Year-End Financial Planning Tips

The end of the year is a good time to make sure you’re tracking toward your financial goals. By making small adjustments today, you could find savings in the short-term, improve your long-term financial outlook, and gain the confidence of knowing your finances are squared away. In this guide, we present several different areas to consider.  

Finances for the Year as a Whole

Did you have a good or bad year? This past year, did you come up short several times and need to scramble to find funds? Or, maybe you were on the opposite end: you were frequently surprised at how much money was in your savings account. Either way, if your cash flow didn’t match your expectations, and there’s not a change expected in the upcoming year, you’ll want to adjust—either by spending less through lifestyle changes, or by finding a more effective way to save (or invest) your excess funds.

Check your emergency fund. Did you use it this past year? If so, have you replenished it? Make sure that the funds you have in case of emergency are at least 3 months, ideally 6-12 months of expenses. And put them in an interest-bearing account, so they have an opportunity for growth.

Review your insurance costs. When was the last time you compared prices on your homeowner’s insurance and car insurance? If you have an umbrella  policy, are you bundling it in as well? If your premiums have crept up without you doing anything about it, consider talking to an independent insurance broker about the best options available to you.

Those Around You

Review your Will and Estate Plan. When was the last time you looked at these documents? Have you since moved states? Has your relationship status changed as it relates to anyone currently named in your documents? Are your children now much older? What about estate tax laws? Have those changed since you developed your plan? If it’s been a while, review these plans with a trusted lawyer.

Double-check your beneficiaries. Every financial account you have allows you to have a named beneficiary. By naming someone, you make the transfer of funds much easier, should the worst happen. Have you named anyone? If not, start doing it. If yes, double-check that the person named is still who you’d choose—many people go a decade or more without reviewing their beneficiaries. 

Life and disability insurance. Who are your dependents? Has the level at which you need to protect your loved ones changed? These are the keys with life insurance. With disability insurance, you usually have access to basic coverage through your employer—with the option to increase coverage by paying a monthly premium. As your open enrollment period comes, look into whether you have the right amount of coverage.

Sunsetting of the TCJA

The 2017 Tax Cuts and Jobs Act (TCJA) has many provisions that are scheduled to sunset at the end of 2025. Some of the most notable sunset provisions include:  

The federal lifetime gift and estate tax exemption is $13.61 million (doubled for married couples). This historically high exemption is set to decrease to $5 million, adjusted for inflation, in 2026. There are strategies that currently exist to help maximize your use of the exemption before 2026, but you must start those conversations now. 

Unless Congress extends the TCJA or makes other changes, the top Federal tax bracket for individuals, estate and trust income will increase from 37% to 39.6% in 2026. 

While it’s possible some changes could happen sooner, we don’t anticipate that in the short term. 

Tax Planning

To optimize your tax strategy, you’ll want to make your moves before the year ends, so that when you file in the spring, you can take advantage. There are several things to consider.

Charitable contributions. If you’re planning on itemizing your deductions, you should make your charitable contributions before year-end. In certain cases, it may be more beneficial to prefund or “bunch” charitable contributions into a single tax year as opposed to spreading out donations over several years. “Bunching” is done to itemize your deduction in the year of the gift and take the standard deduction in following years. 

Funding retirement accounts. Are you funding your retirement at the level you want? If you need to add more to your 401(k), make adjustments in your auto-deduction now. Similarly, if you have an Individual Retirement Account (IRA), be sure to fund it before year-end so you can reduce your taxable income. The 2024 contribution limit for 401(k)s is $23,000 with those aged 50+ allowed an additional $7,500 in catch-up contributions. For IRAs, the 2023 limits are $7,000 with an additional $1,000 in catch-up contributions.

Tax loss harvesting. Did parts of your portfolio have a down year? You may be able to save on capital gains taxes by selling some stocks at a loss. We recommend working with an investment professional to make sure you’re doing it correctly. One benefit of this strategy is that you can use the loss to offset your capital gains over several tax years to come, if you don’t use all the offset in the coming tax year.  

Consider a Roth IRA conversion. If you had a particularly down year with income, you may consider rolling a smaller IRA into a Roth IRA. The long-term benefit would be that, after paying taxes on the conversion now, your funds would still be allowed tax-free growth and you could withdraw them tax-free when you retire. Talk to a financial professional if you think this strategy may make sense for you.

Remember your Required Minimum Distributions (RMDs). If you’re required to withdraw funds from your retirement accounts, you have until December 31 to withdraw the full required amount. If you fail to do so, you’ll be hit with a penalty of an additional 25% on the amount of taxes due on the funds you did not withdraw.

Employee Benefits

Spend your FSA dollars. Your Federal Savings Account (FSA) is a great way to use tax-advantaged dollars to buy healthcare products and services. However, you must spend your FSA dollars by March 15 of the year following—and provide receipts by March 31. If you need to draw down your account now, consider how you’ll do it. Contact lenses, new glasses, hearing aids, and CPAP machines are all larger expenses that qualify.

Check your health insurance deductible. If you’ve already met your deductible, this might be the time to visit your doctor (or a specialist) about lingering issues that you’ve been putting off. By scheduling your appointment before year-end, you’ll finally address the health issue, and the visit will cost less. If you haven’t yet had your annual physical, get one—it’s best practice for keeping on top of your health.

Open enrollment periods begin. Many employers have their open enrollment period in November. Resist the temptation to simply auto-approve what you had last year. Benefit levels and costs change, as do your needs. Especially if you and your spouse both have jobs with open enrollment periods, compare options. Review all your coverage needs for health insurance, disability insurance and other benefits like a transit benefit, access to legal help, a dependent care FSA, a gym membership benefit and so forth. Additionally, if you have yet to price out a high-deductible health care option, consider it—while upfront costs are often higher, overall annual costs are often lower than traditional options.

Investment Portfolio

Rebalance your portfolio. When was the last time your portfolio was rebalanced? If you don’t have it automatically rebalancing at regular intervals, you may be overweight in certain sectors and underweight in others. Work with an advisor to make sure  your portfolio construction is in line with your broader goals.

Risk tolerance. For many of us, as we age, our risk tolerance goes down. If you haven’t sat down with your investment advisor in several years, make sure your portfolio strategy matches where you are in your life.

Tax diversification. Try to save to both retirement and non-retirement accounts. When you retire, you’ll want the option to draw on either a regular brokerage account or your retirement accounts, depending on which is most advantageous for your taxes. For example, what if you need to cover a major expense sooner than anticipated? Pulling funds from a retirement account wouldn’t be ideal in that situation. Lastly, if you qualify to contribute to a Roth IRA, consider prioritizing that—when you retire, you’ll be able to withdraw those funds tax-free.

Tax loss harvesting. As we mention above, if you’ve had a down year, you may be able to sell some equities at a loss to reduce your capital gains taxes in this year and in years going forward. If done correctly, you can still maintain exposure to all the sectors you need for a fully diversified portfolio. Talk to your advisor to learn more.

Your Charitable Legacy

If you have an IRA, are 70½ or older, and are charitable, a Qualified Charitable Distribution (QCD) may be of interest to you. QCDs are a direct transfer of funds from your IRA to a qualified charity. The maximum QCD amount is $105,000 per year, and can be counted toward satisfying your RMDs if certain requirements are met.  

As you think about the charitable legacy you’d like to leave, another option to consider is a Charitable Remainder Trusts (CRT). CRTs are irrevocable trusts that could generate an income stream for you (or other beneficiaries), with the balance of assets passing to your favorite charity. CRTs are becoming more popular because of rising interest rates, and may be a smart way to provide cash flow for you or a family member while still working towards your charitable goals. 

Enjoy the Holidays

For most of us, part of a sound financial future is enjoying a comfortable life with our loved ones. This annual year-end review is a great way to make sure you’re on track. It can also put your mind at ease, which makes getting lost in the moment at a holiday gathering all the more delightful. Do your review now and start the season off right!

As always, if you have questions, please reach out to your 1834 relationship team.