As we head into the fourth quarter of 2023, it is an important time to revisit certain financial planning items to ensure you optimize every financial aspect of your life, maximize savings, save on your tax bill, stay on track to accomplish your goals, and start the new year off strong. Here are some areas of your financial plan that may be worth taking a look at before the end of the year:
Tax Planning
Tax loss harvesting. If you have unrealized losses in your taxable investment account(s) (i.e., revocable trust account or individual brokerage account), you may want to consider realizing those losses to offset any gains. This is especially true if you have sizeable concentrated stock positions. Furthermore, the IRS lets you deduct up to $3,000 against ordinary income after you offset the gains and losses.
Capital loss carryforwards from prior years. If you have capital losses from this year or previous years, consider opportunities to offset gains of highly appreciated positions in your portfolio. Or, again, you may be able to use the carryforward loss to reduce your ordinary income by up to $3,000.
Changes to your marital status. If you have recently had a change in marital status, it may be worth considering how your tax liability will be impacted.
Windfalls. If you expect to receive a significant windfall (inheritance, stock options, large bonuses, etc.) before the end of the year that could impact your tax liability, you may want to review your tax withholdings to determine if estimated payments are required.
Investment Planning
Rebalance Your Portfolio. The end of the year is also a great time to look at your investment portfolio to ensure you are bringing your asset allocation back to its target weight. Coordinating your rebalancing with tax-aware strategies is a good idea to ensure you are not stuck with a large tax bill in April.
Evaluate Your Cash Holdings. For many years, savings accounts, money market funds, certificates of deposit, and treasury bills yielded close to zero percent. Now, cash equivalent securities are yielding close to or over five percent.
Replenish Your Emergency Fund. If life events had you dipping into your emergency fund this year, the end of the year is a great time to go back and replenish it to ensure you always have enough funds in there to protect you for when other life events occur.
Year-end mutual fund distributions. Mutual funds typically pay out income and capital gains toward the end of the year. If you have mutual fund investments in taxable accounts, strategies to minimize your tax liability may be worth considering. Also, if you plan to purchase a fund late in the year, check and see if that fund has already made the distribution for the year to avoid unexpected taxation.
Tax Bracket Thresholds. If you are on the threshold of your tax bracket, you may want to utilize strategies to defer your income or accelerate deductions to remain or move to a lower tax bracket.
Contributing to 529 Accounts. If you have a loved one for whom you would like to save for their education expenses, consider funding a 529 account. You may be able to use your annual exclusion amount to contribute up to $17,000 for 2023 (or $34,000 if you are married and file your taxes jointly) to a beneficiary's 529 account, gift tax-free. On the other hand, you can also make a lump sum 'super-funding' contribution of up to $85,000 ($170,000 if you are married and file your taxes jointly) to a beneficiary's 529 account and elect to treat it as though it were made evenly over five years.
Seek help if necessary. If you have questions about your portfolio or have assets not managed by a financial advisor, consider contacting them to determine if the portfolio aligns with your objectives, risk tolerance, and risk capacity. Moreover, it's a good idea to determine if your investments maintain low costs and are positioned to achieve the highest returns possible for your level of risk.
Retirement Planning
Can you save more? If so, make sure you are contributing as much as you can to your retirement plan and a Health Savings Account (HSA) if you have one.
If you are eligible, we generally strongly encourage individuals to explore Health Savings Accounts due to their triple tax-advantaged benefits (deductible contributions, tax-deferred growth, and tax-free qualified distributions). If you have a Health Savings Account, you can contribute up to $3,850 as a single individual or $7,750 for a family in 2023. There is also an additional $1,000 catch-up contribution if you are 55 or older.
If you participate in an employer retirement plan, such as a 401(k), you may be able to change your contribution amount before the end of the year. However, you will want to consult with the plan provider as the rules may vary for when you can make changes. The maximum salary deferral contribution to an employer plan is $22,500 for 2023, plus a $7,500 catch-up contribution if you are 50 or older.
Required Minimum Distributions (RMDs). If you are subject to RMDs this year, including those from inherited IRAs, you may want to consider the following:
With the exception of RMDs from inherited IRAs, RMDs from multiple IRAs can usually be aggregated. In other words, if you have multiple IRA accounts, you generally can calculate your RMD for each and take the sum of all of them as one RMD from one IRA. However, RMDs from Inherited IRAs cannot be aggregated with traditional IRAs.
RMDs from employer retirement plans generally must be calculated and taken separately from your other IRA(s) – no aggregation is allowed. However, one exception to this is 403(b) accounts, in which RMDs from multiple 403(b)s can be aggregated and taken from a single 403(b) account.
Note that the SECURE Act 2.0 raised the RMD age for some individuals effective January 1, 2023. Talk to your financial advisor or tax preparer to see if this applies.
Future income expectations. Depending on whether you expect your income to either increase or decrease in the future, there are some strategies you can use to maximize tax efficiency this year.
If you expect your income to increase in the future, you want to follow strategies to minimize your future tax liability. This may include making contributions to Roth retirement accounts or performing Roth conversions. Also, if you are eligible, see if your employer offers matching Roth contributions.
If you expect your income to decrease in the future, consider strategies to minimize your tax liability now, such as making contributions to pre-tax retirement accounts instead of to Roth accounts.
Review your employee benefits. If you are still working, the enrollment period runs from November to the middle of January. This is a great time to review the benefits from your employer to ensure you are making the most of them, especially with taking advantage of any company match that may be available to you.
Monitor your credit. Credit is one of those things that is easy to lose and difficult to repair. Everyone can pull their credit reports from the three major reporting agencies (Experian, TransUnion, and Equifax) once per year without penalty on AnnualCreditReport.com. It is a good idea to take advantage of this to monitor the reports for accuracy. If you see an error or discrepancy in your report, you should immediately petition it in writing to the credit reporting agency. The agency will then investigate and reply within 30 days with its findings.
Revisit Your Budget. With inflation still running high, student loan repayments beginning again, and life changes occurring over the past year, now is a great time to revisit your budget and make any necessary adjustments.
Estate and Legacy Planning
Updating your beneficiary designations. Reviewing your beneficiary designations is always a good idea, especially if a significant life event occurred in the last year. This ensures that your legacy wishes will be fulfilled.
Keeping your estate plan current. For all families, it makes sense to put in place your estate plan to protect your lifetime benefits and consider the most effective way to transition your assets to the next generation. Consulting with your financial advisor and tax professional on this matter can have massive benefits for you and your family.
Gifts. If you enjoy giving to charity or wish to be more charitably inclined, consider tax-efficient strategies such as gifting highly appreciated stock with a low cost basis or making a Qualified Charitable Distribution (QCD) from your traditional IRA if you are over 70.5. Also, depending on if you take the standard deduction, consider bunching charitable donations (or contributing to a Donor Advised Fund (DAF)) every few years, which may allow you to itemize your deductions in specific years. Also, gifts up to the annual exclusion amount of $17,000 for 2023 per donee ($34,000 if you are married and file your taxes jointly) are gift tax-free.
Changes to your family, heirs, or buying/selling of valuable assets this year. If any of these apply, you should consider reviewing your estate plan to ensure it aligns with your wishes.
Insurance Planning
Health insurance plan's annual deductible. If you met your health insurance's yearly deductible, you may want to consider incurring any additional medical expenses before the end of the year, after which your deductible will reset for next year.
Spend Flexible Spending Account (FSA) remaining funds. If you have a balance in your FSA, consider spending the funds before the year ends or ensuring you fall below the threshold so they roll over into next year. For 2023, some companies allow up to $610 of unused FSA funds to be rolled into next year, while some companies offer a grace period up to March 15th to spend the unused FSA funds. Your employer sets these rules, so you should consult with your plan administrator about how they handle unused funds. In addition, many companies have a 'run-out' period in which they will accept receipts from expenses that count towards spending down your FSA up to 90 days after the FSA plan year-end. Also, if you have a Dependent Care FSA, be sure to check the deadlines for unused funds as well.
Ensure you have adequate coverage. We recommend annually reviewing your insurance to ensure you understand your policies and have sufficient coverage for risks such as health, life, disability, long-term care, homeowners, and personal liability. Take the time to review the policies, and if change is warranted, consider the potential benefits, costs, and risks of modifying or canceling existing coverage.
Be Mindful of Age Milestones
As you get older, there are certain milestones to be aware of to ensure you are not missing out on anything or making any mistakes that could cost you. Here are several of those milestones to keep in mind:
Age 50 and over: you are eligible to make an additional 'catch-up contribution' to your retirement accounts. For 401(k)s, 403(b)s, and 457 accounts, that amount is $7,500 for 2023. For Traditional and Roth IRAs, the catch-up contribution amount is $1,000.
Age 55 and over: if you turn 55 during the year you lose or leave your job, you may begin taking distributions from your 401(k), 403(a), or 403(b) plan without paying an early withdrawal penalty. You will, however, still have to pay taxes on your withdrawals. Age 55 and older is also when you can make catch-up contributions to a Health Savings Account of up to $1,000.
Age 59.5 and over: you are eligible to take distributions from a Traditional IRA without paying a 10% early withdrawal penalty.
Age 62: you are eligible for Social Security benefits. To see when your Full Retirement Age is based on your birth year, reference this chart on the Social Security Administration's website.
Age 65: you are eligible for Medicare benefits.
Age 70: you are eligible for the maximum Social Security benefit.
Age 72 and over: you must take the required minimum distribution (RMDs) from your pre-tax IRA balance(s). Note that effective January 1st, 2023, the RMD age has been raised for some individuals. If you were born in 1950 or earlier, your RMD age remains 72. If you were born between 1951 and 1959, your RMD begins at age 73. Therefore, if you turn 72 in 2023, you can hold off on taking an RMD until next year. Lastly, if you were born in 1960 or later, your RMD begins at age 75.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.