Who doesn’t love a list this time of year? Holiday wish lists, seasons greetings card lists, and family gathering meal prep lists. When life gets busy, having a list of “to-dos” can help ensure the important things don’t fall through the cracks. Plus, there’s nothing more satisfying than to see a list where every item has been checked, right?
2022 has been a roller coaster ride (to say the least), so a financial planning year-end checklist may be helpful to uncover opportunities before starting a productive 2023.
With this year’s market volatility, there may be opportunities to take advantage of Tax-Loss Harvesting, which sells an investment at a loss to counterbalance gains incurred when other assets are sold at a profit. Since you only pay taxes on the net profit (gains minus losses), taking advantage of Tax-Loss Harvesting can help lower your tax bill. The proceeds may also be used to buy other investments to help grow and recover losses. A repeated cycle of tax savings may be possible by offsetting future gains with future losses. Remember, when you sell an investment at a profit, you may owe capital gains taxes depending on how long you’ve owned the asset. Standard income tax rates apply if ownership is less than a year. Preferential long-term capital gain rates of 0-20% apply for assets held one year or longer. Don’t forget! Sales transactions to harvest losses must be completed by the end of the calendar year.
Maximize IRA Contributions
While you have until April 15th of the following year to contribute the maximum amount for the previous year, there are annual limits to the amount you can contribute to Traditional and Roth IRAs. For those who are 49 years and younger, the limit is $6,000. Those who are 50 years and older benefit from a $1,000 catch-up contribution, which increases their limit to $7,000.
Roth IRA Conversions
Depending on your tax bracket, it may be beneficial to convert your Traditional IRA to a Roth IRA. Because Traditional IRA contributions are taken from your paycheck before its taxed, you pay income tax on every dollar converted to a Roth IRA. Taxation occurs in the year of the conversion, so it’s imperative to consult your financial and tax professionals for planning advice. Advantages of Roth IRAs include:
- Required Minimum Distributions (RMDs) are not required from Roth IRAs as opposed to their Traditional IRA counterparts.
- Withdrawals from Roth IRAs can be made tax-free as long as it’s been at least five years since you first contributed to your Roth IRA account.
- Roth IRAs can be passed down as an income-tax-free inheritance after death.
For charities close to your heart, making a financial donation may make sense for your overall financial plan and long-term goals. Most people assume writing a check is the only way to donate. However, there are other avenues that may have tax benefits, such as giving long-term appreciated securities. For those aged 70 1/2 years or older, a Qualified Charitable Distribution from an IRA may satisfy the RMD requirement.
Importantly, please consult a financial and tax professional for advice before implementing any financial strategy.
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