As the end of the year approaches, there is no better time to analyze your finances to ensure you have maximized your accounts for the 2023 year. This may seem daunting to most, as it can be challenging to know where to start. This article offers some important questions you should ask yourself to get the most from your accounts and provides steps to take based on those answers.
“Do you have unrealized investment losses in your taxable accounts?”
If the answer to that is yes, it could be beneficial to realize those losses to offset any gains. There is also a rule that allows you to offset up to $3,000 against your ordinary income per year, with the ability to roll more over to the following year. Although most people would be concerned with losses in their account, realized losses can actually be a good thing by providing a tax benefit.
“Are you subject to RMDs?”
There are many different stipulations around who is subject to Required Minimum Distributions, or RMDs. It would be best to ask your advisor if you are subject to RMDs and what the best course of action is to withdraw them.
“Do you expect your income to change in the near future?”
Many options exist to minimize taxes based on whether your income increases or decreases. For example, if your income increases, you may become ineligible for Roth IRA contributions and need to begin contributing through a Backdoor Roth. Minimizing your tax liabilities now would be wise if your income is expected to decrease. On top of this, it would be important to reanalyze your Baby Step 4 course of action to see what the new 15% of your income would be and determine the best way to save for that new number.
“Are you on the threshold of a tax bracket?”
If so, you could implement strategies to defer income or accelerate deductions to stay in the lower bracket. You could also utilize capital gains or losses to optimize your tax bracket. There are also other options to reduce taxes, including tax credits offered for different situations.
“Has there been a significant change that has allowed you to save more?”
If this is the case, looking at your overall situation would be wise to optimize where that money could go. For example, if you have at least three months of expenses saved for your emergency fund, it could benefit you to contribute to that to add more of a cushion to your emergency fund. However, if you are in debt, you will want to consider adding these additional dollars saved to pay off your debt items faster. Or, you may want to consider creating a sinking fund (or multiple) for various projects or goals you plan to achieve in the near future.
“Do you want to start saving for your children?”
There are many different options to save for your children. The best option for you depends on the intended use for the savings and your situation. Some circumstances may dictate that a UTMA is the best option, while some may call for a 529 or ESA.
Since everyone’s situation is unique, there is no “one size fits all” action for these questions. This is why it would be best to meet with your financial advisor if any of these apply to you. Even if they don’t, meeting with a Financial Advisor to ensure you are on the right track to start the New Year is always a good idea. If you do not have an advisor, one of our Financial Advisors would happily meet with you to discuss your situation.
What Should I Consider Before the End of the Year?
December 7, 2023
David Gearhart
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