Accomplish these financial planning tasks by year-end

Jeff Witz, CFP

2023 has brought many challenges as we’ve dealt with lingering inflation, rising interest rates, a potential recession, and ongoing geopolitical conflicts. In particular, the high cost of goods and services brought on by high inflation coupled with rising interest rates on things like credit cards forced many investors to dip into emergency funds or adjust their approach to saving, spending, retirement plan distributions, and charitable gifting. When your financial plan faces these types of challenges, the end of the year presents a good opportunity to regroup, close out 2023 in the strongest position possible, and ready yourself for 2024. Here is a list of year-end items everyone should review. The sooner these items are addressed and adjustments are made, the better position you will likely be in next year.

Is your emergency fund fully funded? If you tapped into your emergency fund for any reason this year, it is important to make sure the account is replenished. It is always a good idea to review your budget and see whether your necessary spending has increased or decreased, and then review your emergency fund to ensure it is properly funded. As a reminder, the general rule of thumb for an emergency fund is to have 3 months of your necessary expenses saved in cash if you are a dual-income household and 6 months if you are a single-income household or if one person earns significantly more than the other and their income is relied on to maintain your family’s standard of living.

Have you maxed out your retirement accounts or are they on track to max out by year-end? 401(k) and 403(b) contributions must be made by December 31, 2023. The 2023 contribution limit for employee contributions is $22,500 (or $30,000 if you are 50 or older). Individual retirement account (IRA) contributions can be made up until the tax filing deadline in April 2024. The 2023 contribution limit for IRAs is $6500 (or $7500 if you are 50 or older).

Have you used all the money remaining in your Dependent Care or Health Care Flexible Spending Accounts (FSAs)? Most FSAs are use-it-or-lose-it accounts, meaning any money that is left over in the account at the end of the year is forfeited back to the plan, not back to you. Some employers offer a grace period into next spring or a $500 carryover from one year to the next for Health Care FSAs, but most do not. Make sure you use this money so you don’t leave anything on the table.

Have you made contributions to your children’s 529 accounts? As the cost of college continues to rise, it is important to start saving as soon as possible. A 529 plan offers excellent tax advantages if you’re saving for college or other post–high school educational opportunities. Many states offer a state income tax deduction for contributing to a 529 account. Sometimes these tax savings can be substantial. Contributions must be made before December 31, 2023, to receive a 2023 tax deduction.

Have you designated all the gifts you planned to give this year? For 2023, the annual gift tax exclusion amount is $17,000 per person, or $34,000 for a married couple. This means you can give cash or assets, such as investments, valued up to these amounts to an unlimited number of people without having to worry about gift taxes. Making gifts can be a great way to remove assets from an estate if future estate taxes are a concern. Gifts must be made before December 31, 2023.

Have you made your charitable donations for the year? Giving to charity can be a very powerful tax-savings tool. Check whether you have any appreciated investment assets you could donate instead of cash. Donating appreciated investments allows you to avoid paying capital gains taxes when you sell the investments, and you get to claim a deduction for the full value of the donated asset. The charity can then sell the investment and not have to pay capital gains taxes. However, be aware that with the increased standard deduction under current tax law, you may need to donate a substantial amount to see any tax benefit. Donations must be made by December 31, 2023, to count toward your 2023 taxes.

Have any of your investments lost money this year? Despite a nice rise during the first half of 2023, the stock market retreated in the back half of the year and remains relatively flat on the year. If any investments in your taxable accounts are in the red, you could consider selling those investments to harvest the loss. Tax-loss harvesting can be used to offset gains elsewhere or potentially lower your 2023 tax bill. If your captured losses exceed your realized gains, you will have a net capital loss. Up to $3000 (or $1500 if you are married and file separately) of net capital losses can be deducted against ordinary income, including salary, self-employment income, and interest income. Any excess loss above these amounts can be carried forward to future years to cancel out gains or deduct against income. Sales to capture losses must occur before year-end to count toward 2023.

Have you taken required minimum distributions (RMDs)? If you turned 72 before 2023 and have a pretax retirement account or if you have inherited an IRA from a nonspouse, you must make sure you have taken your 2023 RMD by December 31, 2023. The penalty for not taking an RMD is 25% of the RMD amount, reduced in the Secure 2.0 Act from the previous penalty of 50%! Note that the RMD for IRAs inherited after 2019 has been waived until 2024 for noneligible designated beneficiaries.

Do you need to update beneficiaries? If there has been a major change in your life, such as a marriage or divorce, the birth or adoption of a child, or a death in the family, you may need to update the beneficiaries on your retirement accounts and life insurance policies. You may also need to update your will and power of attorney documents. There is no deadline for these changes, but the sooner the better.

There are likely to be other items to check on, but this list should give you a nice head start on making sure you close out the year on strong financial footing.

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