As the year draws to a close, savvy financial planning becomes crucial, especially when considering the impact on both the current and upcoming tax year. To ensure you make the most of your financial opportunities and minimize tax liabilities, here’s a guide to key year-end deadlines.
Don’t Let FSA Funds Slip Away
Many Americans use Flexible Spending Accounts (FSAs) offered by their employers. There are three types of FSAs: health care FSA, limited purpose FSA, and dependent care FSA. While some employers allow a portion of the saved amount to roll over, FSA funds must generally be spent before the end of the year or they are forfeited.
To maximize the benefits of your FSA, review eligible expenses and ensure any outstanding funds are used wisely before the year concludes. This proactive approach can not only safeguard your funds but also contribute to a healthier you.
Seizing Opportunities with Roth Conversions
If you’ve been contemplating a Roth conversion, the end of the year is the deadline for the 2023 tax year. Consider this: if your retirement account balances are down, it might be an opportune moment to consider a conversion. The tax bill for a Roth conversion is based on the converted amount and with stock prices potentially lower, you could convert the same number of shares for less money than in previous years.
Take advantage of in-kind Roth conversions, allowing the transfer of assets from a traditional IRA to a Roth IRA without selling. While taxes are still owed on the conversion, this strategy can be advantageous. There are many considerations including the timing and the amount so review your options and make a plan that works well for your specific situation.
Maximizing Contributions to Tax-Advantaged Accounts
Contributions to tax-advantaged accounts such as IRAs, HSAs, and 401(k)s play a pivotal role in year-end financial planning. While some accounts allow contributions until the tax-filing deadline in April, others must be contributed to by December 31.
For 2023, the employee contribution limit for a 401(k) is $22,500, or $30,000 if you’re over 50. Consider directing your year-end bonus into your workplace retirement plan to take full advantage of tax-advantaged savings.
Charitable Contributions for Tax Benefits
Charitable contributions not only support worthy causes but can also provide tax benefits. If you itemize your taxes, you can deduct up to 60% of your adjusted gross income (AGI) for cash donations. For donated appreciated securities, a deduction limit of 30% of your AGI may apply.
To ensure these deductions are eligible for your 2023 taxes, contributions must be made before the year ends. If you don’t itemize regularly, consider concentrating your donations into a single year so you can itemize and take advantage of the tax deduction.
Navigating Required Minimum Distributions (RMDs)
The timing of your first RMD is based on your age. The RMD deadline is April 1 in the year after turning 73, with subsequent RMDs due by December 31. Taking your RMD on time can help you avoid a 25% penalty for any amount not withdrawn.
If you delay your first RMD until April of the following year, be prepared to take two RMDs in your first year and pay taxes on both. Understanding these deadlines and planning accordingly is essential to avoid unnecessary penalties and taxation.
Strategic Tax-Loss Harvesting
Tax-loss harvesting is a valuable strategy to optimize your investment portfolio. By selling investments that are down, you can offset other realized capital gains, reducing your tax liability. Unused losses can be carried forward to future tax years, providing flexibility in managing your tax obligations.
To capitalize on this strategy, act before December 31 to harvest your losses effectively. This not only minimizes your tax burden but also positions your portfolio for potential future growth.
Conclusion
By mastering your year-end finances, taking proactive steps can significantly enhance your financial health and set the stage for a successful tax year ahead. Whether it’s utilizing FSA funds, considering a Roth conversion, maximizing contributions, crafting charitable contributions, navigating RMDs, or implementing tax-loss harvesting, these key deadlines offer a roadmap to improved financial success. Consult with a tax advisor and financial professional to tailor these strategies to your unique situation, ensuring a more secure financial future. Remember, it’s never too late to start planning and optimizing your financial strategy for the upcoming year.