6 Year-End Financial Planning Moves

The holidays can be both busy and expensive. With that in mind, it can be helpful to get your finances in order before you get wrapped up in gift buying and pie making. Use the next few weeks to lower your tax bill, save for retirement, and plan for your future health needs.

1. Review your capital gains and losses.

Those who invest in a taxable account must pay taxes on their capital gains each year. Short-term gains are taxed as ordinary income, while long-term gains are taxed at a more favorable rate. Capital losses can be used to reduce taxable income. Once you calculate your net capital gain or loss for the year, you might consider a few different strategies:

• Strategy 1: Offset short-term gains with losses. Doing so reduces your income tax bill. This strategy involves selling securities at a loss. If you end up netting a loss, you can deduct $3,000 of those losses on your taxes and further reduce your taxable income. This strategy makes sense if you have high short-term gains and/or would like to take advantage of the $3,000 loss deduction. Make sure to not re-purchase any sold-at-a-loss securities for 30 days. Doing so would trigger the wash-sale loss rule and eliminate your ability to claim those losses on your return.
• Strategy 2: Preserve gains by selling appreciated securities. This strategy makes sense if you’ve accrued significant losses during the year, such that you have far exceeded the $3,000 deduction. While you can carryover losses, you could also sell some appreciated securities without triggering a tax bill (as long as your losses exceed your gains). You could also re-purchase those securities immediately after sale. There is no wash-sale “gain” rule.

2. Maximize your retirement contributions.

You can contribute to your defined contribution retirement plan until December 31. In 2023, employees can contribute up to $22,500 to a 401(k), 403(b), 457, or other defined contribution plan. Those who are 50 or older can make a catch-up contribution of $6,500.

This strategy could both help you prepare for retirement and reduce your taxable income. Contributing to a traditional IRA would have the same effect. You have until April 15, 2024, to contribute to a traditional IRA, up to the maximum annual contribution of $6,500 with a catch-up limit of $1,000.

3. Convert to a Roth.

Savers who think that their current tax bracket will be lower than their future tax bracket may consider a Roth conversion. This strategy makes sense if you think rising tax rates could negatively impact you down the road.

You would move money from a traditional IRA, pay taxes on the distribution, and put the funds in a Roth account. The funds would be invested and could grow tax-free. In the future, Roth funds can be withdrawn tax-free, as long as you meet certain requirements.

Keep in mind that your $6,500 IRA contribution limit applies to your combined contributions to a Roth IRA and a traditional IRA. For example, if you contribute $2,000 to a traditional IRA for 2023, you could only contribute $4,500 to a Roth IRA.

4. Review your health plan options. 

The end of the year is an excellent time to review your employer’s insurance options. Doing so would likely involve selecting between an HMO, PPO, and/or high-deductible plan. Each plan has different benefits and limits. For example, an HMO may have lower premiums but also offers less flexibility. A PPO offers more flexibility with the potential for higher out-of-pocket costs than with an HMO. High-deductible plans may also offer lower premiums but could force you to pay steep medical bills, should you need ongoing medical care. At the same time, enrolling in a high-deductible plan could allow you to open and invest in an HSA. In order to select the right plan for you, read this guide to reviewing your company’s benefits options.

You may also consider opening an HSA. To open an HSA, you must be enrolled in a high-deductible plan with certain limits on out-of-pocket expenses. If you are eligible to contribute to an HSA, you can contribute up to $3,850 for individual plans or $7,750 for family plans in 2023. Contributing to an HSA reduces your taxable income. At the same time, you can invest and grow those funds. If you withdraw the funds for eligible medical expenses, you can withdraw the funds tax-free.

Finally, retirees should take some time to understand their Medicare coverage. Medicare does not cover all expenses, and you may need to enroll in a Medigap plan. Knowing your options can help you make the best choice for you and your family.

5. Plan your RMDs. 

You must take a required minimum distribution (RMD) from certain retirement plans if you are 73 or older. (Your RMD age may be earlier if you turned 72 before December 31, 2022.) You will face a 50% penalty for not taking your full RMD. If this is your first RMD, your RMD deadline is April 1 of the year following the year in which you turned 73 (or the age where you are required to take RMDs). If you’ve taken RMDs before, you must take your RMD by December 31.

You may not need your RMD for living expenses. You could consider investing the RMD in a taxable investment account or in an educational account for a grandchild, such as a 529 Plan or an UTMA. You could also make a qualified charitable distribution from an IRA. Doing so could reduce your taxable income and count as an RMD, if you follow certain rules.

6. Schedule your next tax, financial, and/or investment planning meeting.

The Elm3 team is happy to assist with year-end planning needs. Make sure to get your appointment on the calendar today, such that you can finish your planning before you’re swept up in the holidays.

Sources: Kiplinger