Year End Money Deadlines: Financial Advisor Tips
As we approach 2024, time is running out to finalize your financial checklist for the year. Consider implementing these six financial strategies to ensure a smooth holiday season and set yourself up towards a prosperous start in the new year.
Money left in your FSA may be lost:
Discovering an overlooked FSA can seem like an unexpected advantage. However, it is crucial to act promptly to avoid losing the funds. If the money is not utilized by the end of the year, it may be forfeited.
There are three distinct types of FSAs: a health care FSA, a limited purpose FSA that aligns with a health savings account (HSA), and a dependent care FSA.
While certain employers permit a portion of the saved amount to roll over into the following year, in most cases, individuals must utilize their FSA funds before the year concludes to avoid losing the money.
Are you considering a Roth Conversion?
The deadline for completing a Roth conversion for the 2023 tax year is the last business day of the year, which falls on December 29.
If you've been contemplating a conversion, now might be the opportune time to act, particularly if your retirement account balances have decreased. This is because the tax implications of converting to a Roth are determined by the converted amount. Given the current lower stock prices, you may be able to convert the same number of shares for a reduced cost compared to the previous year.
Pro Tip: Roth conversions can often be executed in kind, allowing you to transfer assets from a traditional IRA to a Roth IRA without selling. However, keep in mind that taxes are still owed on the conversion.
Make sure you've contributed to tax-advantaged accounts.
Some accounts, like IRAs and HSAs, allow you to add money for the previous year until April's tax deadline. With HSAs, waiting until April to contribute may lead to making a payment outside of payroll deductions. This can result in paying FICA taxes that could have been avoided.
To avoid this, make sure to contribute to your HSAs before December 31 of the previous year. On the other hand, retirement accounts like 401(k)s have clear year-end deadlines.
In 2023, the contribution limit for a 401(k) is $22,500, or $30,000 for those over age 50. For the 2024 tax year, the limits increase to $23,000, or $30,500 for individuals over age 50.
Tip: If you receive a year-end bonus, consider directing a portion of it into your workplace retirement plan.
For those saving for education, it's important to be mindful of deadlines. Some states' 529 plan accounts have a year-end cutoff to qualify for state tax breaks.
Could Charitable Contributions lower your tax bill?
If you choose to itemize your taxes, you have the opportunity to deduct charitable contributions to eligible organizations. You can usually deduct 60% of your income for cash donations, as per IRS guidelines. For donations of appreciated securities, the deduction may be up to 30% of your AGI.
To ensure eligibility for the deduction on your 2023 taxes, contributions must be made within the same year. Donating cryptocurrency or restricted stock requires more planning than cash donations, so it's important to research deadlines beforehand. Additional regulations may apply based on the recipient charity, any chosen elections, and your individual tax circumstances.
For those who do not itemize their taxes, a strategy known as "bunching" could provide a deduction. This involves consolidating deductions in a single year, then forgoing one or more years of future donations. This strategy proves beneficial when the total itemized deductions for a single year fall below the standard deduction.
Donate money to charity for multiple years in advance to exceed the minimum required for tax deductions. As a result, you will receive a tax break for some of your donations. This method needs enough money to combine more than a year's worth of donations into one year.
Remember RMD's if you are 73 or older.
A required minimum distribution (RMD) is when you have to withdraw money from your retirement plan once you turn 73. The initial required minimum distribution (RMD) is due on April 1st following the year in which you turn 73. After that, all subsequent RMDs must be completed by December 31st each year. Not meeting these deadlines can be expensive, as a 50% penalty is charged for withdrawals that are not completed.
It's important to note that if the first RMD is delayed until April, the individual will be required to make two RMD withdrawals in the inaugural year and pay taxes on both. The first must still be withdrawn by April 1, and the second must be completed by December 31.
Think about harvesting investment losses.
Tax-loss harvesting is a strategy that involves selling underperforming investments and replacing them with similar ones. The purpose of this strategy is to utilize the losses from the sold investments to offset taxes on other gains. The end result is less money being taxed, so more of your funds can stay invested and working for you.
The benefits of investment losses extend to two main applications:
Offsetting investment gains.
Offsetting up to $3,000 of ordinary income annually on a joint tax return.
Additionally, any unused losses can be carried forward to offset taxes in future years. To use investment losses for tax benefits, it's important to do loss harvesting before December 31.
Bottom Line
If you miss the deadline for achieving some of your goals this year, there's an opportunity to pursue them in the coming year. To kickstart your efforts, consider consulting with a tax advisor and financial advisor. They can help you decide if these actions or other planning steps will improve your financial results.
Sources:
https://www.fidelity.com/learning-center/personal-finance/year-end-money-deadlines
https://www.irs.gov/retirement-plans/ira-year-end-reminders
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529 Plan, or "qualified tuition plan," is an investment account that provides tax benefits when the savings are used for qualified education expenses. Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, federal income taxes may be due on any earnings withdrawn. A 10% federal penalty tax and possibly state or local tax can also be added.