A Year-End Review Can Improve Your Finances

November 8, 2023 | David Edmisten, CFP®

A year-end financial review can help you improve many areas of your finances.

As the end of the year approaches, it can be tempting to get caught up in the holiday season and leave your finances on the backburner.

But don’t put off your financial planning until the new year.

The end of the year offers great opportunities to make a positive impact on your financial future.

An end of the year financial review can help you to save more for retirement, cut expenses, lower your tax bill, and make progress on your goals.

Whether you’re still working or recently retired, these tips can help you improve your finances at any stage in your journey.

“Can I save more?”

If you’re still working, review your finances before the end of the year to see if you can save more toward important goals like retirement.

Max out your employer sponsored retirement plans.

You should review your contributions to your retirement accounts like your 401k.  

If you haven’t made the maximum contribution, which is $22,500 for 2023, you can look to increase your contribution to the maximum. If you’re age 50 or over, you can also make an additional catch-up contribution of $7,500 for 2023.

Max out your IRA accounts (if eligible).

If your income falls into eligible ranges, you can consider making a maximum contribution of $6,500 to an IRA or Roth IRA, and a $1,000 catch-up contribution if you’re 50 or older.

Max out your Health Savings Account.

An often-overlooked way to increase your retirement savings in a tax-smart way is to maximize your Health Savings Account.

Health Savings Accounts (HSAs) are available only to those who choose high-deductible health insurance plans (HDHPs). If you participate in an HDHP and you have access to an HSA, this can be a powerful vehicle for building tax-advantaged savings for retirement.

To understand the benefits that an HSA provides for retirement, keep in mind:

• The money is not taxed before you pay it in.

• The interest and earnings on the money are not taxed.

• Withdrawals are not taxed if used for allowable medical expenses.

While many people use the balances in their HSA accounts for current medical costs, there is a significant benefit by saving these funds for retirement.

The balance in the HSA account grows tax-free and can be invested to provide higher rates of growth. Since the deposits, growth and withdrawals can be tax-free if done correctly, this can be the most powerful tax-advantaged account.

Also, contribution limits for an HSA account are relatively high. Individuals can contribute up to $3,850 to an HSA for 2023, and up to $7,750 for a family plan. I

If you're 55 or older, you can make an extra "catch-up" contribution of $1,000 per year and a spouse who is 55 or older can do the same if each of you has your own HSA account.

You can also contribute to an HSA account regardless of your income.

Have more money to save?

Consider savings and brokerage accounts.

There’s no limit on how much you can contribute to a bank savings or taxable brokerage account (albeit no tax deductions, either), so if you have more money available to save, consider adding to these accounts.

Having 12-18 months of spending already in cash is a fantastic way to be ready to retire, as stock market changes won’t change your spending plans for your first year of retirement.

Adding funds to your taxable investment accounts gives you more money to grow for your future.

If you expect bonuses or additional compensation before the end of the year, look at all your options to save more and help money grow for your future.

Tax planning

While a lot of people focus on taxes only when it’s time to file their tax return in Aprill, the end of the year presents a number of ways to plan more effectively for taxes and lower your tax bill.

Do you expect your income to increase or decrease in the future?

If you expect your income to increase in the future, you may want to consider strategies to reduce your future tax liability.

Contributing to a Roth IRA, Roth 401k, or converting pre-tax retirement accounts to a Roth IRA could help. 

You will not get a current year deduction with a Roth contribution, and a Roth conversion can increase your tax liability for this tax year. But assets in a Roth account grow without taxes, and withdrawals from a Roth account, if done correctly, are tax-free.

Incurring taxes now, when your income is lower, and having tax-free withdrawals in the future, when your income is higher, can help you to save taxes over your lifetime.

If you’re age 59.5 or older, you may also want to consider accelerating withdrawals from your pre-tax accounts to fill up the lower tax brackets.

On the other hand, if you expect your income or tax bracket to be lower in the future, you may benefit more by contributing to a pre-tax account such as a Traditional IRA or 401k.

Managing taxes in your investments.

Reviewing your portfolio from a tax perspective is an important part of financial planning. Before the end of the year, you want to see if there are ways to manage your tax liability with some simple strategies.

First, check to see if you have any realized or unrealized capital losses for this year, or carry forward losses from prior tax years. If you’ve sold any investments for a loss this year or have some current holdings that are at a loss, you may be able to use these losses to offset other gains.

This strategy is called tax loss harvesting. You can use any realized losses to offset an equal amount of gains in your taxable brokerage accounts, plus up to another $3000 in losses can be applied to your current year tax return.

For example, let’s say you have some equity holdings that have increased in value this year. If you would normally look to sell some of these investments (whether it’s time to take the profits, or to rebalance your portfolio back to your target allocation) you can consider selling appreciated assets up to the level of the realized losses you’ve incurred.

You might also consider selling current holdings that are at a loss to generate more realized losses that can offset more realized gains.

Generally speaking, the investment strategy you follow should take precedence over micromanaging your tax liability on your investments. You don’t want to jeopardize your overall strategy only to save a bit on one year’s taxes.

But you can use tax loss harvesting to help mitigate tax costs while keeping your strategy sound. You may even consider selling one asset at a loss and reinvesting in a similar (but not substantially the same) asset to keep your strategy on track.

Be sure to work with a tax professional and your financial planner so you don’t run afoul of IRS wash sale rules and end up with a disallowed loss in your account.

You’ll also want to review any expected year-end capital gains distributions from mutual funds and ETF’s and any final dividend or interest income expected from your portfolio, to plan accordingly for the increased tax liability that these distributions can generate.

Finally, if you expect to be in a higher tax bracket, you want to consider if tax-exempt municipal bonds make sense for your fixed income allocation in your taxable brokerage account. Interest paid by state and municipal bonds is federally tax-exempt. Your after-tax yield on municipal bonds could be higher than the equivalent in corporate or federal government bonds if you are in a high tax bracket.

Review your tax bracket.

It’s a good idea to review your income for the year and to know which tax bracket you fall into. There are some important thresholds where additional income can trigger an increase in your tax liability.

If taxable income is below $182,100 ($364,200 if MFJ), you are in the 24% percent marginal tax bracket. Taxable income in the next bracket will be taxed at 32%.

If taxable income is above $492,300 ($553,850 if MFJ), any long-term capital gains will be taxed at the higher 20% rate.

If your Modified Adjusted Gross Income (MAGI) is over $200,000 ($250,000 if MFJ), you may be subject to the 3.8% Net Investment Income Tax on the lesser of net investment income or the excess of MAGI over $200,000 ($250,000 if MFJ).

If you’re on the threshold of a higher tax bracket, you may want to consider strategies to defer income or accelerate deductions and strategies to manage capital gains and losses to keep you in the lower bracket.

Charitable giving strategies

If you’re charitably inclined, there are some tax efficient ideas to consider with your giving as well.

You can consider giving appreciated securities, rather than cash, to help your tax situation. When appreciated securities are donated to charity, the donor is not selling the stock. Therefore, they are not realizing a capital gain on the appreciation on that stock position that would otherwise be taxable.

It’s important to donate the stock in-kind and make sure the eligible charity of your choice is equipped to receive direct donations of securities. If a donor sells the stock first and donates the cash proceeds, they are incurring a realized gain on the sale of the appreciated stock.

Donors can also consider donating stock to a Donor Advised Fund. These funds allow a donor to donate securities in a single tax year for the charitable deduction but distribute grants to the end charities of choice at a later time.

Donated funds can also be invested to potentially grow, which could magnify the value of the donation. There are important rules to follow and charities receiving the grants must be eligible, qualified 501c3 organizations.

It’s important to consult with your tax professional, financial planner and donor advised fund provider to understand the rules before proceeding with a gifting strategy.

If you expect to take the standard deduction ($13,850 if single, $27,700 if MFJ), consider bunching your charitable contributions (or contributing to a donor-advised fund) every few years which may allow itemization in specific years.

Qualified Charitable Distribution from a Traditional IRA

If you are age 70.5 or older, you could also consider making a Qualified Charitable Distribution (QCD) directly from a Traditional IRA to an eligible charity.

The QCD is not counted as taxable income as a normal Traditional IRA distribution would be. The QCD also counts against the Required Minimum Distribution amount due for those age 73 and older.

Donors can distribute up to $100,000 as a QCD each year.

The ability to meet one’s RMD, take a distribution from a traditional IRA that is not taxed, and potentially reduce future RMD’s (as they are based on the IRA balance at the prior year-end) can make a QCD a smart tax planning strategy.

Keep in mind that to qualify as a QCD, the distribution must go directly from the IRA custodian/trustee to the third-party eligible charity. If the distribution is paid directly to the IRA owner, it will not qualify as a QCD.

Also, it’s important for IRA owners to keep track of their QCD’s. An IRA custodian will not have the ability to list a QCD as a QCD on the 1099-R statement issued to the IRA owner. The IRA owner will need to account for this correctly on their own when they file their tax return.

Other tax planning issues

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 estimated payments may be required.

Have there been any changes to your marital status? If so, consider how your tax liability may be impacted based on your marital status as of December 31st.

Other planning opportunities

Beyond increasing your savings and planning effectively for taxes, there are a few other areas you can review to help improve your financial situation.

Did you meet your health insurance plan's annual deductible? If so, consider incurring any additional medical expenses before the end of the year, after which point your annual deductible will reset.

Have there been any changes to your family, heirs, or have you bought/sold any significant assets this year? If so, consider reviewing your estate plan.

Do you want to lower your spending? Paying off expensive debt is one of the most impactful ways to reduce your monthly budget. Getting rid of credit card debt, student or business loans, car payments, and potentially even paying off your home mortgage are effective ways to lower the most significant expenses in your budget.

You can also review all other areas of spending to see what you can reduce or eliminate. Typical candidates for reduction include online subscriptions, internet and cell phone plans, impulse purchases, travel costs, dining out, etc.

Keep those items that allow you to enjoy your lifestyle, but you may be surprised how much you can save if you take a look.

As you can see, it’s possible to improve your financial situation in a number of areas with careful review as the end of the year approaches. Taking time to review all areas of your financial plan before the holidays could help you make significant progress on your goals. If you need help with a review, consider setting up a complimentary consultation with us.

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About the Author:

David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.