The end of the year is fast approaching, making now the perfect time to review your finances and make sure you are in good shape for 2024 and beyond. With some strategic planning and expert guidance, you can take steps to lower your tax burden, grow your wealth, and secure your financial future. This article will explore some of the key money moves to make before December 31st.
Harvesting tax losses
One of the most effective year-end tax strategies is tax-loss harvesting. This involves strategically selling investments at a loss to offset capital gains and reduce your tax liability.
- You can use investment losses to offset capital gains from other investments. For example, if you sold Stock A at a $5,000 profit but sold Stock B at a $3,000 loss, your net capital gain would be $2,000.
- Investment losses can also offset up to $3,000 of ordinary income. Any remaining losses can be carried forward to future tax years.
- For cryptocurrency, you can sell at a loss and immediately buy back the same asset to harvest the tax loss. For stocks and funds, you must wait 30 days before repurchasing to avoid the wash sale rule.
- Work with a financial advisor to run the numbers and identify your best tax-loss harvesting opportunities. Time is running out to execute trades, so act soon.
Tax-loss harvesting is a powerful way to lower your tax bill and put more money in your pocket.
Max Out Retirement Contributions
Before December 31st, be sure to max out contributions to tax-advantaged retirement accounts like 401(k)s and IRAs. Here are the 2022 contribution limits:
| Account Type | Contribution Limit | Catch-Up Limit (Age 50+) |
| 401(k), 403(b), 457(b) | $20,500 | $6,500 |
| Traditional IRA, Roth IRA | $6,000 | $1,000 |
| SIMPLE IRA | $14,000 | $3,000 |
Contributing to these accounts can generate substantial tax savings.
- 401(k) contributions reduce your taxable income for the year.
- Traditional IRA contributions may be tax-deductible, depending on your income.
- Roth IRAs offer tax-free growth. You contribute after-tax dollars now in exchange for tax-free withdrawals in retirement.
Work with your employer to maximize 401(k) contributions via payroll deductions. You generally have until the tax filing deadline in April to fully fund IRAs for the previous year.
Required Minimum Distributions (RMDs)
Once you turn 72, you must start taking required minimum distributions (RMDs) from retirement accounts like 401(k)s and traditional IRAs.
- The IRS requires you to withdraw a certain minimum amount each year based on your age and account balance.
- Failing to take RMDs results in a 50% penalty on the amount not withdrawn.
- For your first RMD, you can wait until April 1 of the year after you turn 72. But for subsequent years, RMDs must be taken by December 31.
- Inherited IRAs also have RMD rules that must be followed. Work with a financial advisor to ensure you are compliant with RMD requirements.
As an RMD strategy, consider using the distribution for a Qualified Charitable Distribution (QCD).
- QCDs allow you to donate up to $100,000 per year from your IRA directly to charity.
- The amount is excluded from your taxable income, resulting in lower taxes.
- To qualify, the donation must go directly from your IRA to the charity by December 31.
QCDs are a tax-savvy way to satisfy RMDs while also giving back.
Roth IRA Conversion
When tax rates are low, it can make sense to convert traditional IRA funds to a Roth IRA. Roth IRAs offer tax-free growth and withdrawals in retirement.
Some things to keep in mind:
- Conversions create a tax bill on the amount converted since traditional IRAs are funded with pre-tax dollars. Do the math to make sure it makes sense.
- Conversions are permanent and cannot be recharacterized.
- Your income affects how much you can contribute directly to a Roth IRA. Conversions avoid those limits.
- Markets are down from all-time highs, so there may be an opportunity to convert at lower values.
Consult with a financial advisor to run the analysis on whether a Roth conversion is right for you before the December 31 deadline.
Tax-Loss Harvesting for Crypto
If you invested in cryptocurrencies this year and experienced losses, tax-loss harvesting can help offset those losses against other capital gains you realized.
- Sell the coins at a loss before December 31st, and then immediately buy them back. This allows you to harvest the capital loss while maintaining your position.
- Be mindful of the wash sale rule. If you buy back substantially identical assets within 30 days of selling at a loss, the tax loss will be disallowed.
- For crypto, the IRS treats each coin as a separate asset, so you can sell Bitcoin at a loss and immediately buy back Ethereum without violating the wash sale rule.
Consult a tax professional to make sure your tax-loss harvesting strategies adhere to IRS rules. Crypto investments add complexity, so expert guidance is key.
Review estate documents
Review and update your estate plan before the end of the year to make sure your assets will transfer according to your wishes in the event of your death. Documents to review include:
- A Will: specifies how assets should be distributed after you pass away.
- Living trust: avoids probate and ensures assets transfer privately per your instructions. Requires more upkeep than a will.
- Beneficiary designations: supersede will instructions, so double check that these are accurate for retirement accounts, life insurance, etc.
- Power of attorney: This gives someone authority to handle finances if you become incapacitated.
- Healthcare Directive: Provides healthcare instructions if you are unable to make decisions for yourself.
Consult an attorney to draft or update legal documents to match your current wishes and life situation. Outdated estate planning can lead to family disputes or assets going to unintended recipients.
Explore Charitable Giving Vehicles
Giving to charity not only benefits important causes but can also provide financial benefits. Discuss options with your financial advisor, such as:
- Donor-advised funds Make an irrevocable charitable contribution to a donor-advised fund. Obtain an immediate tax deduction while recommending grants from the fund over time. It allows you to bundle multiple years of giving into one for immediate tax savings.
- Qualified charitable distributions (QCDs): As discussed earlier, QCDs allow you to donate IRA funds directly to charity to satisfy RMDs in a tax-efficient manner.
- Appreciated stock: Contributing stock you’ve held for over a year avoids capital gains tax that would otherwise be due on the sale of the shares.
- Charitable gift annuities: Make a gift to charity in exchange for fixed annuity payments for life. Annuities provide a partial tax deduction plus guaranteed income.
Get started now, as some donations must be completed by December 31st to count for this tax year.
Make a financial checklist.
As you check off end-of-year financial tasks, keep a checklist to stay organized and ensure nothing falls through the cracks. Track key deadlines and include:
- Tax-loss harvesting trades
- Max out retirement contributions
- Take RMDs and explore QCDs.
- Consider a Roth IRA conversion.
- Crypto tax-loss harvesting
- Review estate plan documents.
- Explore charitable giving.
- Rebalance investment portfolio
- Pay your January bills early to get a tax deduction this year.
- Fund education accounts like 529s.
- Manage capital gain distributions.
- Review and adjust automatic deposits to savings and investment accounts.
The Takeaway
The end of the year offers unique tax planning opportunities to secure your financial life. Take time now to explore strategies like tax-loss harvesting, Roth IRA conversions, RMD planning, and charitable giving vehicles. Reviewing your estate documents ensures your assets flow properly to heirs and reduces family disputes. Meet contribution and distribution deadlines to avoid penalties. Guidance from financial and tax professionals can help ensure you implement the best moves for your personal financial situation, so you can head into 2024 with confidence.
