Financial Steps to Take Before 2023
As we approach the end of the year, life speeds up. More events are planned, gifts are purchased, and the calendar is full. To help you enjoy the holidays a little more this year, we are providing a few steps you can take before the year ends to give you back time when you want it most.
Max Out Retirement Account Contributions
The end of the year is a great time to catch up on any contributions you may have missed making into your retirement accounts. Once a year ends, you can’t make up for missed contributions the next year.
Maxing out your retirement account contributions has two great benefits. One is to keep you moving in the direction of the type of retirement you want to have. The more you put in now, the longer you are giving that money to grow, releasing the power of compounding. Secondly, it can help reduce your tax bill. Contributions to a 401(k) or an IRA can decrease your total adjusted gross income for the year, therefore reducing how much you owe in taxes[i]. Though many contribute to a Roth, 401(k), or Roth IRA which allows you to pay tax at known tax rates of today.
Get on Top of Your Gifting
Good intentions often remain just that, intentions. When we reach the end of the year, the clock seems to speed up, and we lose track of some of our philanthropic goals. To stay on track and get those endorphins released from giving[ii], why don’t you give your advisor a call and chat through some causes you believe in and would like to support? We can help you research IRS-qualified charitable organizations and create a giving plan. This is a great way to give back and take advantage of any tax breaks that may apply to your gifting.
For those who aren’t sure whom they want to give to, can we suggest setting up a Donor-Advised Fund (DAF)? This is an amazing tool to use that allows you to set aside charitable donations even as you are deciding where to give back. You can invest the money tax-free, allow it to grow, and when you are ready, donate to the charity of your choice. An additional benefit to opening a DAF is it provides those with children an opportunity to discuss how giving can support and further the work of causes you are passionate about while protecting wealth.
It’s also a great time to think of contributing more to any 529 Plans you are funding if you haven’t reached the contribution limit this year. The price of college is only going up and this is a thoughtful way of helping children or grandchildren obtain higher education when the time is right. Some states even offer a full or partial state income tax deduction or credit for 529 Plan contributions. Getting that money in earlier just gives it more time to keep growing tax-free which makes a lot of sense.
Plan for Taxes and Make Any Estimated Tax Payments
If you pay estimated taxes, you may want to make any final payments before the end of the 4th Quarter tax filing date: January 16, 2023. This will keep your tax planning on track and help you know how much you have for gifting.
If you received any large bonuses or an increase in pay, this is also a good time to review your withholdings. Are you paying too much, or do you need to increase your tax withholdings? We recommend visiting the IRS website and using their withholding calculator. If this is something that seems daunting to you, please don’t hesitate to reach out to your advisor for assistance. It’s for moments like this that you hired them for.
Use Up Any Remaining Medical Benefits
Have you been putting off seeing the doctor this year but have a medical flexible-spending account from work? Then go ahead and book that appointment and start spending down your account. Essentially these accounts allow you to spend the money for the year and some accounts don’t roll over into the next year. Know your plan and how it works to be sure you maximize this benefit fully.
Take your Required Minimum Distributions (RMDs)
Retirement and getting older means you have different financial needs. One such need is to be sure you take your RMDs[iii]. To be clear, this step only applies if you are over age 70 ½ and have money in a tax-deferred retirement account like a traditional 401(k) or IRA. If you tick both boxes, then you must make a withdrawal. According to the IRS website, recent changes have been made to the required age for withdrawals thanks to the SECURE Act. If your 70th birthday is July 1, 2019, or later, you do not have to start taking withdrawals until you are 72.
The amount is calculated from how much money is in the account and your life expectancy. The IRS website has helpful information that can help you calculate your required withdrawal amounts. Talking with your financial advisor sooner rather than later is a good idea so you have a plan in place and can avoid penalties that can be applied if you don’t take your RMD. It’s also worth noting that if your retirement vehicle is a Roth IRA, this step does not need to be taken. Roth IRAs are not subject to minimum distributions.
These are all steps you can take to be sure you are ready for the year to end. Clearing this mental space up is also a guaranteed way to be more present over the holidays, and who doesn’t want that?
Need help with any of these steps? That’s what we are here for. Call (425) 458-3853 or book an appointment online.
[i] (2017, December 1). Northwesternmutual.com. 5 Financial Steps You Should Take Before the End of the Year. [Online] Available at: 5 Financial Steps You Should Take Before the End of the Year | Northwestern Mutual
[ii] Marsh, J. & Suttie, J. (2010, December 13). Greatergood.berkeley.edu. 5 Ways Giving Is Good for You. [Online] Available at: 5 Ways Giving Is Good for You | Greater Good (berkeley.edu)
[iii] Blanco, O. (2018, November 1). Consumerreports.org. Your November Financial To-Do List. [Online] Available at: Your November Financial To-Do List – Consumer Reports
