Year-end considerations for your financial strategy

Daniel Ladd
Senior Analyst, Client Needs Research

The markets have seen their share of ups and downs in 2023, with banking and inflation concerns in the spring transitioning to strong gains in the summer. But there is still some economic and market uncertainty as we head toward year-end. One lesson from this past year is that it’s important to focus on what you can control. This year-end checklist highlights actions you can take to help keep your financial strategy on track.

If you are considering any of the following actions or have any questions, check with your financial advisor to see if a plan of action is right for you. Since our recommendations are driven by what’s most important to you, your financial advisor can provide more direction and clarity about your best course of action. In addition, since many of the items below also involve taxes, be sure to discuss with your tax professional in addition to your financial advisor.

1. Year-end review

• Self-assessment — As 2023 ends, how do you feel about your financial situation? Did you meet your yearly goals or make progress toward your long-term goals? Or maybe your goals changed this year, or a major event shifted your financial outlook. Talk with your financial advisor to help ensure your goals, time horizon and strategies are up-to-date and incorporate any new life events.
   
• Assess and estimate your tax situation — It’s important to understand your tax situation before the year closes. Do you have any large capital gains or losses this year? Will you have more interest income due to higher interest rates? What do you anticipate your marginal tax rate to be? Answering these questions can help you formulate strategies that can help you reduce your tax bill while meeting your financial goals. Speak to your tax professional and financial advisor to better understand your 2023 tax situation.

2. Year-end tax ideas

• Tax loss harvesting — Recognizing losses on the sale of investments can help you offset larger gains through the year, including capital gains distributions. In addition, losses can offset $3,000 of ordinary income and then be carried over to offset future gains in 2024 or later.
   
• Required minimum distributions (RMDs) — Generally, anyone age 73 or older must take an RMD for 2023 to avoid a 25% penalty on the amount not taken. If you turned 72 in 2022 (73 in 2023), you’re subject to the rules that were applicable in 2022. If this applies to you, your RMD deadline would be Dec. 31, 2023. However, if you turn 72 in 2023 (73 in 2024), your first RMD is due April 1, 2025. If you do not need your RMD, you could consider other strategies, such as a qualified charitable distribution (QCD), outlined below.

3. Making progress toward your goals

With higher interest rates, money has flowed into short-term CDs, but these may not be the best solution for your long-term goals. Consider how you can continue to make progress.

• Retirement plan contributions — Consider maxing out on contributions to your retirement plan and/or IRA to make further progress on your retirement savings. Traditional retirement accounts typically offer a tax benefit on contributions, but qualified withdrawals are taxable. Traditional IRA tax benefits depend on your income and whether you are covered by an employer plan. Alternatively, contributions to Roth accounts are made after tax, but qualified distributions are tax-free, offering the potential for tax-free income in retirement. Roth IRA contributions may be limited by your income, so consider whether a backdoor Roth IRA strategy is appropriate for you. If available, you could consider a mega backdoor Roth strategy from your employer plan if you’ve maximized your employer plan contributions.
   
• Roth conversions — If your marginal tax bracket is lower than usual, or you expect it to be higher in retirement, consider converting funds from a pretax retirement account to a Roth account. Because a Roth conversion is typically a taxable event, speak to your tax professional and financial advisor to see if this is right for you based on your current and future tax and retirement situation.
   
• Flexible spending account (FSA) — FSAs are “use it or lose it” accounts, meaning you may lose unspent funds at year-end. If you have been contributing to an FSA and have funds remaining, understand your employer plan’s deadlines for incurring expenses and submitting claims. Do your best to use those funds before the deadlines so you’re not forfeiting them back to your employer.
   
• Health savings account (HSA) contributions — Consider maximizing your HSA contributions for yourself and your family, especially because (unlike an FSA) unused balances carry over from year to year. Eligible contributions provide an income tax deduction, any earnings growth is generally tax free and distributions will ultimately be tax-free if used for qualified medical expenses. These “triple tax” benefits make an HSA an incredibly valuable account for paying health care expenses in retirement.
• 529 plan contributions — With this plan, distributed amounts used for qualified education expenses are not subject to federal income tax. Contributing to this plan may also provide you a state tax benefit. In addition, there are multiple options for unused 529 balances if the beneficiary doesn’t need the entire balance.Tax issues for 529 plans can be complex. Please consult your tax advisor about your situation.

4. Maximizing your impact

• Charitable donations — Consider “bunching” two to three years’ worth of charitable donations, which may enable you to itemize your deductions and maximize your tax benefit. A donor-advised fund can be a great way to accomplish this while amplifying your charitable giving impact.
   
• Qualified charitable distributions (QCDs) — If you are 70½ or older, you may qualify to exclude up to $100,000 from your adjusted gross income by donating to a qualified charity directly from your IRA. Amounts donated up to the annual limit satisfy (in part or in whole) your current annual IRA RMD, while providing a reduction in taxable income regardless of whether you itemize your deductions.
   
• Annual gifts — In 2023, you can make a $17,000 gift per person per year without using any of your federal estate and gift tax exemption. If you’re married, you and your spouse can elect to split the gifts, allowing you to gift up to $34,000 per person per year. You can also make payments for tuition and medical expenses directly to providers on someone’s behalf without relying on the annual exclusion or lifetime exemption.

5. Monitoring your long-term strategy

The following actions don’t have specific annual deadlines, but they can help you monitor your progress toward your long-term goals.

• Your comfort with risk — The right investment strategy is not just one that helps you meet your goals, it’s one you can stick with in good times and bad. Your comfort with risk helps your financial advisor design a portfolio to do just that. That’s why it’s important to revisit your risk tolerance with your financial advisor to help ensure it stays up to date and aligned with your investment strategy.
   
• Portfolio balance and diversification — While your portfolio was set up to match your objectives and goals, ever-changing economic conditions mean your portfolio needs reevaluation. In addition, proper diversification across your stocks and bonds (e.g., large versus small, domestic versus international) is also critical. Your financial advisor can help ensure your portfolio is still aligned with your goals. Keep in mind that you could employ some of the above-mentioned actions (making additional contributions, tax-loss harvesting and RMDs) to help address potential rebalancing and diversification opportunities.
   
• Expecting the unexpected — During volatile economic conditions, it can be hard to foresee what happens next. The same can be said for life itself. An integral part of your financial strategy should be to plan for unexpected twists and turns. Are you adequately covered with insurance? Consider homeowner’s/renter’s, auto, health, disability, life, long-term care or an umbrella policy. Do you have a suitable emergency fund? We recommend having three to six months’ worth of total expenses set aside for emergency expenses.
   
• Reviewing your beneficiaries, asset titling and estate plan — Do your beneficiaries and asset titling still align with your estate plan? Will your assets pass according to your intentions? Generally, beneficiary designations on retirement accounts, brokerage accounts and certain types of joint accounts will supersede your will. It’s important to follow your attorney’s recommendations on how to title your assets appropriately and keep up-to-date beneficiary designations, considering primary and contingent beneficiaries.

Deadlines to help you

Please note, many of the above actions must be completed by certain dates. It may take time to process requests and changes, so acting sooner rather than later is advised.