Your Financial Checklist After a Volatile Year
By Frank Cornett, CFP®, Senior Client Manager
The holiday season is rapidly approaching, with turkey, apple pie, gifts, and stressful Christmas shopping right around the corner. I remember late nights spent coupon hunting with family after Thanksgiving dinner, scouring the papers and meticulously planning purchases at each store for Black Friday. Now, as an adult and financial professional, I see that it is equally important to take the time to make a list (and check it twice) of my end of year financial tasks.
Here are eight financial “to-do’s” to complete before December 31st:
Tax Loss Harvesting and Rebalancing
You can benefit from selling an investment at a loss to offset gains, with the potential to deduct up to $3,000 of your taxable income. Years like 2022 offer plenty of opportunities to sell assets and “harvest” losses, saving tax dollars that can be re-deployed to rebalance and re-invest your portfolio. However, be aware of the following:
Short-term gains on an investment held less than one calendar year are taxed at a higher rate. The “wash sale” rule states that if you sell a security at a loss, but purchase another “substantially identical security” within 30 days before or after, the IRS will consider that a “wash sale” and will not allow the loss deduction.
With all strategies, consult your tax professional and your financial advisor to avoid penalty or unwanted tax liability.
Retirement Plan Contributions
While contributions to Roth and traditional IRAs can wait until Tax Day of the following year, your 401(k), 403(b), or other employer sponsored retirement plan contributions end on December 31st. Contributing more to your employer sponsored plan is an excellent way to reduce taxable income or get more money into your Roth IRA (usually tax-free on withdrawal after age 55). If you anticipate receiving a holiday or year-end bonus, consider earmarking as much as you can towards your retirement savings, especially if your company offers a matching contribution.
Required Minimum Distribution (RMD)
An RMD is a taxable distribution that the IRS requires you to take from your IRA if you are over the age of 72. The amount is based on IRS-generated life expectancy tables. If you have inherited an IRA from a loved one, you are required to take a distribution within ten years of the decedent’s passing. Your current age and the balance of the account also play roles in determining your IRA distribution. Don’t forget to plan for related taxes!
Charitable Giving
To-do #1 focuses on accounts with losses to capture, but what do you do with the stock or fund holdings that have appreciated over the years? Instead of writing a check to your chosen 501©(3) organization(s), re-deploy those dollars into your portfolio and consider donating an appreciated security instead. The taxes owed on the gain of the holding will be forgiven, and the donation will help a charitable organization gain a valuable asset. These donations also qualify for income deductions if you itemize deductions on your tax return.
Under the ruling for Qualified Charitable Distributions, donations made directly from your IRA (over age 70 ½) to a charitable organization are non-taxable events. This includes your RMD after age 72.
Roth Conversions
New retirees often have lower income before they start taking Social Security or other pension income. Roth conversions are considered taxable, but you may benefit from lower tax rates today versus tax liabilities tomorrow.
Open Enrollment
Most companies begin their open enrollment periods (when employees can select or change their benefits for the upcoming year) in the final quarter of the preceding year. Check with human resources at your employer to receive open enrollment information.
If your employer offers a flexible spending account (FSA), you may forfeit any unused FSA funds after December 31st, so year-end is a great time to get that annual checkup.
Personal Life
Though a sensitive topic, dedicate time to updating account beneficiaries. Estate planning is a pillar of financial wellness and should not be overlooked. Take the time to evaluate goals and wishes for your property if the unexpected were to happen.
Set Goals for the New Year
Many of us make New Year’s resolutions, and financial resolutions should be included! Take the time to evaluate any bonuses, raises, or promotions and incorporate those changes into next year’s budget. Set specific and attainable savings goals in addition to contributions to your retirement savings.
At Innovest, we hope you enjoy this holiday season! Let us know how we can help you achieve your financial goals and set you up for long term success.