2023 Year-End Financial Checklist

by: Jonathan I. Shenkman,

At the start of 2023, prior year uncertainty and economic turbulence persisted, which caused concerns and market volatility. However, as we approach the end of 2023, there is cause for optimism. The market has rebounded, economic data indicates a strong labor market, and wages are keeping up with inflation.

While you cannot control the uncertainty and outcome of the economy, market, or the future tax environment, investors can create a well-structured plan to help them achieve their financial goals. Doing so will offer some certainty amidst all the uncertainty.

Below I have outlined 10 financial planning ideas to consider before year-end.

1. Year-End Investment Do’s and Don’ts: Many individual investments have underperformed the overall market this year. Furthermore, even though the S&P 500 is up meaningfully, that return has been driven primarily by just a few large technology stocks.

Do consider rebalancing your portfolio: Given these asymmetric returns across asset classes, this may be a good opportunity for many investors to rebalance their portfolio to ensure their allocation is brought back to its appropriate risk tolerance.

Don’t chase past performance: Remember to stay away from the hot strategy du jour! Every year, there is always some investment or portfolio manager that did phenomenally well. Unfortunately, it’s impossible to know beforehand which strategy or manager that will be. This won’t stop aggressive salesmen from capitalizing on a recent

As I always try to emphasize to my clients, the market moves in cycles. One year’s lucky winners are oftentimes losers in the following years. The key is to stick with a proper asset allocation and plain vanilla investments that will allow you to achieve your goals. Chasing past performance will not work out in the long-term.

Do consider setting up an Investment Policy Statement (IPS): One way to stick to a disciplined plan is by developing an IPS. This document helps define an investors’ goals, risk tolerance, and other considerations to ensure they are on track to achieve their objectives. Most importantly, it will help investors ignore the noise and the slick salespeople trying to sell them something imprudent.

Do assess where your cash is located: Money market yields are paying approximately 5% as of this writing. Investors would be wise to ensure that the cash part of their portfolio is generating income. If you’re not being proactive on this in this environment, then you’re leaving money on the table.

Planning Tip: Evaluate your current financial situation with your advisors to craft an appropriate investment strategy for the coming year. Some factors to consider may include whether you have too much cash sitting on the sidelines, received a large sum this past year, or anticipate a large expense on the horizon that will cause you to withdraw funds.

2. Don’t forget to take your Required Minimum Distribution (RMD): If you are 73 years old, you must take RMDs from your IRA. If you are subject to RMDs and don’t take them out, there will be a penalty. If you don’t need your RMDs to pay your living expenses, it’s worth exploring other options:

Planning Tip: Investors who are 70½ or older, can donate all, or a portion, of their RMD directly to charity via Qualified Charitable Distributions (QCD). QCDs are limited to $100,000 maximum annually per taxpayer.

3. Charitable Giving: When it comes to giving to charity there are a myriad of creative options this year.

Deduction for cash contributions: Under the Tax Cuts and Jobs Act, the deduction for cash contributions directly to charity increased from 50% of AGI to 60%, including for gifts to a donor-advised fund. After the sunset of this Act, this limit will revert to 50%, so donors should consider maximizing their cash gifts today.

Donate appreciated stocks: Some investors may have long held or concentrated stock positions with large imbedded unrealized capital gains. In such a situation, it’s worth considering donating these highly appreciated securities directly to charity, which helps avoid paying capital gains tax. It also allows you to trim a large position, which can help derisk a portfolio.

Utilize a Donor-Advised Fund (DAF): A DAF is an account where you can deposit assets for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and can still control how the funds are invested and distributed to charity. A DAF can be quite useful if you hold a security with no cost basis, a highly appreciated stock, or a concentrated position. In all these scenarios, the tax liability can be circumvented by moving that position to a DAF.

Planning Tip: A DAF may be particularly useful when “bunching” your charitable contributions, which involves donating several years’ worth of charitable contributions all at once, which is done for tax planning purposes. For example, charitable contributions are only tax deductible to those who itemize their deductions. This year the standard deduction is $13,850 for single filers and those married filing separately, $27,700 for those married filing jointly, and $20,800 for heads of household. Bunching donations via a DAF may allow the donor to exceed the standard deduction this year and take the itemized deduction, yet still distribute the funds over the current and subsequent years.

4. Roth IRA conversions: A Roth IRA conversion is the process of transferring retirement funds from a traditional IRA, SEP, or 401(k) into a Roth account. Since a Traditional IRA is tax-deferred while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the converted funds at the time of conversion. It’s important to:

Evaluate your personal tax situation: This strategy may make sense if a saver believes that the postponed tax liability in the traditional account will be more onerous as retirement approaches. For example, if they think tax rates will go up if they retire to a higher tax state or if they will be earning a higher income in the future. This strategy may be particularly interesting for folks who were laid off this year and have a lower income than usual. It’s important to note that if paying the tax bill now is too burdensome, then this may not be a good option for you.

Planning Tip: Roth IRA conversions may be particularly appealing to folks who want to hedge the risk of potentially higher taxes in the future given rising federal budget deficits and the expiration of the current favorable tax rates at the end of 2025.

5. Review your beneficiary designations: Retirement accounts and insurance policies have beneficiary designations that pass outside of one’s will. Therefore, even if you did estate planning, it’s important to review your various beneficiary designations to ensure that your money is passing according to your wishes. Be mindful of:

Changing family dynamics: Did a family member who was a beneficiary on your account pass away this year? Did you want to alter beneficiaries because your family dynamics have changed? It is not unheard of for monies to pass to someone you don’t want, like an ex-spouse, if you never updated your beneficiary designations. It’s worth reviewing your beneficiaries once a year to ensure something like this does not happen.

Planning Tip: In late 2019, Congress passed the SECURE Act, which eliminates the “stretch” option on distributions from inherited retirement accounts. Under the new rules, most non-spouse beneficiaries are required to fully distribute inherited account balances by the end of the 10th year following the year the account owner dies. Conducting annual beneficiary reviews is a great way to identify clients whose estate plans have been impacted by this change.

6. 529 College Savings Accounts: A 529 is a tax advantaged college savings account that may provide an opportunity for immediate tax savings if you live in one of the 20 or more states offering a full, or partial, deduction for your contributions to the home-state 529 plan. Most states require you to invest in the in-state plan to receive the deduction for your contributions. Though there are several states that are considered tax parity states, meaning you can use any state’s 529 plan to receive the deduction. Here are a few 529 account considerations:

Annual Gift Exclusion: Make sure to use your Annual Gift Tax Exclusion. You can give up to $17,000 a year gift tax free per person, which may be a nice way to tax efficiently contribute to a loved one’s 529 account. The annual exclusion recycles on January 1, so if you haven’t already used your 2023 gift allowance, please do so immediately to avoid losing it.

“Superfunding”: In this strategy, you can spread a tax-free gift to a 529 account over five years for gift tax purposes. A married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $170,000 to a 529 plan for each child and, with the election, not run into gift tax problems.

Planning Tip: 529 accounts are not factored in as assets for the purpose of determining federal financial aid under the FAFSA process if held by grandparents, as opposed to parents. This may be a wonderful way for grandparents to save for their grandkids’ higher education without jeopardizing their ability to qualify for financial aid.

7. Tax loss harvesting: Tax-loss harvesting is the process of selling securities at a loss to offset a capital gains tax liability. When reviewing your portfolios, determine if there are opportunities to strategically generate losses to offset other gains. For example, using a tax-swap strategy for mutual fund holdings allows you to realize a tax loss while retaining essentially equivalent market exposure. The key is that the funds are not “substantially identical.” A strategy around the “substantially identical” rule may include using an ETF/mutual fund at different fund families that track slightly different indices. A common example is swapping out an S&P 500 fund at one company and buying a total US market index fund at another fund family. Other factors to consider:

Minimizing short-term capital gains: This strategy may be used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains.

Donate cash proceeds from the sale of stocks that are at a loss: This is particularly relevant in a year like 2023 when some areas of the stock market have dropped in value. In this strategy, investors benefit from recognizing a loss by selling a stock that went down in value. The loss can be used to offset any capital gains for the year, or it can be used to offset up to $3,000 of your ordinary income. Additionally, you will receive a deduction for your cash donation from the proceeds of this sale.

Planning Tip: It is generally a poor decision to sell an investment, even one with a loss, solely for tax reasons. There must be an investment strategy behind the sale. As I say frequently to tax conscious investors: “Don’t let the tax tail wag the investment dog.”

8. Employer retirement plans: Company retirement plans are one of the best ways for folks to save for their future. Everyone should review the following items regularly:

Assess contributions made this year: Review how much money you contributed to your employer retirement plan this year. If you are financially able, it’s worthwhile to max out your 401(k) or 403(b) if you have not done so already. In 2023, contribution limits are $22,500 before any company match or $30,000 if you are 50 or older.

Be mindful of next year’s contribution limits: For 2024, the contribution limit has increased to $23,000. Catch-up contributions will remain the same, at $7,500, for those 50 and over. Don’t forget to make the required tweaks within your plan to ensure you will make the maximum contribution for the upcoming year.

Roth vs Traditional: The rule of thumb is if you think you may have a high-income year, then a traditional IRA makes more sense. If you anticipate a low-income year, then a Roth IRA makes sense.

Review your investment lineup and portfolio: Determine with your advisor if it makes sense to make any changes. This is especially applicable if your firm recently switched 401(k) providers, if you rolled over an old 401(k) into your IRA, or if you are approaching retirement. In any of those scenarios, tweaking your investments may make sense.

Consolidation of old accounts: Do you have old retirement accounts still held at a previous employer? It rarely makes sense to have old retirement accounts scattered at various institutions, especially old employers. It makes financial planning, managing the assets, and monitoring your progress unnecessarily difficult. I would highly recommend consolidating those assets today into an IRA today to keep your assets organized.

Planning Tip: It’s common for business owners to neglect retirement planning for themselves given the rigors of running their business. Business owners without retirement plans may easily establish a SEP IRA or SIMPLE IRA. Alternatively, it may make sense to upgrade to a 401(k) plan that can offer more flexibility and customization to meets their needs. A retirement plan can provide a foundation for a secure future, and it can also assist in attracting and retaining good employees.

9. Budget expense goals for the coming year: It’s always important for investors to assess their expenses and plan ahead for the future. Given the challenging economic backdrop, this is even more important today than in previous years. Be sure to review:

Cash Flow FLOW +0.1% Management for Retirees: Retirees must evaluate how much cash they will need to live in the year ahead and work with their financial advisor to ensure they are able to meet their cash flow needs.

Mitigating sequence of returns risk: It’s important to have adequate cash in your rainy-day account. Typically, three to six months of expense money is a good rule of thumb for those who are working. However, retirees should target a higher cash cushion to sufficiently mitigate sequence of returns risk, which is experiencing lower or negative returns early in retirement when withdrawals are made from an investment portfolio. The order, or the sequence, of investment returns can significantly impact your portfolio’s overall value and, and consequently, your ability to maintain your lifestyle later in retirement.

Planning Tip: While the US market is up, many other areas of the global market have not performed as well. Therefore, it’s important for retirees to reassess their “safe withdrawal rate” from their investment portfolio. Many financial advisors use 4% as the safe percentage of money an investor can withdraw from their nest egg every year. It’s worth reassessing that number every year based on personal circumstances and market performance.

10. Income tax planning: Consider utilizing tax projections to help lower your tax bill in the future. Projections are most impactful for people who have control over the timing of their income, like a business owner.

Start with last year’s tax return: Use your income and deduction information from your last tax return and adjust for anything you know about the current year, such as changes in income, tax rates, and potential deductions. Then calculate what your taxes would be based on those conditions. The more you know about your current year’s finances, the more accurate the projection will be. That’s why it’s important to wait until later in the year to run a projection.

In general, year-end income tax planning often involves trying to accelerate deductions and defer income while being sure to take advantage of lower marginal tax rates and avoid income bunching in future years.

Planning Tip: It’s important to understand what opportunities are available based on your income. For a higher income year, you may want to consider maximizing contributions to tax-advantaged accounts, accelerating income tax deductions, and tax-loss harvesting. On the other hand, opportunities to consider in a lower-than-usual income year may include converting pre-tax assets to a Roth IRA and proactively taking distributions from your IRA.

Final thought: A good reminder after reviewing a list like this is personal finance is PERSONAL. The goal of investing and financial planning is not about how to achieve the best return or the most optimal tax strategy. Rather, it’s about being able to reach your goals, while allowing you to sleep at night. Striking this balance is different for everybody. Hopefully some of the aforementioned ideas can help you achieve that level of serenity in your financial life.

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