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10 Step Year-End Financial Checklist for Physicians

Contributor Alvin Yam
Editor Vinci Palad

As we wrap up 2023, it’s the perfect time to evaluate our finances, including taxes, investments, retirement, savings, and estate planning. In this post, we created a ten-step year-end financial checklist for physicians and high-earners to close 2023.

Let’s take a look.

 

1. Maximize Retirement Savings 

Employer-Sponsored Accounts

If there’s still room to put away into your retirement savings before the year ends, consider fully utilizing your retirement savings options. The first place to look is your employer-sponsored accounts. 

If you’re enrolled in an employer-sponsored retirement plan such as a 401(k), Roth 401(k) or 401(b) plan, maximizing contributions should be a priority. First, review how much money you contributed to your employer’s retirement plan this year. 

In 2023, the maximum contribution limit is $22,500, with a higher limit of $30,000 for those aged 50 and above. Contributions made by December 31st will be part of your 2023 tax return. 

Remember that contributions made towards these plans are deducted from your pre-tax income, effectively lowering your taxable income for the current year, which could mean a lower tax bill.

Many employers also offer matching contributions, which we like to call “free money.” So, making sure you contribute enough to get those employer matches is a no-brainer in terms of building up more retirement savings.

You should also note next year’s contribution limits: For 2024, the contribution limits have increased to $23,000. Catch-up contributions will remain the same, at $7,500, for those 50 and over.

 

IRA Contributions

If you’re not enrolled in an employer-sponsored plan, Individual Retirement Accounts (IRAs) provide another way to build up tax-advantaged retirement savings. The 2023 contribution limit for IRAs is $6,500, with a catch-up limit of $7,500 for those 50 and above. Unlike employer plans, IRA contributions have a more flexible deadline –  April 15th of the following year. 

You might think, “I already have an employer-sponsored retirement plan – should I still contribute to an IRA?” While employer-sponsored plans are great, contributing to an IRA can still make sense, even if you’re already maximizing your company’s retirement plan.

Employer plans typically have limited investment options, which your employer determines. However, IRAs allow for a much broader range of investments, such as individual stocks, bonds, and ETFs, which can help diversify your investments and potentially improve your returns. 

IRAs also offer additional benefits, and when choosing an IRA type, such as a traditional or Roth IRA, you’ll want to consider the current and future tax benefits of each.

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Traditional IRAs offer immediate tax deductions on contributions, lowering your taxable income for the current year. Traditional IRA deductions can vary based on your modified adjusted gross income (MAGI) and whether a retirement plan at work covers you, so your contributions to a traditional IRA may be fully or partially deductible.

These deductions can be beneficial if you’re currently in a higher tax bracket. However, qualified withdrawals in retirement are taxed as income, potentially pushing you into a higher bracket. 

Roth IRA contributions are made with after-tax dollars, so no upfront tax benefits exist. Also, unlike Traditional IRAs, Roth IRA contributions have income limits for eligibility. However, Roth IRAs let your contributions grow tax-free, meaning you pay no taxes on your withdrawals in retirement. 

This flexibility allows you to optimize your tax strategy based on your current and future income brackets. In addition, Roth IRAs allow for tax-free growth and qualified withdrawals in retirement, which is ideal if you anticipate lower tax brackets in the future.

For 2023, the maximum contributions you can make to all of your traditional IRAs and Roth IRAs is $6,500. If you’re 50 or older, the limit is $7,500. The contribution deadline for each year is the tax filing deadline (usually April 15) of the following year. 

 

2. HSAs and FSAs

 

A Health Savings Account (HSA), or a “Medical IRA,” provides triple tax benefits. Your contributions are tax-deductible, your earnings grow tax-deferred, and your withdrawals for qualified medical expenses are tax-free. 

Some HSAs allow you to invest your funds in various investment options. This can be a great way to grow your HSA balance over time. Remember, any earnings from these investments are tax-deferred. 

You’ll want to be sure to use your HSA funds for eligible medical expenses to enjoy these benefits. Unlike Flexible Spending Accounts (FSAs), HSAs do not have a “use-it-or-lose-it” policy. Any unused funds in your HSA will roll over to the next year.

You can maximize your savings by contributing up to the annual limit of $3,850 for individuals and $7,750 for families in 2023, with an extra $1,000 catch-up contribution allowed for those aged 55 and above. Note that these limits include both the individual’s and employer’s contributions. If you haven’t reached these limits yet, consider increasing your contributions before the year ends.

In 2024, these limits increase to $4,150 for individuals and $8,300 for families in 2024. The deadline to contribute to a HSA for a tax year is typically April 15 of the following year.

A Flexible Spending Account (FSA) is a type of savings account with specific tax advantages and is typically established by an employer for employees. There are two main types of FSAs: a health care FSA and a dependent care FSA.

A health care FSA can be used for medical expenses, over-the-counter items, dental care, and vision care. A dependent care FSA can be used for services like preschool, summer day camp, and daycare for a child or dependent adult.

FSAs operate on a “use-it-or-lose-it” basis, so make sure you spend or submit claims for eligible expenses before the deadline. The deadline to use funds in an FSA is typically December 31. However, your employer may offer a grace period until March 15 or allow a carryover of up to $610 in 2023. Any unused funds will expire, so be sure to plan your spending carefully. 

 

3. Consider After-tax Contributions to Employer-sponsored Accounts 

 

After-tax contributions refer to the amount of money you contribute to a 401(k), Roth 401(k), or 403(b) after you’ve reached your employee contribution limit. These contributions are made with after-tax dollars (and not pre-tax dollars). This is because you’ll have paid taxes on these amounts, and these contributions won’t reduce your taxable income. These types of contributions are worth considering if you’ve already maxed out your pre-tax contributions but still want to put away more in retirement savings.

Once you’ve reached your employee contribution limit, if your plan allows, you can make after-tax contributions as long as the contributions do not exceed the combined employee and employer contribution limit. Also, your total contributions cannot exceed your annual compensation at your company. 

 

Unlike the traditional pre-tax or Roth options, after-tax contributions are deducted from your paycheck after taxes have already been withheld. While you won’t enjoy the immediate tax benefits from pre-tax contributions, your money still enjoys tax-deferred growth within the plan. This means your contributions and any earnings accumulate tax-free until you withdraw them in retirement.  

The combined employee and employer 401(k) contribution limit is $66,000 for 2023 (or $73,500 for those age 50 or older). For 2024, the combined employee and employer 401(k) contribution limit is $69,000. 

Also, some employer-sponsored plans such as 401(k)s offer the ability to convert your after-tax contributions to Roth contributions later. This means future withdrawals would be tax-free, which is a potentially huge advantage if you anticipate being in a lower tax bracket in retirement. 

You can read our The Mega Backdoor Roth IRA: A Comprehensive Guide (2023), which covers this in more detail.

 

4. Consider a Roth IRA Conversion

Roth IRAs offer many advantages, including tax-free growth and distributions, provided you’re at least 59½ years old and have held the account for a minimum of five years. The absence of required minimum distributions (RMDs) simplifies the process of leaving a tax-free inheritance. For these reasons, we favor Roth IRAs over traditional IRAs.

A Roth IRA conversion, often called a “Roth conversion,” takes distributions from an existing traditional IRA, pays any necessary taxes, and then transfers those funds into a Roth IRA. The converted amount is added to your gross income for the tax year, and you pay your ordinary tax rate on the conversion.

A conversion may be beneficial if your tax rate is lower now than what you project it to be when you start taking withdrawals. You’ll pay conversion income taxes at a lower tax bracket now and then enjoy tax-free Roth IRA withdrawals later.  

Note that converting assets from a traditional IRA to a Roth IRA is taxable. You’ll owe ordinary income taxes on any pre-tax amounts. However, opting for partial conversions can distribute your tax payments over several years. To avoid bumping up to a higher tax bracket, consider converting an amount that maintains your current tax bracket. Depending on your residence, state income taxes may also apply.  Also, the IRS mandates the aggregation of all your IRAs for the purpose of calculating the taxable basis.  

It’s also worth noting that tax rates are projected to increase when the 2017 Tax Cuts and Jobs Act expires at the end of 2025. If you’ve been delaying a Roth conversion, this potential rise in tax rates may make this an opportune time to do a Roth conversion. You have until the end of this year to complete a Roth conversion for the 2023 tax year.

 

5. Rebalancing Your Portfolio and Tax-Loss Harvesting

When markets fluctuate, as they do most years, your portfolio can veer off target. Rebalancing means adjusting your portfolio to realign with your investment goals. If your portfolio suffered losses this year, you could use those losses to offset gains to reduce your tax bill. This strategy is known as tax-loss harvesting.  

Tax-loss harvesting involves selling investments at a loss to counterbalance capital gains tax. Review your portfolio for opportunities to incur losses to balance out your gains strategically.  

 

One approach is a tax-swap strategy for mutual funds, which lets you realize a tax loss while maintaining similar market exposure. The key here is that the funds can’t be “substantially identical.” 

You could use ETFs or mutual funds from different fund families that track slightly different indices. For instance, you could swap an S&P 500 fund at one company for a total US market index fund at another. This is basically a strategy to reinvest proceeds from the sale of losses to a similar type of investment so that you don’t lose out on potential gains in any market rebound. If you do this, however, you’ll want to be aware of the wash sale. 

Another effective strategy to lower your taxable income is to sell investments that have depreciated in value since you bought them. These losses can offset any gains from other investments during the year, potentially lowering your tax liability. A common strategy is to reinvest the proceeds from the sale of these depreciated assets into a similar, but not identical, investment. This allows you to maintain a similar market position while potentially benefiting from future market rebounds.  

However, it’s important to be aware of the wash sale rule. This IRS rule states that if you sell a security at a loss and buy a substantially identical one within 30 days before or after the sale, the loss cannot be claimed for tax purposes. Therefore, when reinvesting, you’ll want to ensure the new investment is not considered “substantially identical” to avoid violating this rule.

6. Review Your Charitable Giving Strategy

 

Charitable giving offers a way to support your favorite charities while also allowing you to enjoy tax benefits, particularly for high-earners. As the year ends, it’s an ideal time to review your charitable giving strategies. Here are some key areas to consider.

For 2023, charitable contributions can only be deducted if you itemize your tax deductions. The special provisions that were in place for 2021, allowing taxpayers to deduct up to $300 ($600 for married couples) even without itemizing, unfortunately, were not extended.

If you do itemize your deductions, one strategy to consider is donating taxable investments with unrealized capital gains rather than cash. This approach allows you to bypass capital gains tax and claim a deduction for your donation amount.

Cash donations are straightforward, but they may not be the most tax-efficient method of giving. Many investors hold long-term or concentrated stock positions with significant unrealized capital gains (for example, you’ve held Apple stock for many years).

If this applies to you, consider donating these highly appreciated securities directly to charity. This strategy helps you avoid capital gains tax and allows you to reduce a large position, reducing concentration risk in your portfolio. Plus, you can donate the full pre-tax value of the asset.

Another traditional strategy is to donate cash proceeds from selling stocks that have decreased in value. This could be relevant in a year like 2023, where certain stock market sectors experienced a downturn. You can recognize a loss by selling a stock that has decreased in value. This loss can be used to offset any capital gains for the year, or it can be used to offset up to $3,000 of your ordinary income. Also,  any unused capital losses can be carried forward into future years to reduce taxable income.

Lastly, under the Tax Cuts and Jobs Act (TCJA), enacted in 2017, the deduction for cash contributions directly to charity increased from 50% of adjusted gross income (AGI) to 60%, including for gifts to a donor-advised fund. The TCJA is currently scheduled to sunset at the end of 2025, and after this date, the deduction limit for cash contributions to charity will revert to 50%. 

 

Qualified Charitable Distributions (QCDs)

 

If you’re 70 ½ or older, you can take up to $100,000 annually from your traditional IRA to donate directly to a qualified charity without paying taxes. This is known as a Qualified Charitable Distribution (QCDs), and this amount is simply excluded from your taxable income. If you’re age 73 and don’t need to live off your RMD income, there’s a double benefit – it can help you meet your RMD requirement, and you can exclude this amount from being included in your taxable income.

Note that you can benefit from a Qualified Charitable Distribution (QCD) even if you don’t itemize deductions on your tax return. However, if you opt for a QCD, you won’t be eligible to claim a charitable deduction using the same assets.

It’s also worth noting that the Secure Act 2.0, enacted in December 2022, introduced a provision for a one-time QCD to a split-interest entity. This provision allows you to make a QCD of up to $50,000 to fund a Charitable Remainder Unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (CGA).

 

Donor-Advised Funds (DAF) 

 

A Donor-Advised Fund is an account where you can put money or assets that you plan to give to charity. You get a tax deduction right away when you donate to the DAF, but you’re allowed to take your time deciding when and where to donate. This can be beneficial if you have investments that have grown significantly. 

Contributing to a DAF allows you to receive an immediate tax deduction. For cash gifts, the deduction is limited to 60% of your adjusted gross income. The deduction limit for gifts of other assets is 30% of adjusted gross income. 

In addition, a DAF can be useful for “bunching” your donations, a strategy that has become more relevant since the Tax Cuts and Jobs Act of 2017 roughly doubled the standard deduction. This strategy involves making several years’ worth of gifts all at once.

For 2023, the standard deduction is $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of household. By bunching donations in a DAF, you can itemize your deductions this year while spreading your donations over time. 

 

7. 529 College Savings Accounts

 

A 529 is a tax-advantaged college savings account that may provide an opportunity for immediate tax savings if you live in one of the 30 or more states offering a full or partial deduction for your contributions to the home-state 529 plan. 

Also, there are several states that are considered tax parity states, meaning you can use any state’s 529 plan to receive the deduction. Remember that these plans can be used for pre-K through college expenses and even student loans, though limits may apply based on how you use the money.

 

Further, you can give up to $17,000 a year gift tax-free per person, which is a way to contribute to a loved one’s 529 account efficiently. The annual exclusion recycles on January 1, so if you haven’t already used your 2023 gift allowance, you can contribute to a 529 plan by the end of the year to use it. 

Lastly, superfunding, or 5-year gift-tax averaging, allows families to front-load large contributions to a 529 plan without having to pay gift taxes while protecting their lifetime gift and estate tax exemption. With 529 plan superfunding, individuals can contribute up to $85,000 per beneficiary if it’s treated as if it were spread over a five-year period.

You can learn more details about 529 plans in our article, 529 Plans: What You Need to Know About College Savings Plans in 2023.

 

8. Review Your Stock Compensation 

If you have stock options, restricted stock, or other forms of equity compensation, the year-end is an opportunity to evaluate these holdings. Here are some key points to consider:

  1. Review your vesting schedules to anticipate when you might receive shares or when you can exercise options in the upcoming year.
  2. Consider the overall value of your stock awards that will be reported as income. It’s important to understand how this might impact your tax situation, including the possibility of triggering the Alternative Minimum Tax (AMT).
  3. Keep an eye on market conditions and the performance of your company’s stock. This can influence your timing in exercising your options or selling shares.
  4. Holding a significant portion of your wealth in your company’s stock could expose you to higher risk, so you should review your portfolio’s diversification.

9. Take Required Minimum Distributions (RMD) 

 

If you are 73 years old or older, don’t forget that you must take RMDs from your IRA. However, it’s worth exploring other options if you don’t need your RMDs to pay your living expenses.

As mentioned earlier, if you’re 70 ½ or older, you can donate all, or a portion, of your RMD directly to charity via Qualified Charitable Distributions (QCD). Still, you’ll need to act before the end of the year.

If you turned 73 this year and are taking an RMD for the first time, you have until April 1, 2024 to withdraw your RMD. After that, you’ll need to take it before the end of each calendar year.  

If you inherited an IRA on or after January 1, 2020, you might be subject to the new 10-year rule. This means the account must be distributed by the end of the 10th year following the year of the original owner’s death. The penalty for not taking a distribution in 2023 is waived for this year, so you can skip taking an RMD if you’d like. But note that the account must still be distributed at the end of the 10th year.  

 

10. Reviewing Your Estate Plan and Account Beneficiaries

 

As the year winds down, now is also a good time to revisit your estate plan and the beneficiaries of your accounts. Review key documents such as your will, health care power of attorney, advanced medical directive, and general power of attorney. 

You’ll want to ensure that all names are current and accurately reflect your intentions. Also, remember that beneficiary designations on retirement accounts and insurance policies are transferred outside of your will. 

This means that even if you have an estate plan in place, you should periodically review and update your beneficiary designations in order to ensure your assets are distributed according to your wishes. You don’t want your assets to unintentionally go to someone you didn’t intend, such as an ex-spouse.

 

Bonus Check-list Items

We’re also including these bonus items to help further optimize your year-end financial planning. 

Retirement Accounts if Youre Self-Employed

Traditional employer-sponsored retirement plans are generally not available if you’re self-employed. But there are other options available, such as the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA. These plans offer tax advantages and flexibility that can benefit self-employed individuals.

A SEP IRA is a retirement plan that allows self-employed individuals and small business owners to contribute to their and their employees’ retirement. The contributions are tax-deductible, and the investments grow tax-deferred until retirement. With a SEP IRA, you can set up and contribute to your account until the due date (including extensions) of your income tax return for the year you want to establish the plan. This means if you’re a self-employed individual and you obtain an extension to file your tax return, you can set up and contribute to your SEP IRA by the extended due date. 

On the other hand, a SIMPLE IRA plan is a retirement plan that is easy to set up and has low operating costs. It’s suitable for self-employed individuals and small businesses with 100 or fewer employees. 

A SIMPLE IRA plan should be set up between January 1 and October 1 of the year. If you became self-employed after October 1, you can set up a SIMPLE IRA plan as soon as administratively feasible after your business starts. As for the contributions, you can make them throughout the year or in a lump sum by the due date of your income tax return (including extensions).  

Custodial Roth IRAs

Custodial Roth IRAs have become popular for parents looking to help their children build their savings. These accounts offer a combination of tax benefits and flexibility, allowing young people to start saving and investing early. You can read more about Custodial Roth IRAs in our article, Custodial Roth IRAs: Is It Right For You?.

Re-assess Your Cash 

Many money market accounts are now yielding around 3.3% to over 5% as of the time of this writing. You should assess your bank accounts and cash holdings to ensure they earn a competitive yield.

We also suggest evaluating your current financial situation and considering whether you have too little or too much cash sitting on the sidelines based on your anticipated spending needs. If you find yourself with surplus cash that isn’t needed for immediate or short-term expenses, consider putting this money to work by investing it.

 

Final Thoughts

Being proactive with your finances will steer you towards your financial goals and also help you finish the year on a strong note. Reviewing your finances and necessary actions before the year ends could significantly improve your overall financial well-being.

Some of these strategies require careful planning and analysis. That’s why we recommend that you consult with your tax professional or estate planner professional to understand how these strategies can fit with your specific circumstances.

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