2023 Year-End & 2024 New Year Reminders

Watch or read below for important end-of-year and new year tips in this edition of PFA Advisor Huddle. We covered a range of topics — from pointers on employee benefits and portfolios, to tax-saving opportunities and retirement savings suggestions.

Each advisor also previewed their favorite holiday recipe featured on our blog here. Enjoy!

Flexible Spending Accounts and Health Savings Accounts

As year-end approaches, it’s important to check those HSA and FSA account balances. An FSA is a “use it or lose it” accounts for most companies. Every employer operates differently, some make you spend your balance by December 31st, while others allow you to roll over a certain amount to the next year or a grace period of a few months to spend the remaining funds. An HSA allows you to roll unused funds every year. This is an account you own for life, regardless of employer.

Both accounts are designed to be used to pay for qualified medical expenses. Otherwise, those under 65 years of age will pay a 20% penalty plus income taxes on the money used for non-qualified expenses. If 65 or older, there is no penalty, but you will need to pay income taxes.

In addition to checking your balances, reviewing your contributions is also key. If you overfund these accounts, you will pay a 6% excise tax on excess contributions. So, watch those automatic deposits as year-end approaches, and remember if your employer contributes to your HSA, that amount counts towards the annual maximum.

You can also invest your HSA funds. A good rule of thumb is holding enough cash to cover your maximum out-of-pocket expenses and investing any money above that amount.

New 2024 contribution limits are as follows; up to $3,200 for an FSA, with a max carryover of $640 (if you employer allows this), HSA limit of $4,150 for a single individual and $8,300 for families. Those 55 and older can give an extra $1,000 per year.

Many employers have open enrollment before or after year-end. Be sure to look at your current elections and make any changes necessary for you and your family. If anything about your situation has changed, you will want to make sure you update your benefits accordingly. Employees may receive a COLA increase in salary so check on that household budget to make sure you are accounting for an increase in income and adjusting any expenses that have been paid off or have been added to the list!

Portfolio Rebalancing

As you develop your risk tolerance and build a portfolio mix of stocks to bonds, you will want to make sure you remain in that risk tolerance. Since asset classes don’t grow or decline at the same rate, it is important to periodically make sure that your mix isn’t too far out of whack. If your stocks, for example, do well for a period of the year, your 60/40 (60% stocks to 40% bonds) portfolio might be closer to a 70/30 portfolio which means you are now holding on to more risk than you intended. To correct this, you will want to trim some of the gains on the stock side and rebalance that into your bond allocation. This keeps you in the same risk tolerance over time and is an important end-of-year task for any investor.

Tax Hoss Harvesting 

This can be done in conjunction with any portfolio rebalancing. Tax loss harvesting is when an investor sells positions that are down in their portfolio that may not be attractive to generate additional losses. These losses can be used to offset any gains you may have or used to offset any other taxes you may incur from income. A quick reminder you can only write off $3,000 in losses in any given year but if you have more than that amount, you can carry those losses into future tax years. While this can be valuable to do throughout the year, spending a little time at year end can make a big difference on what you might owe Uncle Sam come tax time.

Maxing Out Your Retirement Plan at Work Before Year End 

If you are maxing out your retirement plan at work and your employer offers a match, you need to be careful about the amount of your contributions. If your contributions are large enough that you max out your retirement plan before the last payroll of the year, you will need to stop contributing at that time. When that occurs, your employer will not be remitting their matching contributions. This may mean that you are missing out on matching contributions by maxing out too early! 

Some plans have a protection in place know as a “true up” provision. This means the employer will look at your total contributions during the year, usually at the end of the plan year, and ensure you get the full match by making a one-time adjustment. However, according to a Deloitte survey, 55% of plans do not have this provision!  If this is the case, and you are maxing out early, you are missing out on free matching dollars! 

As we roll into the new year, potentially with a higher salary, make sure to revisit your contribution election to ensure you are contributing throughout the course of the year. It is usually better/more consistent for budgeting purposes as well! 

Tax Withholding

It’s especially important this year to make sure that you have paid in enough tax withholdings or estimated payments to avoid an underpayment penalty.  

This year, the IRS has moved the penalty up to 8% – worthy of avoiding!  Check out how much has gone to either tax withholding (looking at your paystub) or estimated payments or both.  If that amount is more than 100% of what you paid in 2022 taxes (110% if you made more than $150,000), you’re probably in the clear here.  There is also a “get out of penalty-free” card available if you have paid in at least 90% of your 2023 tax liability.  

Timing does matter here – if you made most of that money in the early part of the year, you may still have underpayment penalties if you haven’t covered your tax obligation as you go.  BUT if you’re coming up short, make sure to get an estimated payment in on or before January 15.  8% is a good penalty to avoid!

Roth IRA Contribution Deadlines

If you’re eligible to make direct contributions to a Roth IRA, you have until April 15, 2024, to contribute. The 2023 IRA contribution limit is $6,500 ($7,500 if you’re at least 50 years of age). Tip: remember to designate the contribution year as 2023 for contributions made after Jan. 1.

On the other hand, if you’re ineligible for direct Roth IRA contributions but doing a “backdoor Roth,” transactions must be completed by Dec. 31. Tip: remember to let your tax preparer know.

Looking ahead to 2024, IRA contribution limits increase by $500, so increase automated contribution amounts accordingly!

Qualified Charitable Distributions (QCDs)

QCDs are a win-win for the donor and the charities they support. Beginning at age 70.5, distributions made directly from your IRA to qualified charities are considered tax-free withdrawals by the IRS. And if you’ve started required minimum distributions, QCDs count toward your RMD amount for the year. 

If you write and mail a check (using a checkbook for your IRA), the charity should cash the check by Dec. 31 to count as a QCD for the current year. If you have your custodian send checks to the charities, checks should be dated on or before Dec. 31 to be considered a current year QCD. 

Important reminder: give your CPA a list of QCDs so they know to properly report the gift amounts as tax-free distributions. This is key, as the Form 1099-R you receive will NOT identify how much of the year’s distribution is for QCDs. 

Have questions about any of these topics? Reach out to your PFA advisor or send us a note.