4 Financial Best Practices for Year-End 2023
Scan the financial headlines these days, and you’ll see plenty of potential action items vying for your attention. Some may be particular to 2023. Others are timeless traditions. If your wealth were a garden, which actions would deserve your attention? Here are our four favorite items worth tending to as 2024 approaches.
- Feed Your Cash Reserves
With basic savings accounts currently offering about 5% annual interest rates, your cash is finally able to earn a nice little bit while it sits.
Mind Where You’ve Stashed Your Cash: If your spending money is still sitting in low- or no-interest accounts, consider taking advantage of the attractive rates available in basic money market accounts, short-term CDs, or online high yield FDIC savings accounts. Your cash savings typically includes money you intend to spend within the next year or so, as well as your emergency, “rainy day” reserves.
Put Your Cash in Context: While current rates on many savings vehicles are appealing, don’t let this distract you from your greater investment goals. Once you’ve got your cash stashed in those high-interest savings accounts, we believe you’re better off allocating your remaining cash into your investment portfolio and allowing those dollars to appreciate for your long-term goals.
- Prune Your Portfolio
While we don’t advocate using your investment reserves to chase money market rates, there are still plenty of other actions you can take to maintain a tidy portfolio mix.
Rebalance: In 2023, relatively strong year-to-date stock returns may warrant rebalancing back to plan, especially if you can do so within your tax-sheltered accounts.
Relocate: With your annual earnings coming into focus, you may wish to shift some of your investments from taxable to tax-sheltered accounts, such as traditional or Roth IRAs, HSAs, and 529 College Savings Plans. For many of these, you have until April 15, 2024 to make your 2023 contributions. But you don’t have to wait if the assets are available today.
Revise: As you rebalance, relocate, or add new cash to your portfolio, you may also consider changes to your long-term goals. Have any of your priorities changed?
Redirect: Year-end can also be a great time to redirect excess wealth toward personal or charitable giving. Whether directly or through a Donor Advised Fund, you can donate highly appreciated investments out of your taxable accounts and into worthy causes. You stand to reduce current and future taxes, and your recipients get to put the assets to work right away.
- Train Those Taxes
Speaking of taxes, there are always plenty of ways to manage your current and future tax burdens.
RMDs and QCDs: Retirees and IRA inheritors should continue making any Required Minimum Distributions (RMDs) out of their IRAs and similar tax-sheltered accounts. If you’re charitably inclined, and 70 ½ or older, you may prefer to make a year-end Qualified Charitable Distribution (QCD), to offset or potentially eliminate your RMD burden.
Harvesting Losses … and Gains: Depending on market conditions and your own portfolio, there may still be opportunities to perform some tax-loss harvesting in 2023, to offset current or future taxable gains from your account. As long as long-term capital gains rates remain in the relatively low range of 0%–20%, tax-gain harvesting might be of interest as well. Work with your financial planning team to determine what makes sense for you.
Keeping an Eye on the 2025 Sunset: Nobody can predict what the future holds. But if Congress does not act, a number of tax-friendly 2017 Tax Cuts and Jobs Act provisions are set to sunset on December 31, 2025. If they do, we might experience higher ordinary income and capital gains tax rates after that. Let’s be clear: a lot could change before then. However, if it’s in your overall best interests to engage in various taxable transactions anyway, 2023 may be a relatively tax-friendly year in which to complete them. Examples include doing a Roth conversion, harvesting long-term capital gains, taking extra retirement plan withdrawals, exercising taxable stock options, gifting to loved ones, and more.
4. Weed Out Your To-Do List
This year, we’re intentionally keeping our list of year-end financial best practices on the short side. Not for lack of ideas, mind you; there are plenty more we could cover.
But consider these words of wisdom from Atomic Habits author James Clear:
“Instead of asking yourself, ‘What should I do first?’ Try asking, ‘What should I neglect first?’ Trim, edit, cull. Make space for better performance.”
Let’s combine Clear’s tip with sentiments from a Farnam Street piece, “How to Think Better.” Here, a Stanford University study has suggested that multitasking may not only make it harder for us to do our best thinking, it may impair our efforts.
“The best way to improve your ability to think is to spend large chunks of time thinking. … Good decision-makers understand a simple truth: you can’t make good decisions without good thinking, and good thinking requires time.”
— Farnam Street
In short, how do you really want to spend the rest of your year? Instead of trying to tackle everything at once, why not pick your favorite, most applicable best practice out of our short list of favorites? Take the time to think it through. Maybe save the rest for some other time.