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While many may be making a gift list and checking it twice for the holiday season, investors should consider checking off another type of list: a year-end financial planning checklist.
The end of the year is a great time to reflect and take a closer look at one’s larger financial picture. Financial goals are common New Year’s resolutions, but checking in on finances ahead of the new year can help set you on the right track toward reaching your goals.
For those looking to get ahead financially, here are a few considerations.
Rethink open enrollment benefits
If you haven’t yet chosen your elections for the open enrollment period, you may want to consider opting in for a health savings account (HSA) to couple with an employer’s high-deductible healthcare plans (HDHPs). HSAs represent a flexible opportunity to prepare not only for various health care costs but overall retirement readiness.
After contributing enough to secure any available match in an employer-sponsored retirement plan, consider contributing to an HSA. Even if you’re facing budgeting constraints HSAs offer a triple tax advantage: contributions and qualified withdrawals are made tax free and investment growth is tax deferred. What’s more, if you are able to cover qualified medical expenses out of pocket, you can reimburse yourself from your HSA to spend on another goal (like college tuition or to cover an emergency) as long as you’ve saved your qualified medical expense receipts. Keep in mind that you may have to pay income tax on withdrawals for unqualified medical expenses and will also incur a 20% federal tax penalty if you’re younger than 65.
How you use your HSA will depend heavily on your needs, risks, and goals. A financial adviser can help you to determine the best approach.
Read: You’ve spent decades saving money for retirement. Now comes the hard part — spending it.
Check in on investment accounts
Review your investment portfolios and contributions at the end of the year. Things can change throughout the year. For instance, maybe you need to buy a new car, are looking to purchase a home, or perhaps you’re gearing up to retire. Whatever your circumstances, you’ll want to check in on these to ensure your strategy is still appropriately aligned to your goals, risk tolerance, and time horizon. And if you’re unsure, now may be a good time to tap a financial adviser to help you to create a strategy tailored to each goal, rebalance as necessary, and support you along the way.
In some instances, it may make sense to max out your contributions in your retirement accounts. Remember, the deadline for doing so is Dec. 31, 2023 for your employer plan. And don’t forget that your IRA contributions can’t exceed your earned income for the year or the IRS-imposed limits (whichever is less).
Additionally, if you’re required to take a required minimum distribution (RMD), be sure to act before the end of the year. Of note, you have until April 1, 2024 to withdraw if you’ve just turned 73 this year and are taking it for the first time. Delaying this year’s RMD to next year will result in taking two RMDs for 2024.
Read: Are you taking an RMD? 10 smart things you can use it for right now.
Lastly, don’t forget to update your beneficiaries if necessary to ensure your money will end up in the right place.
Get ahead of tax planning
With tax season right around the corner, you’ll want to plan well in advance and consider opting in to tax-efficient investments for 2024. Doing so could help to reduce next year’s tax bill. Accounts such as 401(k)s, IRAs, and HSAs can certainly help with this because of their tax efficiency. Other considerations include 529 plans (for financing education) and tax-exempt investments like municipal bonds (which are exempt from federal income tax, though you may owe taxes on capital gains realized through trading or redemption of shares). Additionally with municipal bonds specifically, for some investors a portion of the fund’s income may also be subject to state, local, and or the federal Alternative Minimum Tax.
Investors also may want to consider tax-loss harvesting. In short, you may be able to sell certain investments at a loss to offset your gains in other investments and up to $3,000 of ordinary income. However, as a word of caution, if you buy the same investment (or any investment the IRS considers “substantially identical”) within 30 days before or after you sell a loss, it will be deemed invalid. Given the strict rules around this strategy, as well as the other potential risks of tax-loss harvesting (such as higher costs, portfolio tracking errors, and unintended tax implications), I highly recommend you carefully review your terms of consent and consult with a tax adviser for guidance.
If you recently got married or received a significant increase in income and are debating changing your tax filing status, be sure to understand the possible tax implications in doing so. For example, you’ll have a higher standard deduction and a lower tax bracket if married filing jointly (compared to filing separately). However, filing separately could help you save money on taxes if you have a higher income.
Read: ‘Retirement security is under threat’: More people are raiding retirement savings to pay bills
Maximize the impact of your donations and gifts
It’s giving season, so you’re likely considering gifting to family, friends, and charitable organizations. When it comes to family and friends, you can gift monetarily up to $17,000 annually without incurring a gift tax. This amount doubles to $34,000 annually for married couples.
If you want to take your charitable giving to the next level, gift appreciated securities instead of writing a check. This may allow you to take advantage of certain tax benefits. For example, this strategy could lower taxable income, eliminate capital gains tax on the embedded investment profit, while also decreasing further growth within your estate.
While the above are just a few considerations all investors should keep in mind, your full checklist should be personalized to you. And while year-end is a great time to check in, it’s generally best practice to check in on your finances at least two or three times a year. A financial adviser can help with reminders so you’re set from year-start to year-end. Just remember that even with the help of an advisor, all investing is subject to risk (including the possible loss of money) no matter the season.
Lauren Wybar is a senior financial adviser with Vanguard Personal Advisor.
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions, and other guidance that is complex and subject to change. Additional tax rules, including state and local tax rules, not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.
