12 Financial Steps to Take Before the End of the Year

Maura Schauss |

By Maura C. Schauss, CFP® at Washington Wealth Advisors

The end of the year is the perfect time for goal setting, New Year’s resolutions, and renewed hope for the future. It’s also the perfect time for year-end financial planning. You don’t have to wait until January 1st to get your financial house in order. Here are 12 steps you can take to set yourself up for success going into 2023.

1. Maximize Your Retirement Savings

Before the end of the year, be sure to max out your retirement contributions. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s which allow you to contribute up to $20,500 annually in 2022 ($27,000 if over age 50).

These contributions are automatically deducted from your paycheck and won’t show up as part of your annual income, so the more you can maximize your contributions during the year, the less taxable income you will have come April 15th. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket.

2. Contribute to a Health Savings Account

If you’re enrolled in a high-deductible health plan, consider contributing to a health savings account (HSA) before the end of the year. HSAs offer triple tax savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for medical expenses.

The 2022 IRS contribution limits for HSAs are $3,650 for individuals and $7,300 for families. If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You technically have until April 15th for your contributions to count for the previous year’s tax return, but we recommend making contributions by December 31st to ensure you don’t forget.

3. Contribute to a Traditional IRA

Contributing to a traditional IRA is another year-end strategy to reduce your AGI if your income is within certain limits. By contributing pre-tax funds, you can effectively reduce your current-year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. The 2022 contribution limit for traditional IRAs is $6,000 with additional $1,000 catch-up contributions for individuals over the age of 50. Like HSAs, contributions can be made until April 15th for the 2022 tax year, but the sooner they are made, the less likely you are to forget.

4. Consider a Roth Conversion

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits.

To get around this threshold, consider a Roth conversion. Using this strategy, you will pay tax on money contributed to a traditional IRA, thereby converting it into a Roth. If you have earned less income in 2022, or your traditional IRA balance has taken a hit due to recent market volatility, a Roth conversion may be a great opportunity for your specific situation. Converting to a Roth also allows your money to grow tax-free for as long as you’d like.

5. Don’t Forget About RMDs

If you are over the age of 72, you are required to take minimum distributions from all of your retirement accounts (except Roth IRAs). In the year in which you turn 72, you have until April 1st of the following year to take your RMD. Every year thereafter, however, you must take the distribution no later than December 31st.

If you haven’t yet taken your RMD for 2022, be sure to do so. If you don’t, you will face a 50% penalty on the distribution you should have taken. If you don’t need your RMD money to live on, consider donating the funds to a worthy cause, which could also lessen your tax burden for the year. To calculate your RMD, use one of the IRS worksheets.

6. Donate to Charity

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a great way to give back at the end of the year while also minimizing your tax bill. With the higher standard deduction, you’ll need to make sure your total itemized deductions for the year exceed $12,950 for an individual filer, and $25,900 for married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.

Donor-advised funds are another option that allow you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.

7. Invest in a College Savings Plan

If you have children or grandchildren in your life, contributing to a 529 savings plan is an excellent way to jump-start their college savings and give a thoughtful holiday gift that will last longer than a few months.

This type of educational savings plan was created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan where it grows tax-free. When the money is later taken out for qualified expenses, there are no federal taxes due. You may qualify for a state tax deduction on your contribution if you invest in the state’s plan where you reside.

In 2022, you can give up to $16,000 (or $32,000 if gift-splitting with a spouse) per 529 account gift-tax-free. There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum, meaning you could give up to $80,000 (or $160,000 if gift-splitting) entirely gift-tax-free!

8. Review Your Workplace Benefits

The end of the year is a great time to review your workplace benefits and take advantage of any remaining sick days, vacation time, or deductibles before they reset.

Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, be sure to take advantage of a last-minute vacation or a staycation before the end of the year.

Similarly, if you’ve hit your deductible for the year, now would be a good time to incur additional medical expenses before your deductible resets in 2023. Take the time to get that dental work, blood test, or other medical procedure you’ve been putting off. Dental plans in particular often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.

9. Use Up Your Flexible Spending Account

Unlike HSAs, flexible spending accounts (FSAs) have limits on how much you can carry over from year to year. Because of that, you’ll want to use up as much of your FSA dollars as possible by the end of the year. In 2022, you are only allowed to carry over $570 going into 2023. Also, keep in mind that the COVID-19 relief measures that allowed taxpayers to carry over their entire FSA balance are no longer in effect for 2022.

That being said, check the restrictions on your account to see what the money can and cannot be used for, and take care of any needs you may have as allowed by your plan.

10. Consider Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return. Given the unprecedented market volatility throughout 2022, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. Talk with your advisor about potentially harvesting your losses and if it makes sense for you. Any appropriate actions need to be taken by December 31st.

11. Make the Most of the Annual Gift Tax Exclusion

If you’re in the giving spirit as you head into the new year and you want to reduce your taxable estate, consider making gifts up to the annual exclusion amount. In 2022, individuals can give to each recipient (and to an unlimited number of recipients) up to $16,000 and married couples can give up to $32,000 without triggering gift tax. Not only that, but the beneficiary of your gift will not have to report it as income. This is a great way to spread your wealth amongst family and friends.

12. Review Your Asset Allocation & Invest With Impact

The end of the year is also a great time to review your asset allocation strategy and incorporate ESG and impact investing if desired. Given the dramatic market volatility and historic levels of inflation over the last year, it’s crucial to evaluate your investments and make sure your portfolio is properly diversified. It should also be tailored to your specific risk tolerance level, ensuring you earn enough returns to keep up with inflation but you’re not overexposing yourself to risk.

If you are interested in using your funds to support environmental, social, or governmental issues (ESG), you can also consider impact investing as a way to earn returns while also promoting change on causes you care about.

Jump-Start Your Finances for 2023

Your financial well-being doesn’t have to wait until 2023. If you’re ready to take some of these steps before the end of the year, please reach out to us! At Washington Wealth Advisors, we are dedicated to helping our clients make the most out of their finances, and we can help you navigate these steps and more. Call our office at 703.584.2700 or email clientservices@washingtonwealthadv.com to get started today. You can also click here to schedule a meeting with us..

 

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