6 Tips For Your End-of-Year Finances

Person using a calculator to manage end-of-year finances, emphasizing financial planning and calculations for the year's end.

Here are the six financial key points for people to be aware of before the end of the year to better position themselves.

1. RMDs — Required minimum distributions:

If you are age 73 or older and have a “tax-deferred” retirement account like a 401K, Traditional IRA, TSP, 403B, or a 457 plan, you must take out a Required Minimum Distribution by the end of this year or you will be subject to a 25% IRS penalty on the amount that was missed. So, if you had a RMD of $20,000 and you missed taking it for 2023, you would be subject to a $5,000 penalty. A couple of items to be concerned with in this area: if you have multiple kinds of “tax-deferred” accounts, the IRS requires you to know the rules on how to take them out appropriately or you could be penalized. For example, if you have multiple 401Ks, you will be required to take an RMD from each 401k and you will not be able to combine the values and withdraw the total amount from only one account.

The IRS will let you postpone your very first RMD until April 1 of the following year, but then you will be required to take out two for that year. Most people don’t want to take out two RMDs in a year for tax purposes, but it is an option.

2. Maximize your contributions:

If you are working for an employer and have an employer sponsored plan like a 401K, for 2023 you can contribute up to $22,500 into the plan if you are under age 50. If you are 50 years old or older, you can contribute up to $30,000. So, know your number on how much you have contributed so far for the year to make sure that you can maximize your contributions for 2023. Unlike 401ks, when it comes to IRAs, you actually have until April 15 of the following year to make contributions for 2023. By continuing to a “tax-deferred” account, these contributions will be deducted from your gross income earned for the year.  So, if you need a tax deduction, this would be the place to contribute.

If you have a Roth 401K (or similar account) option, I would highly recommend you contribute into this tax-free account. You will not receive any tax deduction for contributions into a Roth, but these dollars will not be taxed in the future when you take withdrawals unlike the “tax-deferred” accounts. In my opinion and mostly what I hear, tax-free trumps tax-deferred any day of the week.

3. Charitable giving:

There is a great opportunity to get your donations into a charity before the end of the year to lock in some tax savings. Many charities are counting on your donations and are basing the next year’s planning/strategy on what they receive this year. You can deduct cash donations to qualified charities worth up to 60% of your adjusted gross income (AGI), which is your total gross income minus certain deductions. Donating appreciated long-term investments can be especially tax-efficient because you don’t have to recognize the capital gains and you can receive a tax deduction for the full fair-market value of the donation (up to 30% of your AGI).

4. QCDs — Qualified charitable distributions:

Once you are 70½ or older and have a “tax-deferred” retirement account, you can have money sent directly from that account to a charity. By doing this, the charity will receive the full donation and you will not have to count that amount donated as income. This is helpful for two reasons:

  1. You will not have to withdraw the amount from your “tax-deferred” account and pay taxes on the money before gifting it. That means that the charity wins by receiving the full amount you choose to give and you win by not having to pay taxes on the withdrawal.
  2. Also, if you are RMD age or older (73+), any amount gifted from your “tax-deferred” retirement account will count towards your RMD for that year. So, if you are of the charitable kind, you can have your full RMD go to a charity without you paying taxes on the gift. This is the preferred way to gift if you are not itemizing your taxes. It doesn’t make sense to take a withdrawal from an IRA, pay taxes on that withdrawal, and then gift a smaller amount (net after taxes) to the charity when the charity could get the whole amount and taxes could be diverted!


5. Roth IRAs – it’s time to take advantage!

We have about two years left to maximize the lower tax brackets under the Tax Cuts and Jobs Act. This is a great opportunity to convert IRA dollars to a Roth IRA and have these dollars grow tax-free after the conversion. We don’t know where the tax brackets will be in a couple of years, but we do know where they were before 2017 — higher. There are no limits for Roth conversions so you must know your tax brackets and the cost associated with the conversion because it will be considered income in the year you convert.

6. Harvest your losses:

The end of the year is a great time to make sure your Individual or Joint Non-Qualified portfolio is still aligned with your goals. When rebalancing, you may be able to reduce your tax liability by offsetting any realized capital gains with your losses. To employ this strategy, tally up your gains, then cash out losing positions of equal value. If you have more losses than gains, you can offset up to $3,000 of ordinary income. If you do employ tax-loss harvesting, be sure not to buy the same or a similar security within 30 days to avoid the pitfalls of the “wash-sale” rule.

Ready to take control of your year-end finances? Planning ahead can make all the difference. At Principal Preservation Services, we’re dedicated to guiding you toward a more secure financial future. Let’s navigate these crucial steps together. Reach out today for a complimentary financial review and discover how we can assist in optimizing your financial position for the upcoming year.

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