3 TIMELEY DECEMBER IDEAS TO ACT ON NOW (Before It’s Too Late!)
December 8, 2023
As 2023 comes to a close, you may already be thinking about optimizing your finances and planning ahead for 2024. But don't count 2023 as over just yet!
Here are three last-minute ideas for December that can help you save money on taxes, make the most of your health and retirement benefits, and support your favorite causes.
1. Use Up Your FSA Balance Before the Deadline
If you have a flexible spending account (FSA) through your employer, you can use it to pay for qualified health and medical expenses with pre-tax dollars. However, most FSAs have a use-it-or-lose-it rule, meaning that any unused funds are returned to your employer at the end of the plan year (usually December 31). Some employers may allow you to carryover up to $610¹ into the next plan year, or they may offer a grace period for up to 2.5 months into the new year to use up your leftover balance, but they cannot offer both (and they may not offer either one). Check with your FSA provider to find out your remaining balance in your account and your available options.
To avoid losing your remaining FSA money, try using it to stock up on eligible expenses before the deadline. FSA-eligible expenses include eye exams, eyeglasses, contact lenses, dental treatments, hearing aids, prescriptions, and over-the-counter items such as bandages and pain relievers. You can also buy FSA-eligible items online through the FSA store (https://fsastore.com/). For any purchases you make, make sure to keep your receipts and submit your claims as soon as possible.
2. Donate Your IRA RMD to Charity via QCD
A Qualified Charitable Distribution ("QCD") is a tax-free donation from an IRA to a qualified charity.² If you are 70 1/2 or older and have a traditional IRA, the IRS allows you to donate up to $100,000 tax-free each year directly from your IRA to eligible organizations via QCDs.³ Even better, if you’re age 73 or older and taking your Required Minimum Distribution ("RMD") each year, the QCD counts toward satisfying your RMD.⁴
If you're an IRA owner and wish to make a 2023 QCD donation, there are only a few weeks left to do so. You should contact your IRA custodian ASAP (as in, NOW!) so there will be time to complete the transaction before year-end. Note that you must have your IRA custodian make a direct distribution on your behalf to your chosen charity(s) for the IRA withdrawal(s) to count as a non-taxable QCD. The QCD option is available whether or not you itemize deductions on your tax return – donated amounts are not taxable or tax-deductible.
3. Split Large Upcoming Withdrawals Over Two Tax Years
If you expect to take a large withdrawal at the end of the year to pay for an upcoming purchase or expense, it's wise to consider your timing. Choosing to make some withdrawals or investment sales before year-end and the remaining amount in the New Year may benefit you when it comes time to settle up with Uncle Sam.⁵
If you plan to withdraw a large sum before year-end from a tax-deferred retirement account such as an IRA or 401(k), consider splitting the withdrawal over two tax years.⁶ Withdrawing some money before December 31 and the rest after January 1 allows you to spread the income tax burden over two years, which could be an advantage. For example, if you expect your income to be lower in 2024 than in 2023, consider withdrawing a smaller amount before December 31 and a larger amount after January 1. Conversely, if you expect your income to be higher next year, consider withdrawing a larger amount before December 31 and a smaller amount after January 1.
This strategy also works for taxable investment accounts. If you plan to sell investments in a taxable account to raise cash for a large upcoming withdrawal, consider selling some holdings before December 31 and some after January 1. Depending on how long you've owned each asset and what you paid when you bought it, you will likely incur capital gains (or losses) from the sale. Being mindful of the tax status of your holdings, and your timing for selling them, allows you to exert some control over the resulting impact on your tax return.
¹ $610 is the limit for plan years ending in 2023.
³ QCDs are ineligible for a donation to donor-advised fund sponsors, private foundations, and supporting organizations.
⁴ You read that right – 73 is the new beginning RMD age, effective January 1, 2023. Before this, it was 72 (briefly, only as of 2019); before that, it was 70 ½ for a very long time. The beginning RMD age will increase again to 75 in 2033.
⁵ This strategy works if the timing of your cash need allows for it (assuming it's not for some massive emergency that cannot wait).
⁶ Always consult your tax advisor before making large withdrawals from your retirement account. We will say that again: Always consult your tax advisor before making large withdrawals from your retirement account.
This commentary is only general information and should not be construed as investment, tax, or legal advice. You should consult your own investment, tax, and legal advisors before engaging in any transaction. Past performance of any market results is no assurance of future performance. The information presented within has been obtained from sources believed to be reliable but is not guaranteed.
Do you have questions about how to apply any of these ideas to your unique situation, or about anything else related to money, investments, or financial education? We are happy to help get you on track! Contact us for a complimentary, no-obligation conversation.