As the end of the year approaches, it’s the perfect time to review your finances and make strategic moves that can save you money, reduce your tax burden, and set you up for financial success in the year ahead. From tax planning to charitable giving, here are ten financial moves to consider before December 31st.
1. Maximize Your Retirement Contributions
If you have a 401(k), IRA, or other retirement accounts, now is the time to ensure you’re contributing as much as possible. The IRS sets annual contribution limits, and making the most of these accounts can reduce your taxable income and increase your retirement savings.
How to Maximize Contributions:
- Contribute Up to the Limit: For 2023, the 401(k) contribution limit is $22,500 (or $30,000 for those aged 50 and older). The IRA limit is $6,500 (or $7,500 for those over 50).
- Set Up Auto-Transfers: If you’re not at the limit, consider setting up automatic contributions or making a one-time deposit before year’s end.
- Take Advantage of Employer Matching: Ensure you’re contributing enough to qualify for any employer match in your 401(k)—it’s essentially free money for retirement.
Contributing the maximum to your retirement accounts can provide tax advantages and help secure a more comfortable retirement.
2. Use Up Flexible Spending Account (FSA) Balances
Many FSA plans have a “use-it-or-lose-it” rule, meaning any unused funds may not carry over into the next year. FSAs can be used for medical, dental, vision, and other qualified expenses, so make sure you’re using these funds wisely before they expire.
How to Use Remaining FSA Funds:
- Schedule Medical Appointments: Consider using FSA funds for routine checkups, dental cleanings, or eye exams.
- Stock Up on Approved Medical Supplies: You can use your FSA to purchase items like contact lenses, medical equipment, or over-the-counter medications.
- Check for Carryover or Grace Periods: Some plans allow a small carryover or provide a grace period, but it’s best to confirm with your plan administrator.
Using up your FSA funds by year-end helps you avoid forfeiting money that could otherwise benefit your health.
3. Review Your Investment Portfolio
Year-end is a great time to rebalance your investment portfolio. Assess how your investments have performed, review your asset allocation, and make adjustments as needed to align with your long-term goals and risk tolerance.
Steps to Rebalance Your Portfolio:
- Assess Performance and Allocation: Review each investment to determine if the mix of assets still aligns with your goals.
- Consider Tax-Loss Harvesting: If you have losses, consider selling underperforming investments to offset capital gains, which can reduce your tax liability.
- Consult with a Financial Advisor: If you’re unsure about your strategy, speaking with a financial advisor can help you make informed decisions.
Rebalancing ensures that your portfolio remains aligned with your goals and adapts to changes in the market.
4. Make Charitable Contributions
Charitable giving not only benefits causes you care about but can also reduce your taxable income. Contributions to qualified charities are tax-deductible if you itemize, making this a strategic move for year-end financial planning.
How to Maximize Charitable Giving:
- Donate Appreciated Assets: Consider donating stocks or other appreciated assets, which can provide a tax deduction and help you avoid capital gains tax.
- Bunch Donations: If you’re close to the itemizing threshold, consider bunching donations this year to exceed the standard deduction.
- Keep Records: Maintain records of all charitable donations, including receipts and acknowledgment letters from organizations.
By donating to charity before December 31st, you can support worthy causes while potentially reducing your tax bill.
5. Plan for Year-End Bonuses and Additional Income
If you’re expecting a year-end bonus or have other income sources, such as freelance work or investment income, now is the time to plan for how it will impact your finances. This extra income can be an opportunity to pay down debt, increase savings, or invest.
Ways to Strategically Use a Year-End Bonus:
- Contribute to Your Retirement: Consider putting part or all of your bonus into a retirement account.
- Pay Down Debt: Use your bonus to reduce high-interest debt, which can save money on interest payments.
- Save for a Financial Goal: If you have a big expense coming up, allocate part of your bonus to a savings fund for that goal.
Planning for additional income allows you to make the most of it, rather than spending impulsively.
6. Review Your Tax Withholding and Deductions
To avoid a surprise tax bill, review your tax withholding before the year ends. If you’ve had any significant changes to your income, withholding, or deductions, making adjustments now can help prevent underpayment penalties and ensure a smoother tax season.
How to Review and Adjust Withholding:
- Use the IRS Tax Withholding Estimator: The IRS provides an online tool to help you determine if you’re withholding the right amount.
- Check for Changes in Income or Deductions: If you’ve had a salary increase, side income, or other changes, adjust withholding accordingly.
- Make Additional Payments if Needed: If you owe more than anticipated, consider making an estimated tax payment before the year ends to avoid penalties.
Ensuring your withholding is accurate helps you avoid surprises and reduces the stress of tax filing season.
7. Review Health Insurance and HSA Contributions
If you’re covered by a high-deductible health plan, review your HSA contributions and aim to contribute the maximum allowed. HSAs offer tax-free contributions, earnings, and withdrawals for qualified expenses, making them a powerful savings tool.
Maximizing HSA Benefits:
- Contribute the Maximum Amount: For 2023, the HSA contribution limit is $3,850 for individuals and $7,750 for families, with an extra $1,000 for those over 55.
- Roll Over Unused Funds: Unlike FSAs, HSAs allow unused funds to roll over indefinitely, making them ideal for long-term savings.
- Use HSA Funds for Medical Expenses: If you have eligible medical expenses, consider using your HSA funds, which are tax-free when spent on qualified costs.
Contributing to your HSA by year-end provides a triple tax advantage, saving you money now and building funds for future healthcare needs.
8. Pay Down High-Interest Debt
The end of the year is a great time to focus on reducing high-interest debt, such as credit card balances or personal loans. Eliminating high-interest debt can free up cash flow and improve your overall financial health going into the new year.
Strategies for Paying Down Debt:
- Prioritize High-Interest Balances: Focus on debts with the highest interest rates first to save on interest.
- Make Extra Payments: Use year-end bonuses, holiday gifts, or any extra cash to make additional payments on your debt.
- Consider a Balance Transfer: If you have a high-interest credit card, consider a 0% balance transfer offer, but make sure to pay off the balance within the promotional period.
Paying down high-interest debt reduces the cost of interest and puts you on a stronger financial footing for the year ahead.
9. Evaluate Your Emergency Fund
An emergency fund is essential for financial security, covering unexpected expenses like car repairs, medical bills, or job loss. Review your fund at year-end to ensure it aligns with your current needs and expenses.
How to Assess Your Emergency Fund:
- Calculate Your Monthly Expenses: A healthy emergency fund should cover 3-6 months of essential expenses.
- Adjust for Life Changes: If you’ve experienced a change in income, family size, or housing, adjust your emergency fund accordingly.
- Set Up Auto-Transfers: If your fund needs growth, set up automatic monthly transfers to build it steadily.
A well-funded emergency fund provides peace of mind and helps you handle unexpected costs without going into debt.
10. Plan Financial Goals for Next Year
Take some time to set clear financial goals for the upcoming year. Whether you want to save for a down payment, pay off debt, or invest more, having defined goals helps you create a roadmap for your finances.
Steps to Set Financial Goals:
- Prioritize Short and Long-Term Goals: Define what’s most important to you financially, including both short-term and long-term goals.
- Create Actionable Steps: Break down your goals into smaller, achievable steps, such as setting up a savings plan or creating a debt repayment schedule.
- Track Progress Regularly: Use budgeting tools or apps to monitor your progress and make adjustments as needed.
By setting goals now, you can start the new year with a clear financial plan, making it easier to stay on track and reach your objectives.
Taking these financial steps before the end of the year can help you maximize tax savings, increase your savings, and improve your financial security. From reviewing retirement contributions to assessing your emergency fund, each of these moves will set you up for a strong financial start in the coming year. Taking a proactive approach to your finances now can make a big difference in your financial well-being for years to come.
