Year-End Financial Planning Tasks
As the calendar pages turn to December, many minds shift to the holidays, but the year-end is perhaps the most crucial time to reflect on your financial health. This period offers a unique opportunity to optimize your budget, manage your debt, reduce tax liability, maximize retirement savings, and position yourself for financial success in the new year. Here are some important actions to consider as the year concludes.
Your budget is the foundation of your financial plan. A clear understanding of your cash flow is essential for your financial health. The first step should be to analyze your bank and credit card statements for the past 12 months. This can help you evaluate the effectiveness of your existing budget and identify areas for improvement. Categorize your spending into essential and discretionary expenses. Look for recurring expenses that no longer serve you, such as unused gym memberships or subscriptions. Canceling these before January 1st provides an immediate cash infusion every month. Next, analyze your spending seasonally. Did your spending increase during the summer with travel or before the holidays with gift purchases? Use this data to create a more accurate budget for the coming year, smoothing out the expected high-cost months. With a clearer picture of your actual spending, establish a realistic budget for the next 12 months, ensuring it aligns with your core financial values and goals.
Debt can be a major detriment to your financial health, especially if interest is accumulating. The end of the year is a perfect time to evaluate your debts and to plan for better management and debt elimination. Start by listing all your debts. Some forms of debt, like mortgages, may be strategically smart to keep. Prioritize paying down high-interest debt, such as credit card balances and personal loans . If possible, make extra payments or consider consolidating these debts and refinancing them to lower interest rates.
Income taxes are often one of the biggest expenses we face. The final weeks of the year are the last opportunity to make moves that will directly affect your tax bill. Tax planning is not just about filing; it’s about strategically minimizing tax liability by taking advantage of deductions and credits. Consider tax-loss harvesting. Review your taxable investment accounts for any assets that have lost substantial value. If you sell these assets before December 31st, you can offset realized capital gains taken that year. You can also use up to $3,000 of net capital losses to offset ordinary income. Just be mindful of the “wash sale” rule, which prevents you from claiming the loss if you buy back the security within 30 days before or after the sale. Provident reviews your taxable accounts by year end to look for tax-loss harvesting opportunities.
Charitable giving is another strategy used to reduce current year income taxes if made before year-end. One option is to make a Qualified Charitable Distribution (QCD). If you’re 70 ½ or older and taking Required Minimum Distributions (RMD), a QCD paid directly to a charity from your IRA is a tax-efficient way to satisfy your RMD without the distribution being counted as taxable income. Another option is to gift appreciated stock from a taxable account. In this case you avoid paying capital gains taxes on the unrealized gain and the donation may be tax deductible. A Donor Advised Fund (DAF) is a great way to gift appreciated stock while creating timing flexibility for donations.
Whether you’re early in your career or approaching retirement, it’s important to regularly assess your retirement savings strategy. The end of the year is especially crucial for making contribution decisions and making sure you’re taking advantage of the tax benefits. If your budget allows for it and you haven’t reached the IRS maximum contribution limit of $23,500 ($31,000 for those 50 and older, and even higher for those aged 60-63), adjust your final paychecks to catch up. At a minimum, ensure that you have contributed enough to receive the full employer match, which is essentially free money and a guaranteed immediate return on your investment. While you have until April 15th of the following year to make contributions to your Traditional or Roth IRA for the current year, it’s a good idea to plan for this now. Confirm the annual limits and start setting aside the funds. For those who are age 73 or older, don’t forget to take your Required Minimum Distribution before December 31st. Failure to do so can result in a hefty fine.
Lastly, review and update the beneficiaries on your brokerage, retirement and bank accounts, your life insurance policies and annuities. Failing to keep named beneficiaries in line with your desires can have devastating consequences. Life events that occur throughout the year such as marriage, divorce, the birth of a child or the death of a loved one necessitate updating your beneficiaries. Keep in mind that your beneficiary designations supersede your will, so an outdated form means your assets may go to an unintended recipient.
Year-end planning doesn’t need to be overwhelming. Breaking it down into manageable steps can help make the process less daunting and lead to a smoother finish to the year. As always, contact Provident to schedule a meeting or to ask questions regarding financial matters that are important to you.
Dan Krstevski, CFP®