It’s hard to believe that 2023 is just around the corner. With the new year quickly approaching, consider checking these financial to-dos off your year-end financial planning checklist before it’s too late.
#1: Evaluate your current financial plan.
Reviewing and updating your financial plan allows you to head into the new year on solid financial ground with a clear blueprint for decision-making. It also gives you the opportunity to assess your financial progress and determine whether you’re on track to reach your financial goals.
And if you’ve had any major life changes this year, you may want to update your goals altogether. If your objectives have changed, consider whether your current financial plan and investment strategy are still appropriate. If not, use this opportunity to develop a new plan for the year ahead.
#2: Review and update your employee benefits.
Although timing can vary, many employers offer benefit open enrollment near the end of the year. If your enrollment period is still open, be sure to add an employee benefits review to your year-end financial planning checklist. This can be a great opportunity to make strategic financial decisions while maximizing your compensation package.
First, review any changes to your benefits package and current selections. Then, consider how your financial situation has changed this year—or how you expect it to change next year—and select your benefits accordingly.
Here are a few key benefits to consider adding or updating at year-end:
- Insurance: Life, disability, and health insurance are often some of the most valuable employee benefits.
- Retirement: Be sure to take advantage of any retirement benefits available to you. For example, many employers offer 401(k) plan contribution matching, an employee stock purchase plan, or a deferred compensation plan.
- Legal: Some employers offer legal services at a discount. If you have access to this benefit, you may want to consider using it to create or update your estate plan.
#3: Add a tax review to your year-end financial planning checklist.
For most taxpayers, the last day of the year also marks the end of the current tax year. That means year-end may be your last opportunity to proactively lower your 2022 tax bill.
As you review your tax situation, consider the following tax planning tips:
- Identify any changes to your tax situation. Will you itemize this year, or does it make more sense to take the standard deduction? If you’re on the fence, consider bunching your charitable donations this year to maximize your potential tax deduction.
- Look for potential tax-loss harvesting opportunities—i.e., offsetting capital gains with losses.
- Consider strategies to reduce taxable income, such as deferring income until next year or making additional contributions to your retirement and other tax-advantaged accounts.
- In low-income years or down markets, work with a financial planner or tax expert to determine whether a Roth conversion makes sense.
- Make use of the annual gift tax exclusion to strategically transfer wealth to the next generation.
#4: Review your investment portfolio and rebalance if necessary.
Year-end can also be an opportune time to review your investment strategy and current portfolio. If your asset allocation has drifted meaningfully from its original targets, you may want to add a full rebalance to your year-end financial planning checklist.
Over time, differences in asset class and investment performance can cause your portfolio allocations to change dramatically. For example, in years when stock market performance is strong, your equity allocation may appreciate to a much larger percentage of your portfolio relative to your fixed income allocation.
Rebalancing allows you to take gains from investments that have performed well and use them to purchase more of the investments that have underperformed. This helps ensure that your portfolio remains in line with your objectives and risk profile.
Just remember, if you’re rebalancing within a taxable account, you may trigger capital gains or losses. Consider working with a financial advisor to make sure the benefits of rebalancing outweigh the potential costs.
#5: Maximize your retirement plan contributions at year-end.
If you haven’t maxed out your retirement plan contributions for 2022, year-end can be a great time to do so.
In 2022, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans is $20,500 (plus a $6,500 catch-up contribution if you’re age 50 or older). In 2023, this limit will increase to $22,500, plus a $7,500 catch-up contribution.
For individual retirement accounts (IRAs), you can contribute up to $6,000 in 2022, plus a $1,000 catch-up contribution for those age 50 and older. In 2023, this limit increases to $6,500, with the $1,000 catch-up contribution staying the same.
#6: Consider making year-end charitable donations.
The holiday season may inspire you to add charitable giving to your year-end financial planning checklist. Indeed, there are many reasons to give to charity. However, keep in mind you can only take a charitable deduction on your tax return if you itemize.
If you don’t typically itemize, consider “bunching” your donations if you have extra cash on hand. Bunching means making two or more years’ worth of donations in the current year to maximize the amount you can deduct from your taxes.
Alternatively, you may want to consider donating to a donor-advised fund (DAF). A DAF allows you to make a charitable donation and take the deduction in the current tax year. But unlike bunching, you don’t have to decide where your donation goes right away. Instead, you can take your time and direct your donations in the years that follow.
#7: If you’re 72 or older, don’t forget to add RMDs to your year-end financial planning checklist.
The deadline to take required minimum distributions (RMDs) this year is December 31, 2022. The IRS requires anyone age 72 or older to take RMDs from their traditional IRA(s). There are no RMDs for a Roth IRA unless you inherited it.
If you don’t need the extra income this year, you can make a qualified charitable distribution (QCD) with your RMD. A QCD allows IRA owners to transfer up to $100,000 directly to charity each year.
By doing so, you potentially reduce your taxable income for the year. A QCD may also reduce your IRA balance, which lowers your RMD in future years.
It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your requirement. If you take advantage of this strategy, be sure to make the QCD before making any other withdrawals from your account.
#8: Consider working with a trusted financial advisor.
Lastly, as you review your year-end financial planning checklist, consider whether working with a trusted advisor may help you reach your financial goals more effectively in the year ahead. A financial advisor can help you determine which financial planning strategies make sense for you. They can also help you proactively identify opportunities throughout the year to maximize your financial results and minimize potential risks.
Oak Capital Advisors specializes in the financial and tax planning needs of small business owners. To learn more and see if we may be a good fit, please start by requesting your complimentary Financial Independence Roadmap™.