Year-End Financial Checklist: Prepare Now, and You’ll Have Time to Adjust

The end of the third quarter and start of the fourth quarter often marks a pivotal time to pulse-check financial and investment plans. Looking at your year-end financial checklist now provides the “best of both worlds” – allowing you to review and assess progress made on goals set at the start of the year, while still having three months before the end of the year to make notable adjustments if needed.

With this timeline in mind, here are critical considerations before year-end to help ensure your financial plans remain on track:

Investment Planning

Given 2022’s market volatility, there could be an opportunity for many investors to take advantage of tax-loss harvesting (TLH) – selling an investment at a loss and swapping for a similar but different asset to maintain a portfolio’s asset allocation. Investors have through year-end to complete TLH, but it’s beneficial to begin thinking through strategic portfolio changes sooner rather than making impromptu decisions later.

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Additionally, I always use this time of year to sit down with clients and do a “health check” on their overall investment plans. Is their portfolio still meeting short- and long-term objectives? Given market volatility, are there opportunities to consider to rebalance or further diversify? It’s also important to look ahead to 2023 and determine if there are any known liquidity events that could impact overall cash positions.

At Vanguard, we underscore with clients the importance of having six to 12 months of expenses available in an emergency fund. If a client needs to raise cash, aside from adjusting saving and spending goals, there could be tax-efficient buckets to pull from as well, such as, in some instances, selling portfolio holdings to raise cash positions or taking a required minimum distribution (RMD) before year-end and reserving it in a taxable account that you can draw from.

Retirement Planning

I often tell clients to strive to save 12% to 15% of their salary via retirement savings vehicles. With a few months left in the year, employees should evaluate where their 401(k) contributions stand and if they can or should increase deferrals.

For IRAs, investors can contribute up to April 15 of next year. Given market volatility, these investors could consider contributions now to take advantage of current “lower” prices vs. market prices seen over the previous eight to nine months.

Regardless, it’s important to see where these vehicles stand and if any contribution increases can reasonably be made to ultimately bolster long-term retirement objectives.

Depending on their tax bracket, it might also be worthwhile for some investors who have a traditional IRA to convert to a Roth IRA. The benefit of converting to a Roth allows investors to withdraw funds tax-free in retirement, and Roth IRAs don’t require RMDs like traditional IRAs do (these investors need to have a plan to take annual distributions after they reach age 72). Additionally, a Roth IRA allows investors to leave an income-tax-free inheritance to heirs.

For investors who prefer to convert, a major decision factor is considering whether to take the tax liability in 2022, 2023 or beyond. The dollars converted from a traditional IRA to a Roth IRA will be taxed as ordinary income. For example, if you convert $20,000 of a $100,000 traditional IRA, the $20,000 is taxed in the year you convert.

The decision when to convert should be based on which year has the most advantageous tax bracket. If an investor plans to retire in 2023, it likely is more strategic to do a Roth conversion that year (vs. 2022), as their ordinary income will be less.

Charitable Giving

Even with the best intentions, one of the biggest mistakes I see investors make each year is waiting until the end of December to execute a charitable donation. Starting in the fall, think about how a charitable donation might holistically fit into a broader financial plan. It should not be a one-off decision or thought of as just “cutting a check.” Rather, charitable giving should fit cohesively into meeting long-term goals.

For example, think about the best ways to maximize the tax benefits of gifting – this year, given market volatility, perhaps it makes more sense to gift securities as a way to “prune” portfolio holdings and donate the assets from that stock.

Another strategy, for investors who are at least age 70½, is to use a qualified charitable distribution (QCD). A QCD allows these investors to take up to $100,000 out of a traditional IRA to donate directly to a qualified charity. This charitable donation can also offset your RMD, if desired. The benefit of a QCD is twofold, allowing investors to meet RMD requirements and avoid taxes on otherwise taxable distributions while also fulfilling charitable-giving objectives.

These decisions should not be made with only a few days left in the year, and certainly not in a silo, when they can otherwise positively impact larger long-term financial plans.

With a few months left before year-end, investors should take advantage of the time to simultaneously look back and look ahead toward what you hope to achieve with your financial, investment and retirement goals. This strategic checkpoint provides the chance to perform a health check on plans to date, while also allowing plenty of time to pivot, if necessary, to ensure you stay on your path toward financial success.