With so many year-end tasks to attend to it’s difficult to know where to start and how to prioritize. Here are our four financial items we think you should focus on as the new year approaches.
1) Feed Your Cash Reserves
With basic savings accounts currently offering 5%+ annual interest rates, your cash can earn a little bit while it sits still. A couple of considerations about this:
Take another look at where your cash is: If your money is currently in low- or no-interest accounts, think about moving it to a vehicle with better rates such as basic money market accounts, or short-term CDs, or even U.S. Series I Saving Bonds (“I Bonds”). Your cash reserves normally include money you expect to spend within the next year or so, as well as your emergency fund. (Note: I Bonds require you to hold them for at least a year.)
Stay focused on your long-term goals: While current rates are appealing, don’t be distracted from your greater investment goals. Even at these higher rates, your cash reserves are ultimately expected to lose their value in the face of inflation. Inflation is on the high side, so that 5% isn’t as amazing as it may seem. Once you put your cash in those high-interest savings accounts, you should consider placing the rest into your investment portfolio—and leave it there to pursue your long-term goals.
2) Trim Your Portfolio
Year-end is a good time to perform an annual review and ensure that you are maintaining a tidy portfolio mix. For example, you might consider:
Rebalance: In 2023, relatively strong year-to-date stock returns may justify rebalancing, particularly if you can do so within your tax-sheltered accounts.
Rearrange: With annual earnings becoming clearer at year-end, you might consider shifting some of your investments from taxable to tax-sheltered accounts, such as traditional or Roth IRAs, HSAs, and 529 College Savings Plans. You have until next April 15, 2024 to make your 2023 contributions for many of these options, but there is no reason to wait if the money is available today.
Revise: As you rebalance, relocate, or add new holdings according to plan, you might also consider capitalizing on the latest science-based ETF solutions by Dimensional Fund Advisors, Avantis Investors, and other evidence-based fund managers. With that said we do not suggest major overhauls, especially where embedded taxable gains may cancel the benefits of a new offering. It’s just worth noting that as you make changes it is also a good opportunity to consider new, potentially improved resources available to you.
Redirect: Year-end is also a good time for many to consider charitable giving. You can donate highly appreciated investments out of your taxable accounts and into worthy causes either directly or through a Donor Advised Fund (DAF). By doing so you could potentially reduce your tax liability. Click here for more information about using a DAF as a vehicle for your philanthropic efforts.
3) Additional Tax Considerations.
There are many tax-savvy moves you might consider at year-end to put yourself in the best possible position for upcoming deadlines. For example:
RMDs and QCDs: Retirees and those who have inherited an IRA should continue making Required Minimum Distributions (RMDs) out of their IRAs and similar tax-sheltered accounts. The penalty for missing an RMD is equal to 25% (or 10% if corrected in a timely manner for IRAs) of the shortfall. If you’re charitably inclined, you may want to consider making a Qualified Charitable Distribution (QCD) from your RMD. Those who are over 70 ½ can donate up to $100,000 of their otherwise taxable distribution from an IRA directly to a qualified charity. This allows you to reach your philanthropic goals without incurring unnecessary income taxes.
Harvesting Losses … and Gains: There may still be opportunities to perform some tax-loss harvesting in 2023 to offset current or future taxable gains from your account. As long as long-term capital gains rates remain in the relatively low range of 0%–20%, tax-gain harvesting might also be worth exploring. Work with your tax-planning team to determine what makes sense for you. You can also click here to reach out to our *affiliated CPA firm Davis & Hodgdon CPAs.
Keeping an Eye on the 2025 Sunset: It’s impossible to know exactly what the future holds, but ifCongress does not act, a number of tax-friendly 2017 Tax Cuts and Jobs Act provisions are set to expire on December 31, 2025. If so, there could be higher ordinary income and capital gains tax rates after that. Much could change before then, so we’re not suggesting you make plans based on what might happen. However, if it’s in your overall best interests to engage in various taxable transactions anyway, 2023 may be a relatively tax-friendly year in which to complete them. Examples of some taxable transactions you might consider include a Roth conversion, harvesting long-term capital gains, taking extra retirement plan withdrawals, exercising taxable stock options, gifting to family, just to name a few.
4) Trim Your To-Do List.
We kept our list of year-end financial best practices short intentionally. Sometimes less is more, so perhaps you will consider just one or two of these ideas. Think about which might best compliment your financial situation and take the time to really think it through.
“Instead of asking yourself, ‘What should I do first?’ Try asking, ‘What should I neglect first?’ Trim, edit, cull. Make space for better performance.”
Please reach out to us for assistance, additional ideas and best-practice advice. At Copper Leaf Financial we firmly believe that proper planning and tax strategizing is a critical component of developing a solid financial plan and investment strategy.
Recipients should not act on the information presented without seeking prior professional advice.
*Copper Leaf Financial is an affiliated and separately registered entity.