Year-End Financial Planning Checklist

By Phil Cutajar |  5 minute read.

As the year-end approaches, it's an ideal time to review your financial strategies and take advantage of tax-saving opportunities before key deadlines. Careful planning now can reduce your tax burden, maximize retirement savings, and position you for a financially successful new year. Here’s a checklist of essential wealth management tasks to help you prepare your investments for the coming year.

1.      IRA, 401(k), and HSA Contributions

If you haven’t yet made contributions to your tax-advantaged accounts for 2024, now is the time to act. For those who set up automatic contributions at the beginning of the year, it may be worth revisiting your contribution rate to ensure you’re maximizing your savings.

• IRA: The 2024 contribution limit is $7,000, with an additional $1,000 allowed for individuals aged 50 or older. Don’t forget spousal contributions if eligible.
• 401(k): The 2024 limit is $23,000, plus a $7,500 catch-up contribution for those 50 and above.
• HSA: If you’re enrolled in a high-deductible health plan, the 2024 HSA contribution limits are $4,150 for individuals and $8,300 for families.

These contributions offer valuable tax benefits, either by reducing taxable income (traditional accounts) or allowing for tax-free growth (Roth and HSA accounts).  Maximizing them each year is a smart way to optimize your retirement savings and reduce your tax liability.

2.      Flexible Spending Accounts (FSAs)

If you’ve set aside pre-tax funds to save on healthcare and dependent care expenses, you have until the end of the year to “use-it-or-lose-it”. Whatever funds are unspent by year-end will be forfeited.

• Healthcare FSA: Use the funds to pay for qualified medical expenses, such as co-pays, prescription medication, dental treatments, vision care, and certain over-the-counter items.
• Dependent Care FSA: Use the funds to cover qualified expenses for child care, after-school programs, or adult day care for dependent family members.

Check your balance, schedule appointments, and stock up on eligible items. If you’re unable to use up the funds by the year-end deadline, inquire if your employer allows an optional carryover or grace period. A carryover allows up to $610 in unused funds to roll over to next year. A grace period allows up to 2.5 months after year-end to use the remaining balance.

While FSA funds provide tax savings, it is essential to plan contributions carefully to avoid overfunding. Keep this in mind as you make your benefit elections for the coming year.

3.      Tax-Loss Harvesting (For Taxable Accounts)

Tax-loss harvesting can be an effective year-end strategy to reduce your taxable income if you have investments in a taxable brokerage account. By selling investments that have declined in value, you can "harvest" losses to offset gains from other assets, lowering your overall tax liability.

• Offset Capital Gains: For example, if you earned $6,000 in gains on one stock but have $5,000 in losses from others, harvesting those losses would reduce your net taxable gain to $1,000.
• Offset Ordinary Income: If your losses exceed your gains, you can deduct up to $3,000 in capital losses to reduce your ordinary income. Additional losses can be carried forward to future years.
• Short-Term vs. Long-Term Gains: Gains on assets held for less than a year are taxed as ordinary income at progressive tax rates, while long-term gains (on assets held for over a year) are taxed at lower rates (0%, 15%, or 20% depending on taxable income).

Consideration: Tax-loss harvesting is especially beneficial for high-income investors or those with significant capital gains. However, avoid violating the IRS’s wash-sale rule, which disallows the deduction if you repurchase a "substantially identical" asset within 30 days before or after the sale.

4.      Portfolio Rebalancing

Over time, the performance of different assets can cause your portfolio's asset allocation to drift from its original target. For instance, if stocks have performed well while bonds have lagged, your portfolio may have become more stock-heavy, increasing its risk profile.

• Why Rebalance? Rebalancing restores your portfolio to its intended asset allocation, ensuring that it aligns with your risk tolerance and long-term goals. It can also help manage volatility.
• How Often? There are no strict rules for rebalancing, some investors prefer to rebalance simultaneously with tax-loss harvesting at year-end, while others prefer to wait until January to start the new year with a balanced portfolio. The key is to rebalance at regular intervals or whenever your asset allocation drifts significantly from your target.

5.      Roth IRA Conversion

A Roth IRA conversion involves transferring assets from a traditional tax-deferred IRA or 401(k) account to a Roth IRA, enabling you to benefit from tax-free growth and withdrawals in retirement. There are multiple strategic reasons for performing a Roth conversion, here are just a few scenarios where a Roth conversion may be beneficial as the year-end approaches.

• Low-Income Years: If you’re experiencing a low-income year (e.g., early retirement, a gap in employment, or substantial deductions), a Roth conversion could lower your overall tax burden by allowing you to pay taxes on the conversion at a lower rate.
• Younger Investors: Those with a long investment horizon, or anyone expecting to be in a higher tax bracket in retirement, may benefit from Roth conversions to protect wealth in a tax-free account.
• Reducing Future RMD Impact: If you anticipate substantial Required Minimum Distributions (RMDs) that could increase your taxable income, consider Roth conversions before reaching RMD age to reduce future tax liability.
• Inheritance Benefits: Roth accounts pass tax-free to heirs, sparing beneficiaries from complex rules, taxes, and RMDs on inherited accounts.

How It Works:

• Determine the amount to transfer from your tax-deferred IRA or 401(k).
• Notify your account custodian to transfer the funds. The process may involve a trustee-to-trustee transfer, a direct transfer between accounts at the same institution, or a 60-day rollover.
• The amount converted is considered taxable income in the year of conversion.

Key Considerations:

• A Roth conversion could increase your taxable income, potentially bumping you into a higher tax bracket.
• Converted amounts are subject to the 5-year rule and standard distribution rules, so you must wait five years before taking penalty-free qualified distributions from the converted amount.

6.      Backdoor Roth IRA Conversion

High-income earners who are unable to contribute directly to a Roth IRA due to income limits can use a Backdoor Roth IRA Conversion as a workaround. This strategy allows contributions to grow tax-free in a Roth IRA.

How It Works:

• Step 1: Make a non-deductible contribution to a Traditional IRA.
• Step 2: Convert the non-deductible amount to a Roth IRA.

The Pro-Rata Rule: If you have both pre-tax and after-tax assets in your IRA when making a backdoor Roth conversion, the IRS requires that pre-tax and after-tax amounts are included proportionally.

The IRS calculates the taxable amount based on the proportion of the total of all IRA balances that consist of pre-tax versus after-tax assets as follows:

• (Non-deductible amount) / (Total of all non-Roth IRA balances) = Non-taxable percentage
• (Amount to be converted to Roth IRA) x (Non-taxable percentage) = Converted amount exempt from income tax

Example: Suppose you have $250,000 in an IRA, with $20,000 in after-tax contributions (8%). If you convert $10,000 to Roth, $800 (8%) would be exempt from taxes, and the remaining $9,200 would be taxable income.

Key Considerations:

• Converted amounts are subject to the 5-year rule and standard distribution rules, so you must wait five years before taking penalty-free qualified distributions from the converted amount.

7.      Mega Backdoor Roth 401(k) Conversion

The Mega Backdoor Roth 401(k) Conversion allows high-income earners to contribute beyond the standard Roth IRA limits by using after-tax contributions to a 401(k) plan, then rolling those funds into a Roth IRA or Roth 401(k). This strategy lets individuals contribute substantially more to Roth accounts each year, maximizing their tax-free growth potential.

How It Works:

• Verify Plan Eligibility: Check if your 401(k) plan allows after-tax contributions and either in-plan Roth conversions or in-service withdrawals. Not all plans allow it.
• Calculate Your After-Tax Contribution Limit: For 2024, the total 401(k) contribution limit is $69,000 (or $76,500 if 50+). Subtract your employee deferrals and employer match to find your maximum after-tax contribution.
• Contribute and Convert: Contribute the after-tax amount to your 401(k) and then convert it to a Roth.

Example Calculation:

• Employee deferral: $23,000 (or $30,500 if age 50+).
• Employer match: $6,000.
• Maximum after-tax contribution: $69,000 - ($23,000 + $6,000) = $40,000.

In this example, you could contribute up to $40,000 in after-tax dollars.

Key Considerations:

• Consider scheduling conversions or rollovers frequently (e.g., monthly or quarterly) to minimize taxes on earnings, as earnings are taxable upon conversion.
• Track contributions carefully to avoid penalties for exceeding IRS contribution limits.
• Converted amounts are subject to the 5-year rule and standard distribution rules, so you must wait five years before taking penalty-free qualified distributions from the converted amount.

8.      Open Enrollment

October to December is when most people have to make their healthcare and benefit selections for next year, including employer benefits, Medicare enrollment, and Affordable Care Act enrollment. Look over your benefit plans and make any needed updates. If you are expecting a child next year or if you are caring for aging or disabled relatives, you may also need to adjust your W-4 tax withholding for next year. Even if you have no changes, you may still be required to confirm your selections for next year during open enrollment.

Conclusion

Year-end financial planning can be a powerful way to optimize your tax situation and set yourself up for a successful financial future. By addressing key tasks like maximizing contributions, tax-loss harvesting, rebalancing, and utilizing Roth conversion strategies, you can potentially reduce your tax liability, increase tax-free retirement savings, and ensure your portfolio aligns with your goals.

To make the most of these strategies, consider consulting a tax or financial planning professional to help with your specific needs and guide you through key concerns, such as the wash-sale rule or Pro-Rata rule. Get started today to ensure you’re prepared for the new year with a strong financial position.

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Phil Cutajar is an independent unaffiliated writer, blogger, and financial analyst.

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