6 Year End Financial Planning Strategies for 2023

It’s hard to believe that we are winding up another year. We’ll be celebrating the new year before you know it. But before the year ends, let’s make sure you haven’t missed any retirement-enhancing or tax-saving opportunities! In this article, I will walk you through the basics of SIX year-end financial planning strategies you can implement. These strategies will decrease taxes or maximize your income during retirement.

Pre-retirement considerations:

1. Make Health Savings Account (HSA) contributions

Making your tax-deductible contribution to an HSA is a great way to save taxes for the current year as well as secure your future retirement. HSA accounts are investment accounts set up for those with high-deductible health insurance plans to help pay for qualified medical expenses. Contributions to an HSA are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.

It is often overlooked, but HSA contributions can also be an additional way to save money for retirement. Once an individual is age 65, they can withdraw funds from an HSA for non-medical expenses. Taxes must be paid if not used for qualified expenses, but used this way, your HSA ends up being a supplemental IRA. Using an HSA is great for individuals with a high deductible health plan who are looking for additional ways to save money for retirement. Contributions must be made by December 31st, 2023!

Contribution limits to an HSA for 2023

Contribution limits for 2023 are $7,750 for a family ($3,850 an individual). Individuals ages 55 and older can contribute an additional $1,000. Be aware, contributions to an HSA must stop once an individual enrolls in Medicare.

2. Maximize your tax-deferred contributions

All contributions to an employer-sponsored retirement plan [401(k), 403(b), etc.] are due by December 31st. Employees are allowed to contribute a maximum of $22,500/year ($30,000 if you’re age 50 or older) to their retirement plans. Check your contribution amounts for the current year and evaluate if you can contribute more. Maximizing retirement plan contributions will give you immediate tax savings and more income in the future. Speak to your financial advisor to learn how you can maximize your retirement contributions for 2023.

For those already retired:

3. Remember Required Minimum Distributions (RMDs)

All good things must come to an end, especially the tax-deferred growth of IRAs and 401Ks.

The IRS requires all individuals ages 73 and older (and those with inherited IRAs) to take distributions from their IRA accounts every year. It’s important to withdraw the full amount of your RMD before the end of the year to avoid a hefty fine!

Let’s assume you have an RMD of $10,000 for 2023. The penalty is a 25% tax on the amount of your RMD that you did not withdraw. So, if you forget to withdraw the required amount of $10,000, you will owe a penalty of $2,500 to the IRS, and will still be required to withdraw the $10,000 and pay the tax on the withdrawal.

As you can see, it costs a lot to forget RMDs. If you are charitably inclined, keep reading to see how you can avoid taxes by donating the amount of your RMD to charity.

4. Qualified Charitable Distributions (QCDs)

If you are 70.5 years old, you can make withdrawals from your IRAs tax-free as long as those withdrawals are sent directly to a charity. This can be done by doing a Qualified Charitable Distribution (QCD).

This is a huge tax benefit that charitably inclined retirees can take advantage of each year. Without the QCD, only charitable donors who itemize deductions receive tax savings by donating to charity, and with the current higher standard deduction, less than 10% of all taxpayers end up itemizing deductions. An additional benefit of QCDs is that they count toward satisfying the RMD requirement.

So, if you make donations to charity, you are age 70.5 or older, and have an IRA, you really need to investigate doing a QCD. Simply changing the way you donate to charity (donating to charity directly from your IRA versus writing a check) could save you significant tax dollars each year.

Feel free to reach out to any of our advisors if you question whether a QCD could benefit your particular situation. For a deeper dive into QCDs, you can visit this blog written by our founder Scott Peterson regarding QCDs. You can also learn more about QCDs by reading chapter 20 of Plan On Living.

5. Roth Conversions

The idea of a Roth Conversion is that you pay tax on a portion of your IRA money today to avoid paying higher taxes in the future. Even though it is a taxable event to convert a traditional IRA to a Roth IRA, the future tax-free growth of the Roth IRA can provide a great benefit.

A careful analysis of your current, as well as an estimate of your future tax brackets, will help determine if a Roth IRA conversion makes sense for you and your heirs. Instances where Roth Conversions make sense, include an abnormally low tax year, when the stock market temporarily declines, or if you desire to leave a large tax-free legacy for your heirs. Additionally, the 2026 Tax Bracket Reset might also make converting from an IRA to a Roth IRA appealing.

a. Abnormally low tax year

If you are currently living on money that has already been taxed such as cash from your savings account, a non-retirement account, or if you are in between jobs, you may be reporting significantly lower income this year than you will be in future years. Whatever the reason, if you are experiencing a low tax year, consider the benefits of a Roth IRA conversion while you are in a lower tax rate!

b. When the stock market temporarily declines

If your account is down this year, you’re not alone! So, make lemonade out of lemons by doing a Roth Conversion. Now could be a great opportunity for you to transfer taxable IRA dollars into a tax-free Roth IRA. By converting IRAs to Roth IRAs while the stock market is down, you are taking advantage of a temporary market downturn and creating a permanent tax reduction.

Let’s say that you started with $200,000 in an IRA at the beginning of the year. However, that $200,000 is now worth only $150,000 because of the slide in the stock market. If you convert the $150,000 to a Roth IRA, you will pay 25% less tax. This is because you are converting $150,000 versus the original $200,000 to a Roth.

c. Provide a tax-free legacy

If you have a desire to leave money to your children and decrease the taxes they will pay when they inherit this money, then a Roth Conversion could make sense. As noted earlier, inherited IRAs are 100% taxable to your heirs and are subject to RMDs. If all their inheritance is from a Roth IRA, they won’t have to pay a single penny to the IRS. If gifting money at your death tax-free is the goal, seriously consider converting your IRAs to Roth IRAs.

d. Beating the 2026 tax bracket reset

In 2017, Congress passed a law that decreased taxes. The law reduced tax rates for practically every income level, as well as reduced corporate taxes for businesses. Tax rates are scheduled to remain at these lower levels until the end of 2025 when they are set to jump back up to the pre-2017 higher tax rates. To avoid paying higher taxes in the future, when the current lower tax rates expire, you might consider doing a Roth IRA conversion now. In saying this, we acknowledge that tax laws are subject to change and a lot can happen between now and 2026.

There are a lot of considerations to make when deciding to do a Roth Conversion. This strategy requires in-depth analysis and will not be advantageous for everyone.

For additional insights regarding Roth IRA conversions, read chapter 20 of Plan On Living.

6. Tax Loss Harvesting

Let’s say that Clara bought a mutual fund in a non-retirement account three months ago for $100,000. Because of the recent downturn in equities, this investment is now only worth $80,000. Clara could simply hold on to that investment and wait for it to rebound to $100,000. If she did this, there would not be any tax benefits or consequences by waiting for the depleted shares to rebound.

However, Clara is an opportunist and hates paying income taxes. She decides to sell the diminished investment and create a $20,000 capital loss which would benefit her tax-wise. She then invests the $80,000 into an investment that will behave similarly to the one she sold. Then when the market rebounds, she would still have the $100,000 of value plus a $20,000 capital loss. This could save her several thousand dollars this year on her income taxes.

You are allowed to deduct up to $3,000 of capital losses per year against your ordinary income. Any losses in excess of $3,000 are carried over to the following year. Additionally, capital losses will offset any current or future capital gains that you may have.

It’s easy to get caught up in the holiday season as the year ends. Don’t let important planning deadlines slip away. Taking small steps now will decrease your taxes and will shore up your retirement outlook.

Please reach out to Peterson Wealth Advisors if you have questions about any of the year-end financial planning strategies or if you would like to schedule a complimentary consultation by clicking here.