Your End of Year Financial Planning Checklist for 2024
As 2023 comes to a close, it’s an important time to revisit your financials to maximize savings, ensure you start the new year strong and to stay on track to accomplish your goals. From tax managing your investments to executing your charitable gifting strategy, here are some financial planning items you might want to consider as you get ready for 2024:
Tax Manage your Investments.
Tax loss harvesting. While most markets are up this year, when appropriate we advocate selling losing investment positions to offset capital gains in future years. It may make sense to simultaneously buy a similar position to stay invested to catch a potential market bounce back. Be aware of the wash sale rules. If you don’t have capital gains to offset, you can offset up to $3,000 of ordinary income per year.
Coordinate tax-aware rebalancing of your portfolio. Additionally, you’ll probably want to bring your asset allocation back to their target weights. For those with large concentrated stock positions, you might want to consider harvesting those gains to diversify the outsized position since there are likely losses in other parts of the portfolio to offset the gains.
Optimize income and expenses. If possible, we would advocate for delaying the receipt of end of year bonuses into 2024 and accelerating expenses into 2023 to potentially lower your 2023 tax bill.
Reevaluate your cash holdings. For years we’ve seen cash in saving accounts, money market funds and CDs yielding close to zero, but recently cash is much more intriguing. While many banks have been slow to offer higher yields, short-term US Treasury Bills are yielding over 5.0%.
Watch out for mutual fund distributions. Mutual funds distribute capital gains distributions toward the end of the year. If you’re buying into a fund late in the year, check to see if they’ve already made the distribution. You don’t want to essentially buy someone else’s capital gains distributions.
Max out contributions. If possible, ensure that you max out contributions to 401Ks, IRAs (not due until April 15th), SEPs (due April 15th or extension deadline), Simple IRAs (April 15th deadline) or other qualified accounts.
Consider a Roth conversion. With a Roth conversion (December 31st deadline), you’ll convert pre-tax IRA money into nontaxable Roth IRA money. You’ll be taxed on the conversion amount as ordinary income, but all future gains and distributions within the limitations won’t be taxed. This makes the most sense to do if you’ve had a down year income wise, and you have the cash on hand to pay the taxes. Roth conversions also make a lot of sense if you believe your current tax rate is lower than when you are distributing your assets in retirement. This strategy might be attractive given that many people might be in higher tax brackets in a few years as the 2017 TCJA (Tax Cuts and Jobs Act) bracket levels expire in 2026.
Reevaluate your marginal rate for municipal bonds. Many people have been in lower brackets for a few years in a post TCJA environment, which means that the after-tax benefit of municipal bonds has been lower relative to the after-tax benefit of other bond alternatives for many people. Given the sharp rise in bond rates, the relative value between the tax-exempt and taxable bond market has changed, discuss your expected marginal tax rate with your tax preparer and adjust your portfolio going forward.
Do some Stock Option Planning. If you have unexercised shares and the stock price has dropped dramatically , now may be a good time to exercise when the AMT or income component is significantly lower. You should with your advisor and tax professional to project all the considerations.
Review the Basics and Tidy Up your Accounts.
Review health savings accounts (HSA) contributions. You have until the April tax deadline to make an HSA contribution. If you don’t have an HSA, we’d strongly encourage you to explore if you’re eligible, given the account’s triple tax benefits.
Spend Flexible Savings Account (FSA) remaining balances. If you don’t use the money in the account by December 31st, you lose out on the opportunity to spend that money.
Update your beneficiaries on your retirement accounts and insurance policies. Failing to update beneficiaries can be one of the biggest financial and estate planning blunders one can make. If there’s been a change in your circumstances, it’s important to address this. Furthermore, the SECURE Act effectively ended the “stretch IRA” financial planning strategy for non-spousal beneficiaries so talk to your advisors about this if you plan on leaving your IRA to someone other than your spouse. For wealthy families, it also makes sense to begin thinking about your estate planning and the best way to transition your assets to the next generation during this time of year.
Make annual gifts to reduce the size of your estate. The annual gift tax exclusion is $17,000 for 2023. Also, given that the higher than normal exclusion for estate, gift, and generation-skipping taxes is set to expire in 2026, those with large estates might want to revisit their estate planning tax strategy with their estate attorney, CPA, and financial planner.
Consider rising interest rates on estate planning strategies. For high net-worth families, some estate planning techniques will become more attractive with rising rates, like qualified personal residence trusts (QPRTs) and charitable remainder trusts (CRTs), while for other strategies the window might be closing, like intrafamily loans and grantor retained annuity trusts (GRATs).
Check your tax withholding and estimated payments. As the year comes to a close, you might want to check with your CPA or the IRS online withholding estimator to see if you’re on track with your payroll withholding or estimated payments. If you didn’t withhold enough throughout the year from your paycheck, you could be subject to an underpayment penalty. With inflation-linked I bonds yielding their highest rates in years, some people may want to consider overfunding witholding or their fourth quarter estimated payments so that they can fund an I Bond purchase with their refund. I Bonds have a $10,000 annual investment max, but $5,000 more can be purchased through Federal tax refunds.
Execute your Charitable Gifting Strategy.
Donate to a Donor Advised Fund (DAF). If you oscillate between taking the standard deduction and itemizing in most years, you may want to consider donating to a donor-advised fund (DAF) in 2023 the next several years of expected charitable contributions. The DAF will let you make the contributions to the charity over time, but you can take the deduction immediately. You can give low basis stock to a DAF to avoid future taxes on the capital gain. You might want to consider the possibility of the TCJA expiration in 2026 on this strategy. Higher marginal tax rates in 2026 might charitable deductions even more valuable, so front-loading too many of them now might not be optimal.
Choose how you fund charitable gifts wisely. If you’re making a charitable contribution, it’s preferable tax-wise to donate low basis stock to a charity or donor-advised fund as opposed to selling positions and giving cash. Custodians have various deadlines for processing stock or mutual fund donations, so plan ahead.
Consider a Qualified Charitable Distribution (QCD). Another way to minimize your tax burden for those that may not be able to itemize anymore and are over 70.5, is to take a QCD, which is a direct distribution under $100,000 from an IRA to a charity. The QCD counts toward the RMD if you are over 72 and reduces the tax burden of your distribution. Moreover, the QCD can lower the impact of how much your Social Security benefit is taxed.
Be Mindful of Age Milestones.
Over 50: You are now eligible to take a “catch-up contribution” to your IRAs and some qualified plans (401K, etc.).
Over 55: You are now eligible to take certain types of distributions from your old 401Ks without penalty.
Over 59.5: You are now eligible to take an IRA distribution without a 10% penalty.
Over 62: You are now eligible for Social Security.
Over 65: You are now eligible for Medicare. If you sign up late, you could face a 10% penalty.
Over 73: Required minimum distributions (RMDs) are due on your IRA balances by April 1st the year after you turn 73. There’s a massive 25% penalty if you fail to take the RMD.
Open New Accounts for your Children or Grandchildren to Maximize Savings.
Open Roth IRA or traditional IRA accounts for children or grandchildren who have had earned income. Child IRA assets are non-assessable in the FAFSA for student aid eligibility. You don’t necessarily have to put the money they’ve earned into the Roth IRA or IRA, you can let them spend the money they’ve made and then redirect other money that’s going toward college savings into a Roth IRA.
Consider 529 contributions for your children, grandchildren or yourself. If you already have children, opening a 529 is highly recommended to begin saving for those college years. People without children can also open 529s for themselves and change the beneficiary once they have children. This maximizes the amount of time for tax-free compounding in the accounts. 529 accounts under the TCJA can now also be used for secondary school expenses, which makes them even more valuable for parents with kids in private schools. With SECURE 2.0 making possible excess 529 funds to be rolled into Roth IRAs, 529s are even more attractive.
David Flores Wilson and Dann Ryan are New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioners & Managing Partners at Sincerus Advisory. Click here to schedule a time to speak with us.