Financial Moves You May Need to Make Before Year-End

As we approach the end of the year, it’s crucial to make informed financial decisions to optimize your financial well-being. While some decisions can be postponed until the tax filing deadline in April, others require immediate attention before the new year begins.

Maximizing Employer-Sponsored Retirement Plan Contributions

Employer-sponsored retirement plans, such as 401(k)s, allow you to make pre-tax contributions, reducing your taxable income and potentially lowering your tax burden. The deadline for 2023 contributions is December 31, and you can contribute up to $22,500 ($30,000 if you’re over 50).

If you haven’t reached the contribution limit, consider increasing your contributions to maximize the tax benefits. If you do have to make a last-minute payroll adjustment, you probably want to coordinate with your human resources department to ensure the contribution change will impact the account before year-end. But if you are short, you can maximize your contribution until you hit the limit.

Harnessing Tax Loss Harvesting

Tax loss harvesting involves selling investments that have declined in value to offset any capital gains from investments that have increased in value. This strategy can reduce your tax liability and improve your overall portfolio performance.

While the ideal time for tax loss harvesting is typically November (as explained last week in Harvest Your Losses in November), you still have time to make adjustments until the end of the year.

Considering Roth IRA Conversions

Although you can contribute to a 2023 Roth IRA until April 15, 2024 (next year’s filing deadline), if you want to convert a traditional IRA to a Roth IRA, you need to do it before the year ends. There are a number of situations in which it may make sense to do such a conversion.

For a conventional IRA, the contributions can be tax protected in the year they are made. But then the withdrawals will be taxed as income. For a Roth IRA, the contributions aren’t tax protected, but the withdrawals are free of state and federal income taxes.

One case in which a conversion may make sense is if you expect to move to a state with a higher income tax rate after retirement. However, if you expect to move to a state with a lower income tax rate, or if you expect your tax rate to be substantially lower when you begin to make withdrawals, it will probably be better not to convert.

Utilizing Flexible Spending Accounts (FSAs)

FSAs allow you to set aside pre-tax dollars for healthcare expenses. However, these funds are “use it or lose it,” meaning you forfeit any unused funds at the end of the year.

Before December 31, review your FSA balance and consider purchasing eligible healthcare expenses, such as medications, bandages, or eyeglasses, to fully utilize your FSA funds.

Notably, if you instead have a Health Savings Account (HSA), this account rolls over year after year, and you can pull funds from your HSA at any time to pay for medical expenses.

Strategic Charitable Contributions

Charitable contributions can provide tax deductions, but timing is essential. Consider whether making a significant donation in this tax year could increase the value of your deductions beyond the standard deduction threshold. Alternatively, you could split your contributions between this year and next to maximize tax benefits over both years.

Remember, these are general guidelines, and it’s always advisable to consult with a tax advisor to determine the most suitable strategies for your specific financial situation.

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