End-of-Year Action Items for Investors for 2023

December 5, 2023

As the end of 2023 approaches, there is still time to make impactful decisions to position your savings strategy for success. Taking a few important steps in December can help to maximize your goals for 2023 and ensure that you’re entering the New Year ready to make the most of your financial plan.

Remember that your advisor, tax attorney, 401(k) plan administrator, and other financial experts will need time to fulfill your current year requests before December 31st, so you’ll need to act quickly to allow your team to address these items.

Here are a few important year-end strategies to consider, while there is still time to take action:

Final 401(k) Contributions

Following the high inflation of 2022, the maximum annual contribution to 401(k) accounts was increased to $22,500, and the catch up for those age 50 or older was raised to $7,500. If you haven’t already maximized your 401(k) contribution for the year and are looking for a way to defer additional taxes while saving for retirement, you still have one or two more pay periods to make an impact. You can defer up to 100% of your paycheck. If you make fixed dollar contributions each pay period, make sure you have accounted for the new, higher contribution amount.  If you turned 50 this year, don’t forget you now have access to the catch up contribution.

401(k) contributions can only be made through payroll and must be completed before December 31st to count toward 2023. Be sure to adjust your deferral now to take advantage of those year-end paychecks or bonuses.

After the New Year, there are still opportunities to maximize retirement savings, as Traditional and Roth IRA contributions for 2023 are allowed until the federal tax filing deadline on April 15, 2024. SEP IRA contributions are also allowed up to the tax filing deadline, including extensions.

Annual Required Minimum Distributions (RMD)

Following the implementation of the SECURE Act 2.0, the required beginning date for Required Minimum Distributions ("RMD") was changed to age 73. This is the second adjustment in three years and represents an increase from the previous age 72 requirement. The calculation is based on your current age and the account balance from December 31st of the prior year.  It applies to tax deferred accounts like traditional, SEP and SIMPLE IRAs as well as 401(k) accounts. While you can take a larger distribution, failing to meet the minimum calculated amount could lead to a 25% penalty in addition to the remaining distribution. While this is a decrease from the earlier 50% penalty, the consequences remain steep. RMDs must be withdrawn by December 31st.

If you have multiple retirement accounts, the RMD must be calculated for each account. One advantage to traditional, SEP, and SIMPLE IRAs is that the RMD for each account can be aggregated and distributed from the account of your choice. However, qualified plans (including 401(k), 403(b), and 457 plans) require that the RMD be taken from each account.

There are a few notable exceptions. Roth IRAs do not require an RMD, since distributions are not taxable. For non-business owners still working at age 73 and beyond, RMDs are not required from your workplace retirement account if you are still actively employed, although you will still be required to take the distribution from your IRA accounts.

Roth IRA Conversions

A Roth IRA conversion involves moving assets from a pre-tax retirement plan (including a Traditional IRA or a qualified employer-sponsored retirement account) into your Roth account. Although taxes will be paid on the converted assets, the funds will be free from future taxation. The most common example is converting traditional, SEP or SIMPLE IRA assets to a Roth IRA, but the process can also be completed within an employer sponsored retirement plan, like a 401(k), 403(b), or governmental 457(b) through an “in-plan Roth rollover.”  It is important to know that while a conversion from a traditional IRA to a Roth IRA allows for taxes to be paid from the converted assets, taxes due to conversion within an employer plan require the taxes to be paid when you file your taxes.

Roth conversions are considered taxable in the year the money is transferred. So, if you want to pay the taxes in 2023, the assets must be converted before December 31st. Unlike annual IRA contributions, which are limited to $6,500 per year and $7,500 for those 50 and older, there is no limit to the amount that can be converted.

Tax Loss Harvesting

Stock and bond market returns have been uneven in 2023 with some stocks performing strongly while others have experienced losses. The latter group may provide an opportunity to offset gains and even income. Tax loss harvesting is a strategy that involves selling an investment that has declined in value from its original purchase price and using the tax loss to offset gains on other investments. Excess losses can be used to offset up to $3,000 of taxable income for the year.

For example, if you have highly appreciated stock in your portfolio and have resisted selling the stock to avoid anticipated taxes, you could sell another stock or fund with a current loss as a way to offset the taxes due. If the loss is greater than the gain, up to $3,000 can be used to offset income in that calendar year. Additional losses above this amount can be carried over into the subsequent years and used to offset future gains and/or income. In addition, you can use the proceeds from the sale to purchase another investment that meets your asset allocation needs.

Charitable Contributions and QCDs

Charitable contributions can help reduce your overall tax burden for 2023. Regardless of the amount that you would like to donate to your favorite 501(c)(3) organization, you will need to do so before December 31st. To receive the tax benefit of your donation, you must exceed the standard deduction which is currently $13,850 for individuals and $27,700 for married taxpayers who are filing jointly.

While there are many ways to donate to your favorite charities, here are four strategies you may consider.

  1. “Bunching” your donations.  Bunching involves making two years of contributions in the same year and using the standard deduction the following year.
  2. Gifting low basis stock.  By providing a direct gift of appreciated stock, you can receive a deduction of the full value while avoiding capital gains that would come with the sale of the stock.
  3. Qualified Charitable Distributions (QCD).  This strategy enables you to donate up to $100,000 tax-free when the funds are disbursed directly from an IRA account to a qualified non-profit organization.
  4. A one-time legacy IRA QCD.  New in 2023, this gift can be used to create a charitable gift annuity or charitable remainder trust that can be distributed to multiple charities.

For more information on these charitable giving strategies, see Malcolm Butler’s recent article in the Savannah Morning News.

Fund a 529 Education Account

A 529 plan is a tax-advantaged education savings vehicle that is sponsored by a state, state agency, or educational institution. Funded by after-tax contributions, 529s are designed to allow tax-deferred growth and tax-free withdrawals for qualified educational expenses. This includes college, K-12 education and even trade schools.

Anyone can open a 529 account for a beneficiary, which makes them a great planning tool. Contributions are considered a gift and current gift-tax limits allow up to $17,000 per individual, or $34,000 per couple, for 2023 without having to file a gift-tax return. In addition, investors can contribute up to five times that annual figure as a “superfunding” lump sum, contributing up to $85,000 as an individual or $170,000 as a married couple under current gift tax laws.  Additional gifts cannot be made until after five years have passed.

Review Your Beneficiaries

Retirement accounts such as IRAs, 401(k)s, and annuities each have their own beneficiary designations, which often receive little attention after the account has been established. It’s especially important to review and update your beneficiary information following major life events, including births, deaths, marriages, and divorces. Review your beneficiaries annually to ensure that your wealth will be transferred to the right people in the event of your death.

Take Advantage of Small Business 401(k) Start-Up Credits

Thanks to the passage of the SECURE Act 2.0, small business owners can receive tax credits of up to $5,000 related to adopting and maintaining a new 401(k) plan. These tax credits are available for three years and are designed to help offset the cost for small businesses to start a 401(k) plan, offer employee education, and provide employer contributions.

An eligible employer with 50 or fewer employees can claim a tax credit for up to 100% of qualified start-up costs. An eligible employer with 51 to 100 employees can claim a tax credit for up to 50% of qualified start-up costs.

Planning for 2024

There are additional changes coming in 2024 including increases in the contribution limits for retirement accounts.

  • 401(k): $23,000 for individuals and $7,500 catch up for those 50 or older.
  • IRAs/Roth IRAs: $7,000 for individuals and $1,000 catch up for those 50 or older.
  • Gift tax limits increase to $18,000.
  • 529s that are 15 or more years old can be transferred to a Roth IRA for the beneficiary subject to annual contribution limits. There is a lifetime limit of $35,000.

    As we approach the end of 2023 and ease into the holiday season, be sure to give consideration to these end-of-year retirement and tax-saving strategies. At The Fiduciary Group, our team is here to discuss whether these strategies make sense within the context of your overall goals and financial plan. Please reach out to us if we can help with year-end financial planning.