The end of the year is upon us, and with it comes one last chance to get your financial ducks in a row before it ends up costing you.
You see, while many of us are focused on trimming trees, making last-minute gift purchases, and planning holiday parties, the truth is that all of us likely have that one item on our financial to-do list that we’ve been meaning to get to all year long.
And while it may seem like no big deal right now, failing to take care of just one year-end planning item that you’ve been putting off all year or simply aren’t aware of could end up costing you thousands of dollars over the near- or long-term.
And how’s that possible?
Well, imagine for a moment that you received stock options from your employer, but you haven’t paid attention to your vesting schedule.
Suddenly, a large portion of your award vests at a high market value, and come next April, you’re likely stuck with a hefty tax bill that you weren’t prepared for.
That’s why evaluating these scenarios would likely have given you time to properly disposition your ISOs or raise the cash necessary to cover your tax bill.
And even if your financial situation doesn’t involve the complexities of equity compensations, there are plenty of things to consider before the year comes to a close.
This approach involves reviewing things like your designated beneficiaries, assessing your cash management process, and even preparing for potential tax changes that could give you a leg up and save you some money as we enter the new year.
Either way, while this list may not be exhaustive, reviewing and taking care of just one item could save you time and money and get you started on the right foot in as we head into 2024.
Top 20 Year-End Planning Tips for 2023
Now, while there are a host of things that you could do as the year comes to a close, we’ve narrowed down our list to 20 things that high earning tech professionals and business owners should consider before the end of the year.
Tip #1: Optimize Your Investment Portfolio
Now, as we close out the year, one of the first things you’ll want to do is to review your portfolio to ensure that it aligns with your risk tolerance and investment goals.
That’s because market shifts throughout the year can leave your asset allocation out of alignment. That’s why now is a perfect time to realign your investment portfolio with your chosen investment objective and start the new year off right.
This process will ensure that you’re maximizing your after-tax returns, considering tax- and cost-efficient funds, and assessing the tax impact of your investment choices to enhance and preserve your assets.
So then, to get started with this process, you can ask yourself:
“Does my current portfolio allocation still align with my financial goals and risk tolerance after this year’s market changes?”
Then, using this question as a starting point, review your current asset allocation and compare it to your target allocation found in your investment policy statement. And if you don’t have an investment policy statement, then now would be a good time to talk to your financial advisor about getting one put together.
Tip #2: Charitable Giving Through a Donor-Advised Fund
Alright, the next thing you’ll want to consider as the year ends is a donor-advised fund. Now, if you have one in place, reviewing your charitable contributions before year-end ensures that you’re maximizing your tax deductions.
And if you don’t have one in place, it’s worth noting that a donor-advised fund can be especially advantageous and offers flexibility in donation timing and tax planning, so it’s something worth looking into.
Ask yourself, “Have I optimized my charitable giving this year to achieve my philanthropic goals while maximizing my tax benefits?”
If you haven’t, then open a donor-advised fund if you don’t already have one, and contribute cash, stocks, or other assets.
Tip #3: Maximize Your Retirement Account Contributions
Now, the end of the year is also your last chance to maximize contributions to retirement accounts for the current tax year. Taking this approach could allow you to reduce your taxable income and put your money to work sooner, rather than later.
Here you’ll want to ensure that you’re contributing the maximum amounts to your retirement accounts and explore non-deductible 401k and IRA contributions, followed by Roth conversions to take advantage of tax-free growth.
Either way, check your year-to-date contributions to see if they are below the limit. If there is room, adjust your remaining contributions to reach the maximum before year-end. And if you need additional information, be sure to check out our resources at https://fimastery.com.
Tip #4: Consolidate Your Retirement Accounts
You know, when it comes to saving, multiple accounts can lead to scattered assets and an unclear investment strategy.
That’s why consolidating before year-end can help simplify your finances and start the new year with a clear, winning strategy.
And so to get going, start by identifying all your retirement accounts and begin the rollover process for any old 401(k)s or similar accounts into your current 401(k) or an IRA. This way, you’ll have one simple strategy from which to fund your crucial financial independence goals.
Tip #5: Implement Tax Loss Harvesting
Now, we wrote about the topic of tax loss harvesting a few weeks back, so be sure to check out our report on that topic.
But nevertheless, it’s essential to remember that losses in your portfolio can offset gains and reduce your taxable income as they occur.
That’s why the year-end is the critical time to review your portfolio for this opportunity.
You can do so by identifying investments that are down from their purchase price, and sell them to realize the loss, which can be used to offset any realized capital gains and up to $3,000 of ordinary income on your tax return.
Tip #6: Manage Your Company Stock Concentration
Now, as we wrote about earlier this year, having a significant portion of your wealth in company stock poses a high risk to your life and financial goals.
That’s why now’s a good time to reassess this risk and make strategic adjustments.
And one way to determine whether you’re taking on too much risk is to ask, “are my holdings in my employer’s stock appropriately balanced, or am I overexposed to potential volatility and risk?”
So then, if you come to realize that you’re taking on too much risk, or even if you still need help figuring out what the right level of concentration for you is, be sure to check out our piece on managing concentrated company stock.
Tip #7: Ensure Adequate Tax Withholding for Equity Compensation
Not paying enough tax on equity compensation is another issue many high earners face come tax time.
That’s why, to avoid unwanted surprises come April, you’ll want to take time now to ensure that the withholding on your equity compensation is accurate before the year closes and that you have enough cash on hand to pay this year’s tax bill.
Here what you’ll want to do is to ask, “is the amount being withheld as my RSUs vest or ISOs exercised, sufficient to cover my expected tax liability?”
That’s why, at a minimum, take a few minutes to to review your pay stubs or speak with your HR department to check current tax withholdings and adjust if necessary to avoid under-withholding penalties.
Tip #8: Use Your Incentive Stock Options Strategically
Along the same lines, exercising ISOs has implications for your taxes, especially as it relates to AMT or the Alternative Minimum Tax.
Here again, it’s crucial to have a plan to exercise your incentive stock options in a way that minimizes alternative minimum tax and leverages favorable tax treatment.
Obviously, the analysis can be complex, but you can start by evaluating the potential tax impact of exercising your ISOs, and if it makes sense, proceed with the exercise of the options before the end of the year.
Tip #9: Sell Underperforming Incentive Stock Options
Now, given current market conditions, if you have ISOs that have declined in value, selling them to realize losses that can offset other gains is one tactic best reviewed before year-end for tax purposes.
That’s because selling ISOs that are down in value is one approach to tax-loss harvesting strategy and can lessen your AMT burden.
Now, before you take this options, be sure to run it by your financial or tax advisor to ensure that you’ve got all of your ducks in a row.
Tip #10: Develop a Detailed Cash Flow Analysis
Now, as many of us know, understanding your cash flows is crucial for making informed financial decisions.
That’s why reviewing your spending decisions at year-end can help you adjust your spending and saving strategies accordingly.
Here what you’ll want to do is analyze your income versus expenses to ensure that you’re making informed decisions that align with your overall financial plan.
You can start by tracking your income and expenses using a budgeting tool or spreadsheet to identify areas where adjustments can be made to better align with your financial objectives.
And if you still need help in this arena, be sure to check out our post on the difference between budgets and cash flows.
Tip #11: Reevaluate Your Fixed Income Investments
Now, depending on your current situation, you may have fixed-income holdings that likely need some tender loving care.
That’s because interest rates can fluctuate, affecting the performance of overall fixed-income investments. And so, the year-end is a great time to ensure these holdings still meet your income needs and risk profile.
And where should you start?
Well, as interest rates change, begin by reviewing your fixed income holdings to ensure they’re meeting your investment needs and take advantage of current market conditions.
Ultimately, what you want to do is take the time to ask, “are my fixed income investments performing in a way that supports my income requirements and risk tolerance in the current interest rate environment?”
If they’re not, take a moment to evaluate whether trimming, holding, or adding to your fixed-income positions makes sense this time of the year.
Tip #12: Monitor Your Credit Report
Fraudsters are out in full force during the holidays, which is why you’ll want to check your credit report to catch any inaccuracies or fraud before they impact your financial decisions in the new year.
Indeed, it’s crucial to take just five minutes and log into your preferred credit reporting agency’s website to ensure that you’re not missing anything.
Once you’ve downloaded your credit report, ask, “are there any errors or unrecognized activities on my credit report that need to be addressed before they potentially impact my financial options?”
Doing so will help you avoid any headaches and help you start the year off on the right foot.
Tip #13: Set a Budget for Holiday Spending
Without a budget, holiday spending can spiral out of control and impact your overall financial well-being.
That’s where setting a budget before holiday spending kicks in can help you maintain financial discipline and start the year off on the right foot.
Now, the focus of your financial discipline during the holidays should be to target a budget that prevents overspending and aligns with your financial goals.
The simplest approach here to this end is to create a holiday spending plan, listing all expected expenses and setting spending limits for each category to keep you within your overall budget.
Tip #14: Optimize Your Employer Benefits
Another thing to consider here at year end is your year-end benefits. Now, with benefits elections season largely behind us, optimizing your benefits might seem like ship that has already sailed.
With that said, however, many employers offer a second chance to make last-minute changes in December before your benefits go into effect in January.
That’s why now may be the time to ensure that you’re taking full advantage of all your employer benefits.
So then, be sure to review all your current employer benefits, understand what’s available, and make any changes during the second-look period following open enrollment to optimize your benefits for the upcoming year.
Tip #15: Adjust Your HSA Contributions
And, while you’re considering that second look at your benefits, take the time to evaluate the balance in your Health Savings Account (HSA) and make adjustments as necessary.
Now, as you’ll likely recall, contributions to your HSA offer a triple tax advantage, and the year-end is your last chance to change your contribution for the upcoming year.
And how much should you contribute to this account?
Well, one of the easiest ways to determine whether you should add more money to this account is to check your HSA balance right now. Do you still have money in this account? Or, could you have used more money this year?
Now, if you have a good chunk of change in your HSA, then your contributions may be on the right track.
And, if you’re out of HSA money, now might be a good opportunity to consider upping your contributions for 2024 if your employer offers you a second-look to adjust your benefits elections.
Tip #16: Review and Revise Your Estate Plan
Another crucial topic to review at year-end is your estate plan. Now, many of us don’t want to think about what happens after we pass. But the truth is that laws and personal circumstances change, and so, our estate plans need to adapt and change with the times.
So then, the year-end is a natural time to ensure your estate plan reflects your current wishes and maximizes your tax advantages.
Here, what you’ll want to do is think back on the past year and update your estate plan to reflect any changes in tax laws, your wealth status, and personal wishes.
You can do this by reviewing your current estate planning documents, checking them for accuracy and current dispositions, and making changes as necessary with the help of your attorney or online legal services, depending on your current situation.
Tip #17: Update Your Designated Beneficiaries
Along those same lines, you’ll likely want to review your designated beneficiaries. Here again, life changes such as marriage, divorce, or having children can affect your beneficiary choices for both your probate and non-probate assets.
So then, reviewing your beneficiary designations on the regular can help ensure they match your current relationships and intentions.
And how do you get started?
Well, here, what you’ll want to do is log in to your qualified retirement accounts, insurance accounts, and other accounts that require beneficiary designations so that you can review the current designations and submit the necessary online forms to make any updates.
Tip #18: Conduct a Comprehensive Insurance Review
Now, insurance has been a hot topic this year because premiums have been rising across the board. And so, while annually reviewing your coverages to cash in on lower premiums is likely not in the cards this year, it’s still crucial this time of the year to ensure your coverage meets your changing life needs.
More specifically, you’ll likely want to review changes in your current life situation over the past year and evaluate gaps or overages in your policies. Indeed, two areas you may want to consider specifically are umbrella and life coverages to meet unexpected needs.
Either way, to achieve peace of mind, collect all your insurance policies, review the coverage and premiums, and compare them to your current needs to see if adjustments are needed. Then, talk to your advisor or give your insurance agent a call to make necessary changes as needed.
Tip #19: Assess the Adequacy of Your Emergency Fund
Another way to prepare for the unexpected is to evaluate your emergency savings fund. Now, an emergency fund should cover several months of living expenses, but this likely will vary based on your income, assets, and lifestyle needs.
Either way, the year-end is a good time to review and adjust this fund to reflect any changes in your lifestyle or income.
And, if you’re not sure how much to save or whether an emergency fund still makes sense for you, then be sure to check out our latest post on fimastery.com to get more information on this topic.
Tip #20: Prepare for Potential Tax Changes
Finally, the last thing that you’ll want to do is to prepare for tax laws that could be coming down the pipe.
That’s because tax laws can change annually and can impact your long-term financial independence strategy.
Now, while few tax law changes are likely to pass as we head into election season in the year ahead, the truth is that big changes, like the sunsetting of the Tax Cuts and Jobs Acts in just a couple of years, are still worth noting.
That’s why it’s crucial to stay ahead of potential changes in tax law to protect yourself from shifts that could impact your tax liabilities and investment decisions.
Preparing for Year-End
Now, when it comes down to it, the big takeaway here is that as the year draws to a close, is that it’s not just the festive lights that should be catching your attention this holiday season, but also those crucial financial tasks that have been waiting in the wings all year long.
And while the list we just covered might seem a bit overwhelming at first, the truth is that taking just a few minutes to review your financial situation could save you time and money as we head into the new year.
And if you’re not sure where to get started, be check out our learning resources at https://fimastery.com where you’ll find additional “how-to” information on each of these topics.
Indeed, from the stock options you’ve overlooked to the tax-loss harvesting opportunities ripe for the picking, there’s likely a goldmine of potential savings and financial optimizations at your fingertips.
But remember, it’s not just about your investments, it’s about taking a holistic view of your financial well-being. That’s why updating beneficiaries, fine-tuning your cash management process, and staying ahead of potential tax changes next year and in the years ahead are not just items on a checklist, they’re the pillars of a sound financial foundation.
So then, as the clock ticks closer to the start of the new year, be sure to embrace this opportunity to turn over a new leaf in your financial plan and, most importantly, take one step closer to becoming the master of your own financial independence journey.