Pursue Your Ideal Financial Future With a 2024 Check-Up

By Chris Palabe, CFS®, AIF® 

The holiday season is in full swing and it will be 2024 before you know it. While it’s a good time to reflect on everything that happened in the past year, it’s also a prime opportunity to self-evaluate by conducting a financial check-up. The new year could throw anything in your direction—you want to be aware of your financial situation before you have to face it. Here are some ways you can jump-start your plan to prepare for a prosperous 2024.

Retirement 

Maximize Your Retirement Savings

Before the end of the year, aim to max out your retirement contributions. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s, which allow you to contribute up to $22,500 for 2023 (1) ($23,000 for 2024). (2)

Traditional contributions are automatically deducted from your paycheck and won’t show up as part of your annual income, so the more you can maximize your contributions during the year, the less taxable income you will have come April 15th. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket. With a Roth contribution, you pay taxes on the small amounts of contributions you make over time instead of having to pay taxes on the large amounts of distributions later. With this strategy, the amount of funds in your 401(k) that are Roth can be distributed tax-free.

Keep in mind that the SECURE 2.0 Act will increase catch-up contributions starting in 2025. At that point, individuals between ages 60 and 63 will be able to contribute up to $10,000 or 150% of the regular catch-up contribution to their retirement plan.

Contribute to an IRA

Contributing to a traditional IRA is another strategy to reduce your AGI if your income is within certain limits. (3) By contributing pre-tax funds, you can effectively reduce your current-year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. Alternatively, you can contribute to a Roth IRA where taxes are paid up front but distributions are tax-free at retirement as long as the first contribution was made at least 5 tax years ago. The 2023 contribution limit for IRAs is $6,500 ($7,000 for 2024) (4) with additional $1,000 catch-up contributions for individuals over the age of 50. (5) Contributions can be made until April 15th, 2024, for the 2023 tax year, but the sooner they are made, the less likely you are to forget. 

Understand Your RMDs 

At the start of 2023, the rules around required minimum distributions (RMDs) changed thanks to the SECURE 2.0 Act. (6) If you turn 72 after December 31, 2022, your RMD age will be increased to 73. If you turn 74 after December 31, 2032, your RMD age will be 75. If you are subject to RMDs in 2024, the sooner you understand the rules around your distribution, the better. Depending on what age you are required to start taking distributions (70½, 72, 73, or 75), you could face a 25% – 50% penalty on missed distributions. 

If you don’t need your RMD money to live on, consider donating the funds to a worthy cause, which could also lessen your tax burden for the year. To calculate your RMD, use one of the IRS worksheets. (7)

Cash Flow 

Assess Your Emergency Fund

Now is the time to confirm you have enough money set aside in your emergency fund or create a plan to build this up over the next year. An adequate emergency fund should cover 3-6 months of necessary living expenses, including mortgage or rent, utilities, groceries, transportation, etc. 

With all the stock market uncertainty and recession fears, many experts have suggested maintaining a larger emergency fund, closer to 8-12 months of expenses. (8) If you’re single, or your household only has one source of income, consider saving on the higher end of this scale to make sure you’re covered in the event of a job loss or reduction in income.

However much you save, keep this money in a highly liquid account. It needs to be readily available and easily accessible, but it should also be in an account that offers a competitive interest rate so you don’t lose out on potential growth.

Risk Management

Contribute to a Health Savings Account

If you’re enrolled in a high-deductible health plan, consider contributing to a health savings account (HSA) before the end of the year. HSAs offer triple tax savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for medical expenses. 

The 2023 IRS contribution limits for HSAs are $3,850 for individuals and $7,750 for families (9) ($4,150 and $8,300 for 2024, respectively). (10) If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You have until April 15th for your contributions to count for the previous year’s tax return.

Revisit Your Plans and Policies

Your insurance needs may also change as the year goes by, so periodically review your coverages and designated beneficiaries to bring them up to date to reflect your current financial situation. For example, if you paid off debt, you may not need as much life insurance coverage since your family’s liabilities have decreased. You might also want to evaluate your need for other types of insurance, such as long-term care or disability insurance. 

Taxes

Donate to Charity

Donating to charity doesn’t have to wait until the holiday season. In fact, charitable gifting is a great tax strategy to incorporate throughout the year. 

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a great way to give back at the end of the year while also minimizing your tax bill. With the higher standard deduction, you’ll need to make sure your total itemized deductions for 2023 exceed $13,850 for an individual filer, and $27,700 for married filing jointly. (11) (These numbers will rise in 2024 to $14,600 and $29,200, respectively.) (12) If your deductions fall below this amount, consider doing several years’ worth of giving in one year.

Donor-advised funds are another option that allow you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.

Invest in a College Savings Plan

If you have children or grandchildren in your life, contributing to a 529 savings plan is an excellent way to jump-start their college savings in the new year. 

This type of educational savings plan was created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan where it grows tax-free. When the money is later taken out for qualified expenses, there are no federal taxes due.

In 2023, you can give up to $17,000 per 529 account gift-tax-free (13) ($18,000 for 2024 or $36,000 if gift-splitting with a spouse). (14) There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum, meaning you could give up to $85,000 entirely gift-tax-free! 

What’s more, remaining 529 balances can be rolled into a Roth IRA for the account beneficiary starting in 2024, so you won’t have to worry about losing the funds if your child chooses not to go to college or doesn’t use the full account amount. Keep in mind that the account must be at least 15 years old and the maximum lifetime rollover limit is $35,000. Contributions made in the last 5 years will not be eligible for rollover.

Consider a Roth Conversion

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits. (15)

To get around this threshold, consider a Roth conversion. When you convert funds from a traditional IRA, you will pay taxes on the amount converted. Converting to a Roth also allows your money to grow tax-free for as long as you’d like.

Consider Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return.

Given the continued market volatility throughout 2023, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. Even though the deadline for this to count toward the 2023 tax year has passed, there will likely be ample opportunity to revisit this strategy in 2024. Talk with your advisor about potentially harvesting your losses and if it makes sense for you.

Investments

Review Your Asset Allocation

The beginning of the year is also a great time to review your asset allocation strategy. Given the dramatic market volatility and historic levels of inflation over the last year, it’s crucial to evaluate your investments and make sure your portfolio is properly diversified in 2024. It should also be tailored to your specific risk tolerance level, ensuring you earn enough returns to keep up with inflation but you’re not overexposing yourself to risk.

Estate Planning

Review Beneficiary Designations

If you had any major life events happen this year, like the birth of a child, marriage, divorce, or a death in the family, make sure you review your beneficiary designations. There are several assets, including retirement accounts, bank accounts, and life insurance policies, that are distributed based on beneficiary designation and not the terms of the will. If you have an updated will but an outdated beneficiary listed on one of these accounts, there is a chance your assets will not pass according to your wishes. 

Review Your Estate Documents

Similarly, it’s important to review your estate planning documents, including your last will and testament, any powers of attorney, living wills, and/or trust documents. The new year is always a good time to take another look at these documents or start drafting them if you don’t already have them in place. 

Make the Most of the Annual Gift Tax Exclusion

If you’re looking to reduce your taxable estate, consider making gifts up to the annual exclusion amount. For 2023, individuals can give to each recipient (and to an unlimited number of recipients) up to $17,000 and married couples can give up to $34,000 without triggering gift tax. (These numbers increase in 2024 to $18,000 and $36,000, respectively.) (16) Not only that, but the beneficiary of your gift will not have to report it as income. This is a great way to spread your wealth amongst family and friends.

We’re Here to Help

This list might seem intimidating, but intentional care helps to keep you out of a financial situation you would rather not be in. Not having a proper plan is one of the most common financial mistakes people make. But now is the perfect time to make a new plan or reevaluate the one you already have. And remember that you’re not alone! 

At Palabe Wealth, our goal is to develop a financial road map that aligns with your vision for the future. If you’re ready to enter the new year on solid financial ground, we are here to partner with you. Schedule a 15-minute introductory phone call, call us at 847-249-6600, or email Chris@palabewealth.com to learn if we are the right fit for your financial goals. 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Contributions to a traditional IRA may be tax-deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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(1) Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits, IRS, August 29, 2023

(2) 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000, IRS, November 2, 2023

(3) IRA Deduction Limits, IRS, August 29, 2023

(4) IRA Contribution Limits 2023-2024, NerdWallet, November 23, 2023

(5) Retirement Topics – IRA Contribution Limits, IRS, July 5, 2023

(6) Secure 2.0 Act: How Your RMDs Might Be Impacted, SmartAsset, December 29, 2022

(7) Required Minimum Distribution Worksheets, IRS, April 21, 2023

(8) Suze Orman: Americans are short on emergency savings amid ‘dangerous scenario’ for economy, CNBC, January 25, 2023

(9) HSA contribution limits and eligibility rules, Fidelity, July 10, 2023

(10) HSA contribution limits and eligibility rules, Fidelity, July 10, 2023

(11) What’s the 2023 Standard Deduction? Kiplinger, November 10, 2023

(12) Standard Deduction 2024 Amounts Are Here, Kiplinger, November 10, 2023

(13) Maximum 529 Plan Contribution Limits by State, Saving for College, November 27, 2023

(14) Frequently Asked Questions on Gift Taxes, IRS, November 22, 2023

(15) Roth IRA Contribution and Income Limits 2023-2024, NerdWallet, November 3, 2023

(16) Frequently Asked Questions on Gift Taxes, IRS, November 22, 2023