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As 2022 comes to a close, it is a great time to review critical areas with your finances, as some of these opportunities will be over once the calendar turns to January 1st. Year-end financial planning will help you become more successful financially in 2023 and the future. I will cover topics ranging from tax loss/gain harvesting, required minimum distributions (RMDs), Roth conversions, and reviewing your estate plan. 

Tax Loss/Gain Harvesting

 A popular year-end topic is tax loss harvesting. Tax loss harvesting is when you sell investments at a loss to offset the gains realized from the sale of other investments. Suppose your realized losses exceed your realized gains, the IRS will allow up to $3,000 of losses to reduce your ordinary income, and losses exceeding $3,000 in a year may be carried over into future years.  Tax loss harvesting can be a very effective strategy when used correctly. There are many considerations, such as your tax bracket and whether you are harvesting long- or short-term losses. Generally, it is more effective for those in higher tax brackets. Short-term capital gains are typically taxed at a higher rate than long-term capital gains, making short-term losses more effective.  Another less talked about strategy is tax gain harvesting. Tax gain harvesting involves selling assets that have been held for at least one year at a gain to take advantage of favorable long-term capital gains tax rates. For example, a couple married filing jointly with taxable income below $83,350 in 2022 has a long-term capital gains tax of 0% – yes, you read that correctly, 0%! Once any gains are taken at 0%, they may be reinvested in a non-substantially identical security at a higher basis, which may reduce taxes in the future. Tax gain harvesting also involves numerous factors to be successful, but it may help both in the current year and in the future. 

Required Minimum Distributions (RMDs)

Another critical piece to year-end financial planning is ensuring you have taken your RMD (if required) for the year. Once you reach a certain age (between 70 1/2 and 72), the IRS says it’s time to begin paying taxes on a portion of your retirement savings, which had previously been tax-deferred, and they require you to take out a certain amount based on the balance of the account(s) and your age. RMDs apply specifically to retirement accounts such as 401(k)s or IRAs. It is critical to ensure you take your RMD once required, as there is a 50% excise tax on the amount not distributed as required. The RMD rule may also apply to inherited retirement accounts, and the rules differ greatly depending on the relationship to the original account owner, amongst others. Significant changes were enacted beginning in 2020 with the SECURE Act, so it is essential to know which rules apply to you if you have inherited a retirement account, as the 50% excise tax on RMD amounts distributed still applies.

Roth Conversions

A Roth conversion is when you move money from a Traditional IRA and convert all or a portion of the balance to a Roth IRA. When converting funds from a Traditional IRA to a Roth IRA, you must pay taxes on the amount being converted, as those funds have never been subject to income taxes. So what is the benefit of doing a conversion and having to pay taxes? Once the funds are in the Roth IRA, they will continue to grow tax-free, and withdrawals in the future will also be tax-free. A Roth conversion may be a good idea when markets are down, as the value of the assets will be lower, meaning you pay less in taxes. If your taxable income is lower this year than you expect it to be in the future, paying taxes in a lower tax bracket now and withdrawing tax-free when you are in a higher tax bracket makes a Roth conversion an attractive opportunity. It is crucial to ensure you have enough money to pay for the taxes on the Roth conversion and that you are closely following the proper steps to ensure the conversion is completed successfully. 

Estate Plan Review

Lastly, it is always a good idea to ensure your estate plan is current; as things in our lives change, it can be easy to forget to review your estate plan along the way. Everyone should check ownership of all accounts and assets and ensure beneficiaries are listed and are current to your wishes. For those with a Trust or Will based estate plan, it is a good idea to check that all information in the will and/or trust is current and that your wishes remain the same, and to update any needed changes. While you can complete this at any time, the end or beginning of a year is a great time to complete an estate plan review as we reflect on the end of a year and begin to plan for the year ahead. 

Conclusion – Year-End Financial Planning Tips

As the end of the year draws near, take time to review some critical year-end financial planning areas to finish the year strong and set yourself up for success in the future! For more ideas about your unique situation, please get in touch with me at nbremer@8winvest.com or Joe Keimig at jkeimig@8winvest.com or visit our Contact Us page.