Were on the sidelines towards the end of 2023. What are the financial moves you should make before the clock runs out?
Fortunately, Financial Planners spend the last weeks of the year thinking about just such things. We asked several of them for their thoughts and came up with a list of the six most important financial steps to take by December 31st.
The advice covers the spectrum from pension savings to insurance coverage to clever tax shelters.
Update beneficiaries to that 401(k) or life insurance policy
A typical investment account or life insurance policy requires you to name beneficiaries, the loved ones who will receive the money upon your death. For many of us, beneficiary designations act like an estate plan: they’re legally binding and dictate what happens to a large portion of your assets.
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Some people don’t know how to name beneficiaries. Births, Deaths and family disputes can change the landscape of space planning. The end of the year is a good moment to evaluate.
I recommend making sure your beneficiaries are up-to-date on your investment accounts, said Colin Day, a certified financial planner in St. Louis.
It might not be the first thing people think of, but you’re surrounded by loved ones during the holiday season, Day said. It’s a great reminder that you love and support these people and want to make sure your hard-earned dollar reaches them if something happens.
Check your estate plan and insurance coverage
More broadly, the end of the year is a good time to review your estate plans, powers of attorney and insurance coverage, said Paul Mendelsohn, a certified public accountant in Livingston, New Jersey.
Do you have life insurance, long-term disability insurance and long-term care insurance? Mendelsohn said. Long-term care insurance, perhaps the least well-known of the three, helps cover the costs of home care and nursing homes.
And remember, Mendelsohn said, if one spouse has employment insurance, it won’t cover the other spouse.
If you haven’t done so recently, make an appointment with an estate planning attorney to prepare or update your will, health care directives and other legal documents, said Niv Persaud, a certified financial planner in Atlanta.
Make charitable donations and give gifts
Charity is a big part of the holiday. And the IRS allows you to deduct cash donations to qualified charities, potentially up to 60% of your income.
Donations are tax deductible only if they go to recognized charities. You’ll need documentation for larger donations, NerdWallet says.
And charitable giving only works as a tax shelter if you itemize your deductions instead of claiming the standard deduction at tax time. (Most of us don’t itemize.)
Charitable gifts should be made before the end of the year if you want the deduction for 2023, said Seth Benjamin Mullikin, a certified financial planner in Charlotte, North Carolina.
Donation time is also a good time to make monetary gifts to loved ones, Mullikin said.
Individuals can donate up to $17,000 per recipient in 2023 without having to file a gift tax return, he said.
According to NerdWallet, a gift tax is a federal tax on transfers of money or property to someone who doesn’t give you something of equal value in return.
If you give more than the annual gift tax limit of $17,000 in 2023, you must report it to the IRS.
Maximize your pre-tax retirement savings
December is a good time to make sure you’ve maximized your retirement planning contributions, said Catherine Valega, a certified financial planner in Winchester, Massachusetts.
Tax-advantaged retirement accounts allow investors to save a portion of their income before taxes are taken out.
But there is a limit. Individual retirement accounts, or IRAs, have an annual contribution limit of $6,500 or $7,500 for anyone age 50 or older.
For employer-sponsored 401(k) plans, the maximum employee contribution is higher: $22,500 or $30,000 for those age 50 and older.
Those limits will go up in 2024. So now is also a good time to update your paychecks and IRA contributions to reflect the new caps, said Rob Schultz, a certified financial planner in Encino, California.
Over 73? Take the required minimum distribution into your retirement account
The required minimum distribution, or RMD, is the amount you must withdraw from your IRA or 401(k) when you turn 73.
If you haven’t already, you need to take required minimum distributions from your IRA by Dec. 31, said Devin Pope, a certified financial planner in Salt Lake City, Utah.
In exchange for tax benefits, the IRS requires savers to begin withdrawing from retirement plans when they reach a certain age. An RMD is a way for the IRS to take their cut from your retirement account.
A financial advisor can tell you how much you need to withdraw by the end of the year, or you can consult an RMD table. If you do not withdraw funds, you will have to pay 25% excise tax on the amount you did not withdraw.
More:Half of Americans leave FSA health care money on the table. Here are 10 ways to spend it.
Crop tax losses
The end of the year is an ideal time for an investment strategy called tax loss harvesting.
Technology, tax time for the rich, makes an investment loser a tax winner.
You sell an investment that has depreciated, replace it with something similar, and use the losses to offset the gains you made by selling other investments.
Repair tax losses, if any, Mullikin said.
Tax loss harvesting can reduce taxable capital income. It can even reduce your regular taxable income (such as wages) by up to $3,000.
Your other questions for the 2024 tax season have been answered
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Your biggest single payday could be your 2023 tax return. Report early to get your refund faster
Is it better to pay your taxes to someone or do them yourself? We’ll help you decide.
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Daniel de Vis covers personal finance. Be sure to subscribe to our free Daily Money newsletter for personal finance tips and Business News Monday through Friday mornings.
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