My Year End Financial Housekeeping Routine

I have a routine that I undergo each December to be sure the year ends well financially. With the December 31^st deadline approaching I don’t want to miss any of the things that must be completed before year-end.

There are many things to consider and I don’t do everything that people talk about doing at the end of the year. Some of them do not pertain to my situation and everyone has a slightly different financial picture. So look at what I do and take the things you can use and keep the other things in the back of your mind as you might need them later.

Following is my routine for ending the year well.

Estimate my actual income

Throughout my career in medicine, I had a variable income. I never knew how much I would make each year. So, each January I made my best guess of what my income would be for the year, left about 15% of that on the table for a year-end bonus, and divided the remainder by twelve to come up with my monthly salary. This gave me a steady income every month so I could make a reliable spending plan.

On December 31^st of each year my medical business distributed the rest of the money the business had made for the year to its physician owners using a calculation based on both fixed costs and production. Knowing this extra check would be arriving, I estimated what my year-end bonus would be so I could be sure all the financial issues were handled correctly. I then made plans for how the money would be used before the check arrived and was burning a hole in my pocket. 

This year-end estimated income is the first item in my routine because everything else is based off this number. When I made my estimate at the beginning of the year, it was based on the results of the prior year and any changes I could foresee. By December I have real data for eleven of the twelve months and only need to make an estimate for the final month. Now I will be very close to the actual total income for the year.

Now that I am retired, I still have a variable income and need to go through the same process of determining my actual income for the year in order to complete the next steps.

Maximize my retirement plans

Knowing my estimated income for the year I am able to review the amount deposited into my retirement plans so far during the year and make any final payments to get them fully funded for the current year. I also want my health savings account (HSA) to be fully funded. I can put $7,300 into our family HSA as well as a catch up amount of $1,000 since I am over age 55. I need to inform the office manager of any changes or additional deposits I want her to make from my bonus check to be sure I maximize the money invested with pre-tax dollars.

If I haven’t maxed out my wife and my IRAs, now is the time to do so. I can put in $6,000 for each of us as well as an extra $1,000 each since we are both over age 50. That comes to $14,000 for 2022. Based on my income for the year I can decide between Roth, traditional, or back door Roth IRA deposits. These contributions are due by April 15^th of the next year, so I can wait for the bonus check and make the deposit in January to complete this task if needed.

For 2023 the IRA deposit maximum will be going up to $6,500 per person. We could fund our 2023’s IRA deposits in January with our 2022 bonus by dropping another $15,000 into our IRAs in January if we want.

Another retirement plan decision to make involves converting traditional IRA money into Roth IRA accounts. Depending on my income for the year, it can be beneficial to fill up a lower income tax bracket, if possible, with money I am converting to my Roth IRA. If I am already in the highest tax bracket, this may not be helpful for me. You do this by taking distributions from a traditional IRA that are taxable, and moving your income only up to the income point that changes your tax bracket. 

An example of this is if my final taxable income as a married/filing jointly household is $150,000 for 2022, then I am in the 22% tax bracket if I make any IRA conversions. I can convert $28,150 from my traditional to my Roth IRA and still stay in the 22% tax bracket. If I convert any more than that, the additional funds will be taxed at 24%. If I am good with paying 22% now for the conversion, then I should fill up that 22% tax bracket.

The year I retired, I messed up my income tax calculation and missed a great opportunity to convert money from my traditional IRA to a Roth IRA without paying any taxes. I was surprised to learn the following April that I owed no taxes for last year so all the taxes I already paid were being refunded. Had I known this before December 31^st, I could have converted money to Roth IRAs without paying any taxes. This was an incredible missed opportunity. Converting traditional IRA money into a Roth IRA must be done before December 31^st so check with your CPA before year-end, so you don’t miss your window of opportunity to make this conversion.

Determine my income tax bill

At the beginning of the year, I set an amount to be taken from my monthly salary to pay my full income tax bill by the end of the year. I used the safe harbor tax laws to be certain I would not face any underpayment penalties since my income varied. 

The following three options are available for a safe harbor. One, pay at least 90% of the tax owed for the current year. Two, pay at least 100% of the amount of taxes owed for the previous tax year. Or three, have a final tax bill that owes less than $1,000.

Because my income was variable, the only guaranteed safe option was to always pay 100% of last year’s tax bill. So, by the end of December I have already paid the amount I owed the prior year, so the IRS will not charge me any penalties, even if the current year was a banner year and I owed a lot more taxes.

Now that I calculated my estimated income for the year, I can compare that with the taxes I have already paid. If I will owe a significant amount more than I have paid, I ask the payroll officer to take it out of my bonus. Even though I will not owe a penalty for the additional taxes owed, I do not want a big tax bill in April so I pay it out of my bonus before I get the check. 

I have many coaching clients who have gotten into trouble when they kept their tax money in order to earn a little interest, thinking they would pay the bill in April when it was due. Then something happens in February, like they wanted a new car and saw all that money just sitting in their account, and they spent the money that was needed to pay their taxes. When April comes they owed money they don’t have. Make sure to never get in a position that you owe money to the IRS, for they are relentless when it comes to getting their money. 

Estimate year-end net bonus

With our retirement plans full and our taxes paid, the rest of the money is ours to do with as we please. I calculate what this amount will be and then together my wife and I make a plan for its use. It is very important we do this before the bonus arrives, while we are thinking rationally. Once the money is in my hands, without a plan, I am likely to just spend it. The next three sections are included in making our plan.

Make donations

One decision is what portion of our income we will give to others. Since I know my estimated income for the year I can calculate our tithe. A tithe is the first tenth of your earnings for the year. 

During the year we tithe to the church monthly, but the amount was based on a guess of our annual income. Now we can dial it in and give our church the balance of the tithe we owe, if any. 

Next, we consider other organizations we wish to support. Organizations that we gain benefit from, like the Christian radio station we listen to; organizations we have been involved with, like Crown Financial Ministries; and others that are close to our heart, like the Boys and Girls club, are among the organizations we donate to at year-end. We also support missionaries, but those gifts have been given throughout the year. Sometimes, however, a missionary may have a special need we wish to fill as a Christmas gift.

Once we have completed our charitable giving, we think about reducing our estate. My wife and I can each pass on up to $16,000 to each of our children and grandchildren annually without an estate or gift tax. This will reduce our estate taxes after we die and allow our kids to use the money now that they would have inherited later anyway. We feel they can gain a much greater benefit by receiving their inheritance in their 20s, 30s and 40s than they will in their 60s or 70s, after they have themselves retired.

Upcoming expenses

Now we consider any big items we are thinking about purchasing in the near future. Will we be replacing a car this year, buying a boat or a motorhome, or maybe we plan to take a big vacation? Since we do not wish to go back into debt to acquire things, we make a plan to save up for the expenditure before the cash outflow will occur.

Investments

Finally, if there is anything left over, we will decide where to invest the money. Currently, we already have invested in the stock market with our retirement plans and our real estate is paying off its own mortgages, so we really don’t need more money invested. Anything we do invest now is a bonus. This money went to debt reduction when we were younger, or principal reduction on investment real estate mortgages later, or any other investment we wanted to make. 

The end of the year is also a good time to consider tax loss harvesting if you have stocks owned outside of retirement plans. Since I own all my stock mutual funds inside of retirement plans, I don’t do any tax loss harvesting. 

That is how I wind up my year using my bonus money to shore up whatever is needed. Now that I am retired, I use the same routine since my income is still variable. Do you have a year-end financial housekeeping routine? If you don’t, start by using mine and modify it to fit your family’s needs.