By Ryan Egolf, EA, Senior Tax Planner
As the New Year quickly approaches, it’s time to put a bow on your 2023 financial plan. Like many Americans, we tend to procrastinate until the last second. However, there are plenty of things you can and should consider. While this is by no means an exhaustive or comprehensive list of financial planning tools, these three broad areas will get you headed in the right direction.
As you’re thinking about these topics, please remember to consult with your financial advisor to make sure the information you have is accurate and beneficial to your unique situation.
Insurance is always a tricky area to cover. People tend to undervalue the importance of proper coverage. While premiums can cost more than you are willing to pay, no one in an accident has ever said, “I wish I had less insurance.” And in more dire situations, your loved ones named as beneficiaries will be covered.
· Home & auto insurance – Review the cost of your current insurance coverage. Rates are more accessible than ever before. While you may feel loyal to your current carrier, you could be missing out on big savings for similar coverage. It is better to do your research and plan accordingly for any increase in costs. Do not be blindsided when premiums are due.
· Disability insurance – According to the Social Security Administration, more than a quarter of today’s 20-year-olds will become disabled before they reach retirement age.1 Disability insurance can help provide income replacement if you are unable to work for an extended period of time. In some cases, those payments are tax-free. Check into your employer’s short- and long-term disability plans, as they are usually the most affordable options. If you are self-employed or are more susceptible to injury or sickness, consider private coverage.
· Life insurance – Most employers will pay for employees’ basic group term life insurance. However, the coverage provided often is limited, so you may want to consider supplemental coverage. Additionally, there are many other types of life insurance dependent on your current and long-term situation. One of the greatest things about insurance is the liquidity it provides when needed most and tax efficiency. Ensure to review often as life changes happen.
· Health insurance – Most employers update health plans annually and the cost of coverage or deductibles may increase. Be aware of those changes and ask your benefits team for all your options. For anyone self-employed, you may take a deduction for health insurance costs paid. For low-income earners, look at marketplace policies that could offer you tax credits or subsidized state-run programs.
Taxes & Retirement Plans
Tax law seems to get more complicated every year. As the Tax Cuts and Jobs Act (2017) sunsets in 2026, taxes will only become more complex. There are plenty of unique ways to save on your tax return, but the average person can take advantage of many simple opportunities to reduce their tax bill.
· Tax loss harvesting – This can be a great way to reduce taxes in years with large capital gains. Be mindful about wash sales if you decide to buy the stock back before 30 days.
· Roth IRA conversions – Consult your financial advisor to find out if this strategy is right for your situation. This can be paired very nicely with charitable giving.
· Contribute to your employer sponsored retirement plans and other retirement plans – This would include any catch-up contributions for of-age individuals. Note that the deductibility of your IRA is contingent on your Modified AGI (MAGI). Roth contributions are also dependent on MAGI. You also have the option to make Roth contributions to your employer’s plan should that make sense for you.
· RMDs – For those of you turning 73 in 2023, make sure that you take your required minimum distributions (RMDs) from your employer sponsored retirement accounts and IRA-based plans. Late withdrawals have a maximum penalty of 25%.
· HSAs and FSAs – If you have a health savings account (HSA), this is a great way to save for medical expenses. You will also be able to deduct the contributions on your return, subject to limitations. Once in retirement, you can use HSA funds to pay for health insurance premiums. Flexible Savings Accounts (FSAs) are very similar, but do not allow participants to roll over funds infinitely. In 2023, FSAs allow a $610 carryforward to the next year and a grace period to spend the funds (usually 2 months).
Budget & Lifestyle
Review your expenditures. It’s very easy to set a budget for a year and attempt to stick to it. But life happens and unexpected expenses come up – such as your car’s transmission failure a month after your warranty expires. You need to be prepared for emergencies and the unexpected.
· Review your income and expenses year-to-date – Have you stayed within the budget that you have set, while maintaining your lifestyle? If not, what adjustments need to be made for next year? The closer you get to retirement age, the more crucial this becomes. Financial advisors have tools at their disposal to help track your expenses to the penny and create projections that determine your success.
· Set your goals for 2024 – Also consider any goals and milestones that you would like to achieve over the next 3, 5 and 10 years. Your long-term goals start now. Having the discipline and flexibility in a plan to live your life while saving for retirement can spare you and your family from stress.
· Make necessary changes – If you’re in retirement, you may be concerned if your money will last you. That may mean cutting back on spending, downsizing the home, or working a few extra years. These things aren’t always a bad thing but are huge lifestyle changes that you need to be prepared for.
· Review your debt and plan to pay it down – However, if it’s a low-interest debt, it may make sense to keep that loan as you would earn more in other investments vehicles. Every situation differs.
I hope these tips get you focused on year-end planning and looking forward to 2024. No two people’s financial situation is alike and some of these tools may not be right for you. Even if you missed the deadline, you can bookmark this article for next December!
1 Social Security Administration, “The Faces and Facts of Disability,” https://www.ssa.gov/disabilityfacts/facts.html.
Ryan Egolf is not registered with Cetera Advisor Networks LLC. Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. This blog is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.