15 financial decisions you can make now to prepare for 2024
Although the holiday season is usually dedicated to shopping and spending time with loved ones, it can be a great time to take a moment to reflect on your finances. As the new year brings fresh opportunities to grow and protect your wealth, now is the time to make last-minute moves and look ahead at what comes next using an end of year checklist.
In this issue, we’re looking at the many ways M1 clients are preparing their finances for 2024. You’ll learn about investing and rebalancing, maximizing your tax refund, and how to make sure your family is financially secure for years to come.
Portfolio
Rebalance
With the volatility the market has experienced throughout the last year, you have likely seen the impact on your weight allocations in your portfolio. If you’re hoping to get back on track with your targets, you may consider doing a rebalance. A rebalance will sell overweight positions and use the funds to buy underweight positions. You can initiate this process by clicking “Rebalance” when looking at your portfolio on the M1 App or website.
A common rule of thumb is to do at least one rebalance per year, so if you have not done one yet in 2023, now may be time. Speak to your financial advisor to set a schedule that works for you.
Set your schedules for automatic investments
As you look to set investment goals for 2024, you may consider adding a new schedule for automatic investing. Setting up recurring deposits to be automatically invested can save you time and energy while helping you to achieve the goals you set.
At M1, this is done by setting a recurring deposit into your investment account of choice and turning on the Auto-invest feature in that same account. When new funds land in the account, they will be automatically invested according to the target weights set in the account.
Diversify concentrated positions
A concentrated position occurs when an investor owns shares of a stock that represents a significant percentage of their portfolio (usually above 10%). Being heavily invested in one security can make an investor vulnerable to business risk. The easiest way to diversify your portfolio, especially if you have idle cash on hand, is to dilute the position by investing in other securities. Alternatively, you may sell out of the concentrated position, following a tax-efficient schedule. Consult an advisor to set up a long term, tax-efficient plan for selling out of concentrated positions.
Consider realizing capital losses for 2023
If you had portfolio losses this year, you may consider selling those shares to realize the loss and potentially reduce your taxes. If your capital losses exceed your capital gains, you can reduce your capital gains by up to $3,000 in capital losses. Claim the loss on line 7 of your Form 1040 or Form 1040-SR. If your net capital loss is more than this limit, you can carry the loss forward to later years.
Losses must be realized by Dec 31st to apply to tax year 2023. Please note that at M1, when you enter a sell order, your shares will be sold beginning with those that result in the lowest tax burden.
If you want to realize losses, but still believe a specific investment might be a good long-term investment, you can sell the stock for a loss and then repurchase it at least 31 days later. (The IRS requires you to wait at least 30 days before repurchasing to avoid erasing the tax loss, otherwise known as the “wash sale rule”). This allows you to qualify for the tax deduction, while still giving you the opportunity to own the stock again later.
Revisit spending and budget
This can also be a good time of the year to revisit your budget and spending habits to see what changes need to be made in the new year. It’s more than likely that your financial situation is not exactly the same as it was earlier this year, so you may need to make updates to account for new expenses or new income. Take a look at your budget forecast for 2023 and see what needs to change in 2024.
Retirement
Max out your 401(k)
The deadline to max out your 401(k) for 2023 is Dec 31st. The 401(k) contribution limit for 2023 is $22,500 for employee contributions and $66,000 for combined employee and employer contributions. The maximum is going up for tax year 2024 to $23,000, and people age 50 and up can make annual “catch-up” contributions ($7,500 in 2023 and 2024).
Think about maximizing IRA contributions
Investors have until April 15th, 2024, to contribute to traditional and Roth IRAs, but it’s never a bad idea to get this done sooner rather than later. The IRA contribution limits for 2023 are $6,500 for those under age 50 and $7,500 for those 50 and older. Please note this is the total contribution limit for all IRA accounts you have.
In 2024 the IRA contribution limit goes up to $7,000 for those under 50 and $8,000 for those 50 and older.
If you are a single-filer and aren’t covered by an employer retirement plan, your traditional IRA contribution is fully tax-deductible. On the other hand, if you’re filing jointly, and you’re not covered by an employer plan but your spouse is, your tax deduction may be limited, based on household AGI.
If your adjusted gross income (AGI) is below $116,000 as a joint filer or $73,000 as a single filer, your contribution to an IRA can also be tax-deductible, even if you or your spouse is covered by a retirement plan at work. In 2024, this will be raised to $123,000 and $77,000, respectively.
Please note that if you contribute to a SEP IRA, SIMPLE IRA, and/or a solo 401(k), the deadline for those plans is the date you file your taxes. So if you file for a tax extension, you may have until Oct 15, 2024, to contribute.
And while Roth IRA contributions are never tax-deductible, they may potentially offer you other tax benefits.
Do a Roth IRA conversion
A Roth IRA conversion, otherwise known as a backdoor conversion, is when funds from a traditional, SIMPLE, or SEP IRA are converted into a Roth IRA. This might be done by someone whose income is too high to contribute directly to a Roth IRA or claim the IRA tax deduction but wants to enjoy the tax benefits a Roth has to offer.
A conversion is a taxable event so make sure you are aware of the tax implications. Conversions must be done by Dec 31st, 2023. At M1, we ask that you request a conversion by Dec 15th due to the high volume of requests we receive at this time of year. You can request one here.
Take an RMD if you’re required by age
If you turned 73 this year, you will need to take a required minimum distribution from your retirement account(s) in 2024. Accounts that require RMDs at age 73 are traditional IRAs, SIMPLE IRAs, SEP IRAs, 401(k)s, 403(b)s, 457(b)s, profit sharing plans, and other defined contribution plans. You have until April 15th to do this.
Roth IRAs do not require you to take RMDs.
Estate planning-related
Review beneficiary information
Is all your beneficiary information up to date? Now is a wonderful time to review this information and make sure everything is as it should be. You’ll want to think about beneficiary information for your will, and make sure your trust accounts, brokerage accounts, and deposit accounts that have designated beneficiaries.
Consider family gifting before the end of the year
If you are considering possible estate planning strategies to pass on wealth, you may consider gifting before the year ends. The annual gift tax exemption is $17,000 ($34,000 for married couples) per recipient for gifts made in 2023, so you may not be subject to gift tax if the combined value of your gifts falls under that threshold, and it should not count toward your lifetime gift and estate tax limit. Gifts must be made before Dec 31st to fall within the exemption for the 2023 tax year. Gifts made in 2024 will fall within the 2024 gift tax exemption.
Looking ahead to tax season
Automated customer account transfers
If you have completed an in-kind brokerage account transfer in 2023, no reporting may be necessary unless there were sales in the account. For example, if you transferred mutual funds into your M1 account and they were liquidated, you would see this on your 1099-B.
If you plan to do additional transfers that may result in tax implications, you may consider doing this before the end of 2023 to consolidate tax forms. This is not necessary but could save you the additional tax forms in a later year.
Consider making your 2024 mortgage payments early
You might consider making some 2024 mortgage payments early this year. If you do, you may be able to deduct the interest from your 2023 tax returns. Speak with an accountant or tax professional to see if this applies to you.
Charitable donations
It’s the season of giving and, fortunately for you, gifting can have benefits beyond helping others. Charitable contributions can be an opportunity for tax deductions. Charitable contribution deductions for cash donations to eligible charities and organizations are usually limited to 60% of a taxpayer’s AGI. You can also receive a deduction for noncash charitable contributions up to 50% of your AGI, although depending on the type of organization or type of charitable gift it could be limited to 20-30% of your AGI.
For 2023, taxpayers can deduct charitable donations if they itemize their tax deductions using Schedule A of Form 1040. Taxpayers have until Dec 31st, 2023, to make donations eligible for deductions in the 2023 tax year.
Maximize other tax deferred accounts
You have until Dec 31 to contribute to other tax-deferred accounts too, like an HSA or an FSA.
You may also want to consider the balance on your FSA. Funds in an FSA may be reclaimed by your employer unless you’re allowed to roll them over. As of 2023, only $610 can be carried over into the next year.
If you have more than $610 left over, you may consider using these funds to buy things you need. An FSA can be used to purchase everyday medical items, such as reading glasses, prescriptions, Band-Aids, and over-the-counter-medicines. This can be limited based on your FSA plan, but luckily there is an FSA store that will be able to show you what you might be able to spend your unused FSA funds on.
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