MoneySmart

Your Year-End Financial To-Do List

What to do by the end of the year to keep your finances on track for 2024.

As the end of another year quickly approaches, you may find yourself considering New Year’s resolutions or making a list of items you’d like to accomplish before next January 1. One of the most common—and important—year-end to-do items has to do with your finances.

So as January 2024 approaches, make sure that you allocate some time to completing key financial tasks for 2023 and preparing to move into the new year with a plan of action and a corresponding timeline.

Prepare to Close the Books on 2023

While there is still some time left in the current year, some of your primary financial focus areas should include:

  • Savings
  • Required Minimum Distributions (RMDs)
  • Gifting
  • Tax Loss Harvesting

Savings

The end of the year is a great time to bulk up your savings. This is the case for both personal accounts and retirement plans—especially as the latter have maximum annual contribution limits that you’ll want to fulfill.

In 2023, you may contribute up to $6,500 to a traditional or Roth IRA (or combination thereof) if you are age 49 or younger. If you are age 50 or older, you may make an additional “catch-up” contribution of $1,000 in 2023.

You have until April 15, 2024, to make your 2023 IRA contributions. But year-end often brings the “Santa Claus rally” in the stock market. So, if you want to have your funds work for you by catching this rally, now is a good time to fund your IRA if you haven’t already done so for the year.

If you participate in an employer-sponsored retirement plan like a 401(k), 403(b), or 457 plan, you may contribute up to $22,500 in 2023 if you are age 49 or under, and $30,000 if you are age 50 or over.

The deadline for the deferral portion of the participants’ contributions is December 31, 2023.  The employer portion of the contributions, if any, is tax filing deadline plus extensions. So it is important to get the deferral part of the contributions made by year end. This is especially true for self-employed individuals who have Solo K’s, for example.

Required Minimum Distributions

Required minimum distributions, or RMDs, refer to the minimum amount that you must take out each year from traditional retirement accounts, including:

  • IRAs
  • 401(k)s
  • 403(b)s
  • SEP IRAs
  • SIMPLE IRAs

In 2023, the age to begin taking RMDs is 73. This age will increase to 75 by the year 2025. The amount you must withdraw is determined based on an IRS formula. If you do not take the required distributions—or if you don’t withdraw the full amount—you will incur an IRS penalty. This penalty is in addition to any taxes that you owe on the distribution.

Roth IRAs and retirement plans are not subject to the RMD rules, so the money in these accounts may remain even after you have turned age 73, and continue growing on a tax-free basis.

If you inherited an IRA from someone who is not your spouse, the SECURE Act requires that you must fully liquidate the account within 10 years. This is the case regardless of how old you are, with some exceptions. In this scenario, while you don’t have to make withdrawals each year, by the end of the tenth year, the entire account must be liquidated. This is true for both traditional and Roth IRAs that are inherited by non-spouse beneficiaries. Individuals who inherited funds prior to the SECURE Act, are grandfathered, and you will need to withdraw according to your regular schedule.

Gifting

To reduce the amount of taxable assets for estate tax purposes, many people gift money to others. You are allowed to give up to $17,000 to an unlimited number of individuals (in 2023) without taxation. If you are married, you and your spouse together may gift up to $34,000.

Year-end is a good time to determine who you may wish to give a gift to and to move forward with it. Gifting can provide a win-win scenario for both you as the giver and the recipient(s) of the funds.

Tax Loss Harvesting

Tax loss harvesting is a strategy where you sell investments at a loss in order to offset the amount of capital gains taxes owed on other profitable investments. Investors can use the proceeds from the sale (i.e., the loss) to purchase a similar asset and maintain balance in the portfolio.

The amount of capital gains tax that you owe is largely dependent on how long you have held an investment. For instance, long-term capital gains tax rates for investments that are held for one year or longer are 0%, 15%, or 20%, based on your tax filing status and your income.

Short-term capital gains tax rates for investments that are held less than one year correspond with ordinary income tax rates. So in 2023, these can range between 10% and 37% (also based on your income and tax-filing status).

It is important to note that selling an investment at a loss can disrupt the overall balance and diversification of your portfolio. So, it is critical that you replace the asset that is sold with one that is similar, so as to maintain the proper asset mix, including the risk and return levels.

As an example, if you sell an ETF (Exchange Traded Fund) or mutual fund that tracks certain market indexes, such as the S&P 500, you could purchase another one that also bases its return on similar indexes.

With that in mind, the primary goal of tax loss harvesting is to have less money going toward taxes and more remaining invested and working for you. Therefore, as the end of the year approaches, make sure that you review any capital gains taxes that you may owe, as well as any investments that could be sold at a loss to help you offset these.

Is Your Plan Ready for 2024?

With so many “moving parts” in your financial and retirement plan, it can be somewhat overwhelming to keep track of it all. This is particularly the case in the LGBTQ community, where more customized financial strategies may be needed for accomplishing certain savings, tax, and asset-distribution objectives.

That’s why it is recommended that you work with a financial planning professional who can help you work towards your goals.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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