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Your End-of-Year Financial Checklist: For Today, Tomorrow, and Those Wanderlust Retirement Dreams Thumbnail

Your End-of-Year Financial Checklist: For Today, Tomorrow, and Those Wanderlust Retirement Dreams

Hello, my esteemed friends! As the years sprinkle us with wisdom, many of us, especially in our vibrant 55+ community, have shifted our gaze towards that dreamy horizon of retirement. Yet, it's not just about us, is it? We have our aging parents to think about, and possibly adult children, too. And all the while, there's that lingering thought - are our own finances in tiptop shape?

Whether you're envisioning relaxed evenings by the Potomac or dreaming about your next great international adventure, here's a tailored checklist that ensures your golden years and your loved ones are well cared for:

1. Charitable Contributions:

Remember, December isn't just for festive lights in Old Town Alexandria; it's our prime "giving season." If philanthropy is on your heart, consider the most tax-smart ways to donate. This could be through Qualified Charitable Distributions or by donating appreciated investments to avoid capital gains. Another tax-savvy move is “lumping” multiple years of donations into one tax year using a Donor Advised Fund.

2. Boost Your Retirement Contributions: 

If you've got some extra room in your budget, here are tax-savvy ways you can save:

  • At work? Ensure you're putting in the max amount for employer retirement plans. That's $22,500 this year, and if you're over 50, $30,000.
  • Don't forget IRA and Roth IRA contributions—you've got time until the tax filing deadline in April.
  • Got an HSA? Max it out at $3,850 for self-only coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000.
  • Got kids? Consider the 529 accounts—in some states like Virginia, they come with state income tax deductions.

3. Consider a Roth Conversion:

Is this a relatively low-income year? Do you expect your income to increase in the future? Then a Roth conversion might be right for you. A Roth conversion is when you transfer funds from a Traditional IRA (or similar tax-deferred account) to a Roth IRA. This means you pay taxes on the converted amount in the present year but can reap the benefits of the Roth account for life. Those benefits include:

  • Tax-Free Withdrawals in Retirement: Once the funds are in a Roth IRA and have met specific criteria, all future withdrawals can be tax-free. This provides a significant advantage if you anticipate being in a higher tax bracket during retirement.
  • No Required Minimum Distributions (RMDs): Unlike Traditional IRAs, which mandate RMDs starting at age 73, Roth IRAs don't have such requirements. This can be an attractive feature for those aiming to leave a tax-free legacy to their heirs.
  • Flexibility in Tax Planning: If you believe tax rates are likely to rise in the future or if you find yourself in a particularly low tax bracket for a specific year (perhaps due to a temporary income drop), it might be a strategic move to convert and pay taxes now rather than later.
  • Estate Planning Benefits: Roth IRAs can be a valuable tool for estate planning, allowing beneficiaries to inherit assets that can grow and be withdrawn tax-free.

Review with your financial planner to determine if a partial Roth conversion makes sense.

4. Required Minimum Distributions, Simplified:

If you're 73 or over, ensure you're taking enough out of your retirement accounts to dodge tax penalties. For those with inherited IRA and Roth IRA accounts, double-check your distribution schedules, especially given the rule changes that have occurred over the past several years.

5. Anchoring Your Tax Strategy:

Expecting a financial boost (like an inheritance or a juicy bonus)? Review your tax withholdings to avoid any unpleasant surprises. This also applies if you have a taxable investment account.

Receiving an inheritance can be a significant financial event that necessitates a careful review of your tax strategy. If you’re expecting an inheritance, it's essential to understand how it will interact with your current tax situation, especially if the inheritance includes retirement accounts.

Inheriting retirement accounts, such as an IRA or a 401(k), often comes with complex tax considerations. These accounts are typically pre-tax, meaning the original owner didn’t pay taxes on the contributions. As a result, when you inherit such an account, you're required to take distributions which are then taxed as ordinary income.

The IRS mandates that non-spousal beneficiaries must withdraw the entire balance from an inherited IRA or 401(k) within 10 years if the original owner passed away on or after January 1, 2020. This updated rule removes the option for a beneficiary to stretch the distributions over their lifetime, potentially leading to significant tax consequences if not managed properly.

It’s crucial to integrate these required minimum distributions (RMDs) into your existing tax plan. For example, if you're also receiving a large bonus in the same year you're required to take a distribution, this could push you into a higher tax bracket, leading to a larger tax liability.

One strategy could be to time the recognition of other taxable income to minimize the tax impact. This might involve deferring certain income or spreading the inherited distributions over multiple years when possible.

6. Harvesting Potential Tax Losses:

If you've got investments that haven't performed as expected, this might be the time to employ tax loss harvesting strategies. Tax loss harvesting involves selling investments that have declined in value since you purchased them to offset taxable gains from other investments. The "harvested" loss can be used to counterbalance realized capital gains, making it a timely tool in a strategic tax playbook.

Key Benefits of Tax Loss Harvesting:

  • Offsetting Capital Gains: If you have investments that have appreciated, selling them will result in capital gains taxes. However, if you also have investments that have declined, selling them allows you to balance out some or all of those gains, reducing your tax liability.
  • Boosting Portfolio Returns: Over the long run, tax loss harvesting can improve your portfolio's after-tax returns. This isn't about market-timing but rather optimizing your portfolio given the inevitable market fluctuations.
  • Standard Deduction Advantage: Even if you don't have capital gains in a given year, you can use up to $3,000 of harvested losses to offset ordinary income, and any additional losses can be carried forward to offset gains in future years.
  • Flexibility in Portfolio Management: Tax loss harvesting offers the opportunity to make strategic changes to your portfolio. For example, you might sell an underperforming asset and use the proceeds to diversify or invest in areas with better growth potential, all while reaping the tax benefits.

However, there are considerations and complexities:

  • Wash Sale Rule: If you buy a "substantially identical" investment within 30 days before or after the sale of the loss-making investment, the IRS will disallow the loss for tax purposes due to the "wash sale" rule.
  • Tracking Carryforwards: It's essential to track any loss carryforwards, so they're not forgotten and can be utilized in future tax years.

Tax loss harvesting, while powerful, requires careful navigation. It's always wise to partner with a financial advisor or tax professional to implement this strategy effectively, ensuring you make the most of your investments while staying in alignment with your broader financial goals.

7. Making the Most of Your Flexible Spending Accounts (FSA):

Whether you're preparing for a local health check-up or vaccinations for your next global expedition, ensure you're utilizing your FSA benefits optimally. Check with your company to see when you must use the balance in your account. Some companies offer a grace period up to March 15th of the following year to spend while others allow up to $550 of unused funds to be rolled over to the following year.

The Crucial Retirement Planning Years

As you navigate these crucial planning years, remember it's not just about numbers. It's about the peace of mind to cherish moments with our loved ones or hop on a last-minute flight, knowing you’ve secured the best for yourselves and your parents. And as you feed your wanderlust, always feel free to share your travel tales. After all, they inspire many of us to dream bigger!

Safe journeys, financial and otherwise!

Massie Financial Planning (MFP) is an investment adviser registered with the state of Virginia.  MFP may only transact business in states where it is registered, exempt, or excluded from registration.
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