxable accounts subject to end-of-year capital gain distributions?
If so, consider strategies to minimize tax liability, such as redirecting investments to more tax-efficient options.
Are you subject to taking RMDs (including from inherited IRAs)?
If so, consider the following:
- RMDs from multiple IRAs can generally be aggregated; however, RMDs from inherited IRAs cannot be aggregated with traditional IRAs.
- RMDs from employer retirement plans generally must be calculated and taken separately, with no aggregation allowed. However, 403(b) plans are an exception, and RMDs from multiple 403(b)s can be aggregated.
Tax Planning
Do you expect your income to increase in the future?
If so, consider the following strategies to minimize future tax liability by taking advantage of your current (lower) tax rate:
- Direct funds to a Roth IRA. If you are within the income eligibility limits, you may be able to contribute to a Roth IRA if you have earned income.
- If you think your tax rate will be lower this year than when you need to begin taking distributions from your IRA, consider a Roth conversion.
- If you have not already maxed out your 401(k) contributions, consider redirecting the remaining contributions to your company Roth 401(k) if one is offered. Have a plan for how you want contributions to be directed next year, and make sure you implement that plan at the beginning of next year.
- If offered by your employer plan, consider making after-tax 401(k) contributions. To take this one step further, if your employer plan allows, you may be eligible to convert your after-tax contributions to a Roth IRA (also known as a mega backdoor Roth IRA conversion).
Do you have any capital losses for this year or carryforwards from prior years?
If so, consider the following:
- There may be opportunities to take offsetting gains now, especially if you are in the 0% bracket for long-term capital gains, which will reduce taxes later.
- You may be able to take the loss or use the carryforward to reduce your ordinary income by up to $3,000.
Are you charitably inclined?
If so, consider the following:
- Explore tax-efficient funding strategies, such as gifting appreciated securities.
- If this is a high-income year, consider bunching your charitable deductions this year and taking the standard deduction next year. If this is a particularly high-income year, it may be a good year to bunch charitable deductions and contribute to a donor-advised fund.
- If you are over 70 ½, consider making a qualified charitable deduction (QCD) from your IRA.
Will you be receiving any significant windfalls that could impact your tax liability (inheritance, RSUs vesting, stock options, bonus)?
If so, review your tax withholdings to determine if an estimated payment may be required to avoid a tax penalty.
Do you own a business?
If so, consider the following:
- If you own a pass-through business, consider the qualified business income deduction (QBI) eligibility rules.
- Consider using a Roth vs. traditional retirement plan and its potential impact on taxable income and qualified business income.
- If you have business expenses, consider if it makes sense to defer or accelerate the costs to reduce overall tax liability.
- Many retirement plans must be opened before year-end (if you follow a calendar tax year), except for certain solo 401(k)s and SEP IRAs (if the appropriate rules are followed).
Have there been any changes to your marital status?
If so, consider how your filing status and tax liability may be impacted based on your marital status as of December 31.
Savings & Contributions
Are you able to save more?
If so, consider the following:
- If you have an HSA, make sure you are maxing it out.
- If you have an employer retirement plan, such as a 401(k), try to max out your contribution. If you are over 50, take advantage of the catch-up provision. Consult with the plan provider, as the rules vary regarding when you can make changes.
Do you want to contribute to a 529 account?
If so, consider the following:
- You can use your annual exclusion amount to contribute to each beneficiary’s 529 account, gift tax-free.
- Alternatively, you can front-load annual gifting and make a lump-sum contribution to a beneficiary’s 529 account and elect to treat it as if it were made evenly over a 5-year period, gift tax-free.
- You may be able to transfer portions of unused 529 funds to the beneficiary’s Roth IRA (rules and limitations apply).
Take the next few weeks to consider the above items and work on establishing how you plan to address them. As always, if you have any questions or would like to discuss your specific situation, we encourage you to contact us, and we’d be happy to help. Stay tuned for part two where we will discuss insurance planning, estate planning, and other considerations.
Source: fpPathfinder
