Financial Planning Checklist: 20 Ideas To Consider Before Year-End

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In the financial planning world, year-end is an important time of year. The end of the secular year typically coincides with certain deadlines. It is also a great opportunity to set the stage for a financially successful new year. L’havdil, it’s like Rosh Hashana on the Jewish calendar, with people setting goals, tying up loose ends, and preparing for the year ahead. Below is a list of 20 items to review, and potentially implement, before 2024.

1. DO consider rebalancing your portfolio: Though the S&P 500 is up meaningfully this year, that return has been driven primarily by 7 large technology stocks. Meaning there are areas of the market, like REITS, international stocks, and investment grade bonds, that have underperformed the S&P 500. Many investors’ asset allocation is probably out of whack, and it may make sense to rebalance your portfolio to ensure your allocation is brought back to its appropriate risk tolerance.
2. DON’T chase past performance: Now is a good reminder to stay away from the hot strategy du jour! Every year there is always an investment or portfolio manager that does phenomenally well. Unfortunately, it’s impossible to predict beforehand which strategy or manager that will be. This fact won’t stop aggressive salesmen from capitalizing on a recent success, touting great returns and encouraging investors to invest in yesterday’s winners. Remember that the market moves in cycles. One year’s winners are oftentimes losers in the following year. Chasing past performance will not work out in the long-term. The key is to stick with a proper asset allocation and plain vanilla investments that will allow you to achieve your goals.
3. DO Consider setting up an Investment Policy Statement (IPS): One way to stick to a disciplined plan is by developing an IPS. An IPS helps define an investors’ goals, risk tolerance, and other considerations to ensure they are on track to achieve their objectives. Most importantly, it will help investors ignore the noise and the slick salespeople trying to sell them something imprudent.
4. What’s your cash doing? In today’s world, cash doesn’t need to earn nothing. Money market yields are now paying around 5%. Proactively moving cash from accounts paying 1-2% to those paying approximately 5% is prudent.

Required Minimum Distributions (RMDs)

5. Don’t forget to take your RMDs from your retirement account: RMDs apply to folks who are 72 and older. If you are subject to RMDs and don’t take them out there will be a penalty.

Charitable Giving

6. Qualified Charitable Distribution (QCDs): Individuals who are 70½ or older can donate all, or a portion, of their RMD directly to charity via QCD. QCDs are limited to $100,000 maximum annually per taxpayer. Regardless of the amount of your RMD for the year, you can give up to $100,000 to charities from your IRA as QCDs.
7. Deduction for cash contributions: Under the Tax Cuts and Jobs Act, the deduction for cash contributions directly to charity, including gifts to a donor-advised fund, increased from 50% of AGI to 60%. The limit will revert to 50% after the sunset of this Act at the end of 2025, so donors should consider maximizing their cash gifts today.
8. Donate appreciated stocks: Many investors may have long held or concentrated stock positions with large imbedded unrealized capital gains. These folks should consider donating these highly appreciated securities directly to charity, which helps avoid capital gains tax that would otherwise need to be paid when selling the security. It also facilitates minimizing a large position, which helps de-risk a portfolio.
9. Utilize a Donor-Advised Fund (DAF): A DAF is an account where you can deposit assets for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and still has the ability to control how the funds are invested and distributed to charity. A DAF can be extremely useful if you hold a security with no cost basis, a highly appreciated stock, or a concentrated position. In all these scenarios, the tax liability can be circumvented by moving that position to a DAF.

A DAF may be particularly useful when “bunching” your charitable contributions, which involves donating several years’ worth of charitable contributions all at once, which is done for tax planning purposes.

Roth IRA Conversions

10. Roth IRA Conversions: A Roth IRA conversion is the process of transferring retirement funds from a traditional IRA, SEP, or 401(k) into a Roth account. There is no early withdrawal penalty on this conversion amount. Since a Traditional IRA is tax-deferred while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the converted funds at the time of conversion. This is typically done to avoid a potentially more onerous tax liability later or for estate planning reasons.

Beneficiary Designations

11. Beneficiary Updates: Retirement accounts and insurance policies have beneficiary designations that pass outside of one’s will. Therefore, even if you did estate planning, it’s important to review your various beneficiary designations to ensure that your money is passing according to your wishes. It is not unheard of for monies to pass to the wrong party, like an ex-spouse, because beneficiary designations were never updated. It’s worth reviewing your beneficiaries once a year to ensure something like this does not happen.

Estate Planning Considerations

12. Take advantage of the high federal unified estate and gift tax exemption: The federal unified estate and gift tax exemption for 2023 is at an all-time high of $12.92 million, or $25.84 million per married couple. Given an extremely divided Congress, many of the changes imposed under the Tax Cuts and Jobs Act, especially these all-time high increased exemption amounts, will expire after December 31, 2025. The amounts are scheduled to revert to a pre-2017 level of $5 million (adjusted for inflation). Depending on a family’s assets, it may be a great opportunity for large lifetime gifts to capitalize on the historically high exclusion amount to remove assets from their estate.

529 Contributions

13. 529 Contributions: A 529 is a tax advantaged college savings account. It may provide an opportunity for immediate tax savings if you live in one of the 20 or more states offering a full or partial deduction for your contributions to the home-state 529 plan. Most states require you to invest in the in-state plan to receive the deduction for your contributions. Though there are several states that are considered tax parity states, meaning you can use any state’s 529 plan to receive the deduction. This is a nice option for using the Annual Gift Tax Exclusion, if you haven’t already used it. You can give up to $17,000 a year gift tax free per person. The annual exclusion recycles on January 1, so make sure to use your 2023 gift allowance by then so you don’t lose it.
14. Consider “Superfunding” 529 accounts: In this strategy, you can spread a tax-free gift to a 529 account over five years for gift tax purposes. So, a married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $170,000 to a 529 plan for each child and, with the election, not run into gift tax problems.

Tax Loss Harvesting

15. Tax Loss Harvesting: Tax-loss harvesting is the process of selling securities at a loss to offset a capital gains tax liability. In addition to offsetting any capital gains for the year, the loss can also be used to offset up to $3,000 of your ordinary income. When reviewing your portfolio, it’s important to determine if there are opportunities to strategically generate losses to offset other gains.

Corporate Retirement Account Considerations

16. Assess contributions to employer retirement plans in 2023: Review how much money you contributed to your 401(k)/403(b) this year. If you are financially able, it’s worthwhile to max out those accounts every year. In 2023, maximum contribution limits are $22,500 before any company match or $30,000 if you are 50 or older.
17. Plan for next year’s 401(k)/403(b) contribution limits: For 2024, the contribution limit increased to $23,000. Catch-up contributions will remain the same at $7,500 for those 50 and over. Don’t forget to make the required tweaks within your plan to ensure you are making the maximum contribution for the upcoming year. Note: For other types of corporate retirement plans the contribution limits may differ.
18. Roth vs. Traditional: It’s important to decide whether to make Roth or Traditional IRA contributions. As a rule of thumb, if you think you may have a high-income year, then a traditional IRA makes more sense since you’ll get an immediate tax deduction. However, if you anticipate a low-income year, then a Roth IRA makes sense. In that scenario, you’ll pay a more modest amount in taxes now and not have to pay tax on the withdrawals years later. This is an overgeneralization of this decision and it’s important to evaluate your own personal circumstances.
19. Review your 401(k)/403(b) investment lineup and current portfolio: Determine with your advisor if it is sensible to make any investment changes in your plan. This is especially applicable if your firm switched 401(k) providers recently, if you rolled over an old 401(k), or if you are approaching retirement. In any of these scenarios, tweaking your investments may make sense.
20. Consolidation of old accounts: Do you have old retirement accounts still held at a previous employer? If appropriate, now is a great time to consolidate them into an IRA to keep your assets organized. It rarely makes sense to have old retirement accounts scattered at various institutions, especially old employers.

While all these 20 ideas may not be applicable to every reader, it’s still a helpful exercise to work through this list with your financial advisor to ensure your family doesn’t miss any opportunities.

Hopefully this checklist can prepare you for a financially successful 2024!