As another year comes to a close, there are a few tasks we should all consider completing before the end of December. Thanksgiving is my usual reminder to check up on everything before the year ends while I still have time to act.
Some of the things on this list have penalties assessed if they are not completed on time and others just lead to a lost opportunity if the deadline is missed. I missed a big opportunity the year I retired when I didn’t realize my taxes owed that year would be zero. If I had made the discovery before December 31st, I could have made Roth conversions without paying any taxes. What an opportunity loss that was.
Look over the list and be sure you accomplish all the items that pertain to your situation. You will be glad you did.
1: Estimate your year-end income and taxes owed
This is the one I missed the year I retired. Since I earned almost no W2 income, I expected to owe very little taxes. I never dreamed it would be zero. Look at what you have earned so far this year and what you expect to earn before the end of the year. Don’t forget to include any estimated bonuses you may receive.
Make sure to pay enough taxes for the income you anticipate. If you underpay your taxes too much you will end up owning interest and penalties. If you get an end of the year bonus, you can ask the person cutting the check to take additional federal and state taxes from your final check to get close to your actual tax bill.
Never let yourself get into a position where you owe money to the IRS. They are very difficult to deal with and clearing up your back debt to them is a cumbersome task.
2: Maximize your retirement plan contributions
If you are in a high tax bracket, the best investment available to you is a pre-tax retirement plan contribution. You could earn up to an instantaneous and guaranteed 40% return with such a move. That is very hard to beat. You also don’t want to miss out on your employer matching contribution, which is a part of your compensation that your employer will get to keep if you don’t make the contribution.
Then consider any after tax contributions you can make to IRAs for both you and your spouse. These are not as valuable as the pretax contributions, but they are still very valuable for tax deferred or tax-free growth. The Roth IRA is the best option to use for this. If you have a low income, like I did my retirement year, you can contribute directly to a Roth account. If your income is too high, you will need to do the backdoor Roth contribution.
2023 limits are $6,500 for each spouse. You can put in an extra $1,000 catch up amount if you are 50 years old or older.
3: Maximize your Health Savings Account (HSA) contribution
The HSA is a fabulous stealth retirement account. Max it out every year, then don’t spend any of it until you are retired. You can save up your healthcare receipts and turn them in later to get reimbursed tax free from your HSA, or you can just wait and use your account to pay for the healthcare costs you will have when you are older.
For 2023 the limit you can contribute to the account is $3,850 for singles and $7,750 for families. Those who are 55 years old or older can contribute an additional $1,000. Remember this is only available to those with a high deductible health insurance plan.
4: Make contributions to your children’s college fund in a 529 account
A 529 plan allow parents, grandparents, and others to save for their children/grandchildren’s college in an account that does not tax the interest as the account grows. Each person can put up to $17,000 a year into each child or grandchild’s account.
You may also take advantage of the five-year rule. This allows you to contribute five years’ worth of gifts in a lump sum and then average the payment out each of the next five years.
For example, you can make an $85,000 lump sum contribution and then no more for the next five years. The IRS will count it as if you made a $17,000 gift every year for the next five years. As the gift tax limitations continue to rise, you can add an additional amount above $17,000 each year to reach the maximum for that year.
5: Make large gifts
You want a great tax write-off, donate money to charity. Now is the time to assess how much money you have at the end of the year and how much you wish to give away. If you are close to the standard deduction, $27,700 for married couples, you could double up your donations and give them every other year and get better tax savings. You would take the standard deduction one year, then itemize the larger deduction the next year.
You also have the opportunity to help your kids by passing on some of your estate early. Each individual may give up to $17,000 to any one individual, such as children, who are not part of a charitable organization without filing additional tax forms. They likely can get a lot more use out of the money now, while they are young, than they will from inheriting the money when you pass away, when they might already be retired.
6: Assess the ability to do tax loss harvesting
If you had an investment that lost money, you can sell it for a loss, invest it in something similar, and take a tax write off for the loss. You can deduct it against anything you might have sold for a gain. You can also use up to $3,000 of the deduction against your earned income.
7: Assess your CME account
Most physicians have an allotted amount of money to use for continuing medical education (CME). If you don’t use it by the end of the year, it is lost, and your CME account will reset for next year. If you still have unspent money, try to spend it now. You might consider buying tickets for the White Coat Investor Physician Wellness and Financial Literacy conference that will take place in February in Orlando, Florida. I will be giving two lectures at that event.
8: Make Roth conversions
Now that you have an idea of what you earned this year and what your tax bracket will be, you can make decisions about Roth conversions. This is converting money you have in a traditional IRA account and moving it into a Roth IRA account. This move will generate taxable income for the current tax year. You can move enough money to increase your taxable income to the top of the tax bracket you are currently in.
Once you move the money into the Roth account, neither the principal nor the interest will ever be taxed again. It also will not have any required minimum distributions when you get older.
9: Be sure to take required minimum distributions (RMD) if you qualify
If you took an RMD last year, be sure to take it again this year. You will pay a penalty if you forget. If you turned 73 during 2023, it’s time to begin taking your RMD every year for the rest of your life. Talk with your CPA to determine how much you need to take from your retirement accounts each year. The RMD will create taxable income.
10: Rebalance your portfolio
If you do portfolio rebalancing, now is the time to assess where you stand. If it was a great year for one of your asset classes, you may need to sell some of your winners and reinvest the money into an asset class that has fallen behind. This should not be done more often than once a year.
11: Redo your budget for next year
Take a look at how you did this year. Did you have to borrow money which increased your debt? Did you end up with a large bank account? If either of these happened, you might think about a change in your budget for next year.
Look at any areas of your budget that are lacking or where you are grossly overspending. Then make the appropriate adjustments to next year’s budget.
Don’t forget that you likely maxed out your social security payments during the year and will have social security taken out of your paycheck again in January. I often get a call from people in my financial makeover coaching program in January wondering why their paycheck is lower than what they got in December of the prior year. It is a big jump to go from not getting any social security deducted from your paycheck in December, back to getting the full deduction from your paycheck in January.
There you have it. Eleven things to consider doing in December to make sure you end the year as clean as possible and start next year with a bang. I hope next year is even better than this one was for you.