Building wealth is a significant step in the process of building your dream financial house. Typically, if you are working with a financial planner, you will have a meeting covering your comprehensive financial plan. However, it you are not working with a financial planner, here are three year-end strategies; related to tax planning, retirement planning and charitable giving; to consider to help keep your financial house in order:
Although tax planning is a year-round activity, this is a good time to look at some year-end activities you could consider.
Did your income increase in 2022?
Consider maximizing your deductions by taking medical expense deductions in 2022 instead of 2023. Also, use your medical reimbursement and dependent care accounts and health and medical savings accounts (if applicable).
Consider paying off consumer loans and credit card debts so that payments to nondeductible consumer interest are reduced or eliminated.
Review your investment portfolio with your advisor to determine if losses on passive investments can be used to offset gains on other investments.
Consider deferring some of your self-employment, consulting or bonus income into 2023.
If you are employed, review and adjust your withholding, if applicable.
Make sure you are maximizing your retirement plan contributions. In addition to any employer sponsored retirement plan, consider contributing to an IRA. Contributions made to your 401(k) plan or traditional IRA reduces your taxable income. In addition, you don’t pay taxes until you withdraw the funds at retirement.
The 2022 contribution limit is $20,500 for a 401(k) (not including catch-up contributions for those 50 years of age and older).
Although you don’t have to actually fund your IRA until April of 2023, you can contribute now. The maximum contribution to traditional IRA or Roth IRA for 2022 is $6,000 (plus $1,000 over age 50 catch-up).
Keep in mind that procrastination can cost you money. If you make your IRA contribution at the last minute, you miss out on more than 12 months of potential gains as well as the chance for those gains to compound over time. So the earlier you contribute to your IRA, the better.
If you are planning to make a donation to a qualified charity, consider donating long-term capital gain property to a charity (such as appreciated stock) rather than selling the property and donating the proceeds. The charitable deduction for a gift of long term capital gain property generally is based on the fair market value of the property and there is no income tax (to you) on the appreciation.
If you are over 72 with a traditional IRA, you are required to make minimum distributions. If you don’t need the funds, consider reducing your taxable income by donating your distribution directly to charity.
Because everyone’ situation is different if you aren’t working with a financial planner, you want to talk with your tax professional.
Take some time to plan before the end of the year. Remember, you are the CFO of your life! These three strategies can help you take steps to building your dream financial house in 2023.