Ep # 88: Your Year-End Financial Checklist

Benjamin Haas |

In this episode, we run through some financial housekeeping items to cross off before the end of the year.

  • Retirement account deadlines - employer plans, IRA, Roth IRA contribution limits and timing - 1:45
  • Roth conversions - what it is and why you may want to consider it - 5:25
  • What are Flexible Spending Accounts and Health Savings Accounts - 10:17
  • What is tax loss harvesting and how does it work - 17:28
  • Education funding - 22:22
  • Holiday spending tips - 25:00




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Full Transcript:

Benjamin Haas  00:02

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!


Adam Werner  00:25

Hey Mike, welcome to the podcast.


Mike Hendrickson  00:42

Thanks Adam. Fun times. I'm so excited. I think we're going to be wild and crazy here.


Adam Werner  00:51

Yeah, what are we talking about today?


Mike Hendrickson  00:53

We are going to go through some year-end reminders or checklists and good ideas, some housekeeping before the year end. So, we'll run through a number of different things and give people a little bit of data around some tips. And of course, if anybody needs more information on this, we're here to help, so reach out. But we want to run through some things we think are important.


Adam Werner  01:20

Yeah, and the fact that the clock is literally ticking here at the end of the year for certain items. We'll make note of those that if they don't happen by the end of the calendar year, better luck next year, I guess. So, with a few weeks left to kind of wrap up maybe some of these items, if there's still some low hanging fruit, where do you want to start?


Mike Hendrickson  01:45

Well, let's start with what we usually talk about: retirement. So retirement accounts, deadlines there. Contributions, the maximum amount and everything like that.


Adam Werner  02:00

Yeah, so I'll go first. We'll say your employer retirement plans - 401k's, 403b's, if you work for a government entity, maybe there's a 457, something like that. You have until the end of the calendar year to make your contributions so that they count for 2022 taxes. For those that maybe haven't maxed out their contributions, you have a little bit of time, if it's possible, if you have some excess cash, or you know there's money coming. Shift money around from one pocket to the other get the tax deduction this year, depending on where you're contributing. But we would say take advantage of those maximums this year if you're able to. On those retirement accounts, it's $20,500, with a $6,500 catch up contribution if you're over the age of 50. So, for anybody over age 50, they can do up to $27,000 this year.


Mike Hendrickson  03:00

And I think it goes up next year to $30,000 or something. So incredible amount. Something I've posted on in the past is like only 10-14% of people max their 401k out. It's an incredible tool but people either don't plan or don't think about this upfront because they have so many other things I hear all the time, like inflation. This is just one thing where it's like, you have to contribute as much as you can. I hear clients talk about, you know, at least contributing what the match is and that's great. But you should try to contribute more.


Adam Werner  03:47

Similar story on the IRA side. So, if you don't have an employer plan or maybe you do, but you're also contributing to either an IRA or a Roth IRA, I guess the year end component isn't necessarily as imperative because you do have up until the tax deadline. So for 2022 taxes, I think it's April 18th. You can still make a contribution in 2023, up to that date in April for 2022. Meaning you can essentially make a contribution backwards but that only pertains to IRAs, not your employer plans.


Mike Hendrickson  04:23

Right. Those have to be year-end for the 401k, the employer plan.  So that is a good little contrast there. Make sure people understand that.


Adam Werner  04:36

Yep, and on the IRAs, those contribution limits are much lower than the 401k, 403b, those employer plans. Is it $7000? $6000. It's going up next year. So $6000 is the limit. It's $1,000 catch up. So, $7000 total if you're over the age of 50. Again, those are going up next year, like you noted on the 401k's I'll have to do with inflation and what the government uses to kind of set those numbers. But those will be higher next year. But same thing, if you're going to take advantage of it, the end of the year is not a bad time to do it. Certainly, we think there's opportunity in the market from that perspective. But just know you do have up until April to make those contributions in the IRAs. What else?


Mike Hendrickson  05:25

Roth conversions.


Adam Werner  05:27

Yeah, that's a big one.


Mike Hendrickson  05:29

So with typical strategy and the benefit of a bear market, you can execute a Roth conversion. I've heard this called the bear market bonus before. I don't know about that. Your balances are in your traditional IRA, your rollover IRA, or whatever it is your tax-deferred IRA, they're down and that's not a good thing. But that loss, these balances that are lower and convert the amount over to your Roth so you have less of a taxable gain. So back up just one moment, when you take the money out of the IRA, let's say you're going to do a Roth conversion, you're essentially realizing that income. That is portable, you pay the taxes, and then you put into the Roth. So why we like to see Roth conversions, people are all different and we wouldn't say blanket just do Roth conversion. But your tax bracket might be low here where you could convert to up to a certain point to keep you underneath the bracket. But now you have this retirement account in which you'll never have to pay taxes on again. If this is a long-term investment, you're letting it ride, it's going to invest and go enjoy the compounding over the long term and now you have tax free money. So when the time comes and you need to start relying on this, you have probably a traditional IRA portion, a tax-deferred portion, and an after tax. You have what we'd say tax diversification. We'd like to see that, it's a good time to take advantage of that. How much depends on a few factors and I wouldn't say here's what you should do without reviewing your situation.


Adam Werner  07:22

Ben and I recorded a podcast, I think it was back over the summer or sometime middle of the year, specifically with Roth conversions in mind. So, if that interests anybody or kind of want to learn more then go into the details, we do have a podcast on there, check it out. I will reiterate, then this all kind of being through the lens of the year-end checklist, Roth conversions are a calendar year item. Unlike your IRA, Roth IRA contributions that you can make next year for this year, does not apply to Roth conversions. That needs to happen by December 31 and if it's something you're interested in, sooner, the better because there is some processing time, there's maybe some things to figure out like you were mentioning the tax impacts, doing some of that analysis quickly to make a decision on what to convert and when. Yeah, end of the year is an important deadline for that.


Mike Hendrickson  08:18

Real quick, easy one is RMDs. So used to be 70 and a half, it's now 72. Whatever the case is, if you are subject to RMDs, get that money, that required distribution out of there. It's a 50% penalty on what was supposed to come out. Can you imagine you have to pay taxes on this money and you have to pay a penalty? So, you ruin probably all the good things about an IRA, the tax deferral. So don't do that. We're on it. If you're not client of ours and you're somehow seeing this, do what you have to do and make sure you take your RMD. If you are a client of ours, we are definitely on you. We don't want to see this. We won't let it happen.


Adam Werner  09:07

I can confidently say for our list of clients because I just looked at this the other day, we only have a small handful and we have the plan. It's now just the timing of it but to your point, for anybody who needs to take an RMD, required minimum distribution, for older individuals that have their own retirement account. It is now the age 72. Maybe they were grandfathered under the 70 and a half rule, but it also applies to anybody who inherited an IRA prior to 2020. So I won't go into the details, why it switched and the rules that changed. But if you do have an inherited IRA, I would double check to make sure if you need to take a required minimum distribution for yourself or if you're under the new rules that allow you to kind of spread out over the next 10 years, the 10-year rule was new as of 2020. But if you inherited an IRA, you may still be subject to those RMD rules and need to take out an amount each year. Same thing with all of these items, if you have questions and you're not sure, reach out to us, let us know, we can help figure that out with you.


Mike Hendrickson  10:17

Okay, so I think that does it for retirement year-end type of things. Let's go on to the forgotten stepchild of financial planning and that is healthcare. I don't know. I feel like maybe estate might be the forgotten stepchild. But healthcare, now these acronyms and names always confused me. So, I can assume that other people get confused as well. Let's talk about flexible spending accounts and health spending accounts. FSA, HSA. So flexible spending account, what is it? What are we telling people? What's the big deal with year end?  What does it look like?


Adam Werner  11:05

So yes, the FSA, that flexible spending account, I was going to say very different from the HSA, the health savings account and I guess they differ in one key way. The FSA is more often than not kind of a use it or lose it account that you must use in the calendar year. Now, there are potentially two exceptions to that. But it varies from employer to employer. So if you're not sure, I would reach out to your employer, reach out to HR, but there sometimes are provisions where you can either roll over a portion of your FSA. Maybe it's up to $610 was the number that I found, you could potentially roll that number for next year. Or you may be able to extend this year's money into the first two and a half months of next year if either of those options are available to you through your employer, it's an either or, you can't do both. It's one or the other, or neither, depending on the situation with your employer's plan but important because a lot of those FSAs are use it or lose it. If you don't spend that money by the end of the year, poof, it's gone and you start from zero the next year so we would hate to see that.


Mike Hendrickson  12:24

So flexible spending, do you have to have a high deductible plan? Or it just varies if employer offers it or not?


Adam Werner  12:31

I think it just varies; I don't think you have to have a high deductible plan for an FSA.


Mike Hendrickson  12:36

Okay, so for the HSA, the health savings account, now let's take one step back, just to try and make sure everyone understands. These are tools to help you, so it's a tax deferral way to save for healthcare expenses. So FSA, HSA similar in that method in that you take a tax deduction and then you can use this money, tax free on eligible things. So awesome tool. The health savings account, you must have a what's called a high deductible plan. And so it is worth researching even further, if your plan is not called high deductible, if your plan meets the threshold of a high deductible plan and those numbers have varied, I don't have them right now but you can contribute to an HSA account. The maximum contributions for a single person is $3,650. The family contribution is double that, it's $7300. If you're over 55, you can do a catch up of $1000. Then, once you join Medicare, you can no longer contribute. So those are the high-level things to know about it. Why we're talking about it here though, is max out that if you can. Some data I saw the average contribution, again is low to these accounts. It's $2,000 a year. That's great that people are doing it and of that $2,000, only 9% is invested. So you have this ability of taking this money, investing it and using this account as long term. It's been estimated that it costs like $300,000 a couple that retired in 2021.


Adam Werner  14:35

For health care.


Mike Hendrickson  14:36

That's a ton. So one of the tools you can use is this, another arrow that you have. Is it a quiver? You have in your quiver?


Adam Werner  14:47

Yes, yes.


Mike Hendrickson  14:51

This is different than an IRA in that it goes in tax deferred, comes out tax deferred, so best of both worlds. It's under-utilized so I try to hammer home as much as I can whenever we talk about it.


Adam Werner  15:08

I'll point out the key difference between the FSA and the HSA. As I said earlier, the FSA for the most part is a use it or lose it type of deal. The HSA is not that. It is kind of like a retirement account and that you can contribute to it up to the limits in any given year but you don't have to use it. You're not required to spend it down in some sort of time period. To your point, that's where we can see the investment portion of an HSA account really come into play. If you're not, if you are using it as a retirement tool and not just money in money out like an FSA is kind of meant to be. That's where the benefit truly is. It's the compounding rates of return, hopefully over time on the investment portion where you're growing that money, tax deferred and hopefully taking it out tax free from the HSA at some point in the future.


Mike Hendrickson  16:01

Okay, so I think that's a good overview for FSA. HSA. One thing I wanted to say, well, we've closed out health care. So all year long, you have this deductible. One thing you may want to consider and it's probably too late to schedule surgery.


Adam Werner  16:21

Yeah, probably.


Mike Hendrickson  16:22

If you're close to your deductible and you've been putting off some kind of appointment or something. I mean, that gets a little personal but if you're close to it, use that so you can reach that deductible and pay less for health care. So not necessarily see something in a financial plan but thinking about this health deductible. It resets Jan 1 and you're going to start all over with the getting max out the deduction. Something to think about if you're putting off or the doctor making an appointment.


Adam Werner  16:57

I think most people understand if you've already met your deductible this year and if there's anything else, if you're putting something off, probably better to do it in this calendar year if you've already met your deductible, rather than like you said, starting fresh again next year. Whatever that's going to cost, you're going to have to meet your deductible first. So yeah, it's good to group those things together if it works out. If not, so be it but I think that's low hanging fruit. So yes, let's switch gears now to, going back, I was going to say similar to the retirement conversation, but specifically for non-retirement investment accounts and I know Ben and I talked about this recently as well, tax loss harvesting. This was I think a couple of podcasts ago, just through the lens of trying to make some lemonade out of lemons that the market has handed us this year, investments have handed us. Tax loss harvesting is a way to essentially sell your investments that are showing a loss for this year. A loss from when you purchased them and those losses, you can either use to offset other gains that you may have or you can deduct those losses on your tax return up to $3,000 each year. If you have losses more than $3,000, you don't just lose those. Say you have $10,000 in losses, you can only claim up to $3000 this year, you can carry forward those losses for up to five. Is it five years, or is it unlimited? I should probably know this.


Mike Hendrickson  18:30

It's unlimited.


Adam Werner  18:32

Yeah, I'm thinking to something else. So you can essentially carry forward those losses to future tax years, again, to either offset other gains or just to deduct them from your taxes. If you have losses this year in a non-retirement investment account, it may make sense to use those losses through the tax lens. Maybe not. It all depends, which I know we say a lot but that is another area of opportunity here before the end of the year because that is a calendar year. If you wanted to lock in any losses or take any gains, you have to do it by December 31.


Mike Hendrickson  19:03

So in my conversations with clients, this one is hard to translate how this is a good thing because a lot of people say like, oh, you're selling my accounts and you've lost money. Why is this good? Thinking about someone and their RMD, Adam. They're taking their money. That RMD is recognized as ordinary income but in their other side they have a brokerage account in which we did some tax loss harvesting. Can you explain like how that would work and how it would be to their benefit?


Adam Werner  19:40

Yeah, so essentially in that scenario, if we're taking from our retirement account or that they're forced to take from a retirement account, then that's where the losses can kick in. I guess that's where the important, it's only the $3,000 impact that you can deduct from the non-retirement account to help offset the income from the retirement account. I think where if you have a larger account or you have larger losses where that comes into play is, if you own mutual funds, we've seen this, I've seen this this year, it's kind of the perfect storm of a bad situation where people are seeing their investment values dropping. But if they own a mutual fund these mutual funds by their structure, they have to pass along their gains to the shareholders. If you own the fund, they pass forward these gains and not all funds do it. Bond funds, for the most part are shielded from that because they just don't necessarily have the gains. But there are some equity or stock funds that are losing value, but also passing on to you a taxable capital gain distribution, which is the worst possible scenario here where you're going to now pay taxes on gains that you're not seeing or feeling but you still have to pay the taxes. So that's where there may be an opportunity to sell that investment, before it kicks off that taxable gain to you and even better if you're able to sell it at a loss, you're avoiding the taxable gain, you're getting the deduction or you're using that loss to offset other gains. That’s where I think it's a bit of the shell game from a tax perspective to just try to use your losses when you have them.


Mike Hendrickson  21:21

So that we can recap with my example, the RMD. RMD income, not a gain and the losses that we would be locking in would offset a gain. So, if it was a taxable distribution or a long-term gain distribution, or you had like a big stock that had a lot of gains, that's where it would come into play. Right?


Adam Werner  21:45

Yes. So I'm thinking of a specific client right now where you may use some of your other losses to take gains in a maybe it isn't concentrated position that you don't necessarily want to own as much of anymore. You can kind of use that loss to offset some of the gain that you're going to realize on that single stock or you holding that maybe you've held for a really long time and just haven't gotten rid of it because you don't want to pay the taxes. That's a way to use a loss to offset another gain somewhere else and allow you to maybe further diversify if that makes sense in your plan.


Mike Hendrickson  22:22

Okay, I think that's far enough for tax loss harvesting, we probably lost everyone. So, let's move on to our last one that we have here is education funding. So 529's, $16,000 is the individual gifts limit without gift tax. That's the so-called limit for 529's, contribution limit for child. If you're a grandparent, you can give to your grandchild, if you have nieces and nephews you can give to them. It's not discriminatory as far as you can only give to these people. So you have that amount. We did a podcast, Ben and I. It was the only one I've done.  We talked about education funding. I'm not the biggest fan of 529's in that it locks up the money and can only be used for a narrow scope but I do see the benefit in it. Those balances can get bloated and to the point of you maybe you have some in an investment account, some in a Roth, and some in a 529. So just consider that carefully. Don't want to jump too far without you given something on 529's, but if a grandchild, if a child has income, you can fund a Roth for them up to the limit, but also up to what their income was for the year. So I was talking with you earlier, like, these are the gifts that no one really cares about. But if you gave someone, I don't even know $500 Roth contribution, $100, whatever. Like that to me is a nerdy financial advisor kind of guy. That's by far better than another toy that they're going to play with for a little bit. Yeah. So I'll let you go, I don't dominate the whole section here.


Adam Werner  24:33

I'll just share, so there's not a ton of fun, you know, gift for a young individual to unwrap. Hey, by the way, we made a contribution to your Roth IRA and they say, well, great, what can I do with that now? You're not going to touch it maybe for the next 50 years of your life or 40 years of your life. Well, thanks mom and dad or you know, thanks, grandma, grandpa, but I think the point is valid. It's a creative way, if it fits the situation for the parents, the grandparents, whoever to start that account or to add to that account and get years, decades potentially of compounding growth over time. So, if it's a $500 contribution, now, maybe that doesn't feel impactful to that child. But I guarantee 40-50 years from now that account, they're going to be very grateful for that contribution. It's just another way to hopefully pass along some good habits, and some good financial tips earlier in life. So yeah, it is a creative way of giving gifts around this time of year.


Mike Hendrickson  25:45

So wish I had a Roth set up for me when I was like, 15 and started working.


Adam Werner  25:51

Oh, absolutely.


Mike Hendrickson  25:52

I guarantee, I wouldn't have contributed, though but if somebody would have, it would have been awesome. Just wanted to close on one thing is that with Christmas holiday shopping, read some things like one in four people are planning on going into debt to buy Christmas gifts. I completely understand the human nature of it all to be like, you want to make sure everyone gets what's on their list and surprise and delight and it makes you feel good. I'm not going to stop anyone from doing that but it's a nasty cycle of running yourself into debt and then catching up the next year. Then thinking about the things we talked about where people aren't maxing out or contributing as much as they can, you're not able to because you ran into debt. So just thinking about these things as we go into the year-end and try and make a budget and think about what you spend, be mindful about these gifts. If you think it's really going to be a great gift for the long-term impact, go for it. That's the personal side of finances. It's not always X's and O's and zeros and ones. Use money that makes you feel good but just don't extend yourself and hurt yourself financially just for a quick hit.


Adam Werner  27:23

Yeah, the quick dopamine hit. Opening a present or giving a gift, that's valid. I'm glad you said that. So then yeah, let's wrap it up. The important part of all of this is, there are some things that have year-end deadlines, some retirement accounts, some of the health care, either spending or savings, education funding. What else did we hit on? Tax loss harvesting for non-retirement accounts, if you have questions on any of this or want to understand if it pertains to your situation, that's why we're here. Give us a shout. We got a couple more weeks here before the end of the year. So let's finish the year strong. Wrap up some of these items and set yourself up for success for 2023.


Mike Hendrickson  28:09

One thing.


Adam Werner  28:09

One thing, go ahead.


Mike Hendrickson  28:09

If someone listening is thinking about doing tax loss harvesting on their own. Maybe call us or look up something called the wash sale rule. Don't get yourself in trouble with that. It's selling and then like going back into the position


Adam Werner  28:28

Buying the same thing.


Mike Hendrickson  28:29

Is it 30 days, Adam?


Adam Werner  28:32

It's 31. It's 30 plus the little extra from the IRS.


Mike Hendrickson  28:38

So you're doing your own tax loss harvesting. Just be careful. That's the only thing I feel like we didn't hit on.


Adam Werner  28:46

It's a good point.


Mike Hendrickson  28:47

Feel free to reach out.


Adam Werner  28:51

All right. Till next time. Thank you, bye.


Benjamin Haas  29:07

Hi everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in this show are for general information only and are not intended provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant or financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

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