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The end of the year is a great time to review your financial plan and make any necessary adjustments. Below we discuss six strategies to consider during your year-end review.
Increase Your Retirement Contributions If There Is Room In Your Budget
Review what you’ve contributed to your retirement accounts. For 2023, the maximum amount of money employees can contribute to their 401(k) plans is $22,500, plus a $7,500 catch-up contribution for those age 50 and older. The amount you should contribute to your 401(k) depends on your personal financial situation.
If you’ve maxed out your employer-sponsored plan, consider making a contribution to a traditional or Roth IRA. The total amount of contributions you can make in 2023 to all of your traditional IRA and Roth IRA accounts can’t be more than $6,500 total ($7,500 if you’re age 50 or older). Your income may limit your eligibility to contribute to these accounts. Make sure you research the current income limits or talk to your advisor to see if you’re eligible before contributing.
Consider Tax Loss Harvesting
Not every investment you make will be a winner. If you have capital gains this year, you could consider booking some losses to offset your gains and lower your tax bill. If you don’t have any gains this year, you could still consider tax loss harvesting as an individual taxpayer can write off up to $3,000 in net losses annually. Any unused losses are carried over indefinitely.
Tax loss harvesting can be a valuable strategy to lower your tax bill each year, but it can be tricky due to the wash sale rule. The wash sale rule states that you must wait at least 30 days either before or after your sale date to repurchase a security you’ve sold for a loss or another security that is “substantially identical”. It is best practice to consult with an advisor and a tax professional when executing this strategy.
Consider Gifting Strategies
The annual exclusion for 2023 is $17,000 ($34,000 for married couples). This amount can be given to each individual recipient without subtracting from your lifetime exemption. This is a great tool for individuals and couples looking to give gifts and reduce their estate.
The current lifetime exemption is $12.92 million ($25.84 million for married couples). This means that an individual or couple can make lifetime gifts up to this amount and not trigger gift or estate tax. However, the unified credit for gift and estate tax is set to re-vert back to pre-2018 levels at the end of 2025. If you are concerned about the change in the lifetime exemption potentially impacting the taxability of your estate, consult with your advisor and an estate planning attorney.
Make a Charitable Contribution
Looking to save on your tax bill this year? A great way to give back and save on taxes is by making a charitable donation. Charitable donations may be tax deductible if certain requirements are met and you itemize your deductions. Consulting with a tax professional is generally advisable to figure out what charitable contribution strategy makes the most sense for you.
Opening a Donor-Advised Fund is one avenue you could use to achieve your philanthropic goals and save on taxes. A Donor-Advised Fund (or “DAF”) allows you to donate appreciated property that has been held for over a year (most commonly appreciated stock) into a fund and receive an immediate tax deduction whether you choose to disburse the assets to charity immediately or wait until a different year. You could decide to let the assets continue to grow tax-free in the DAF and donate them over time as you see fit. Additionally, if you donate appreciated stock to a DAF, you don’t have to pay the capital gains tax you would’ve had to pay had you sold it.
Another strategy to consider is making a qualified charitable distribution from your IRA. If you have to take a required minimum distribution (RMD) from your IRA this year, but don’t want to increase your taxable income, you can make a qualified charitable distribution of up to $100,000 from your IRA. While you avoid paying income tax on your RMD, you don’t receive a tax deduction for the charitable contribution.
Consider a Roth Conversion
If you think you will be in a higher tax bracket in retirement, it might make sense to convert some of your traditional IRA assets into a Roth IRA. A Roth IRA is funded with after-tax money that can be withdrawn tax-free during retirement.
It is important to understand the implications of doing a Roth conversion. First, any amount that you convert from your traditional IRA to a Roth will be included in your taxable income for the year. This is why it’s typically more attractive to do a Roth conversion in your lower-earning years. You’ll also need to consider the “five-year rule” which requires investors to wait five years before withdrawing converted balances without incurring a penalty.
Take Out Your Required Minimum Distribution (if Applicable)
The secure act 2.0 changed the rules for required minimum distributions (RMDs) from traditional retirement accounts. The law increased the age at which RMDs start from 72 to 73 in 2023. If you turned 73 this year, you must take your RMD by April 1, 2024. In the following years, you must take your RMD by December 31 to avoid tax penalties.
If you fail to take your RMD amount by the deadline, the penalty can be up to 25% of the minimum amount that should have been withdrawn. If you know you are required to take an RMD this year but are unsure how much your RMD is, please reach out or consult with a tax professional to avoid paying a hefty tax penalty.
For those who are still years away from having to take an RMD, the Secure Act 2.0 extended the required minimum distribution starting age to 75 beginning in 2033.
Please reach out to an advisor at Aspen if you have any questions on the strategies listed above or you would like help reviewing your financial plan heading into the new year.
Please contact your CPA or attorney before executing any of the above strategies. We are not tax or legal professionals and do not give tax or legal advice.