By Daniel Baumgartner & Petra Peters
As we quickly near the start of 2024, it’s wise to pause and assess your finances. Are they organized and in shape for a new year? Or do you feel unprepared?
At Terra Nova Asset Management, we understand that creating a stable financial plan is a gradual process that demands focus, clear strategy, and consistent effort. If it’s a goal of yours to optimize your financial future, you’ll need to take the time to strengthen your finances, increase your savings, and determine your goals for the future.
That’s why we’ve crafted this comprehensive financial planning guide to help you determine the opportunities available to improve your financial picture. Continue reading to gain insights and discover actionable steps to kick-start your financial plan for a successful new year—and beyond.
Maximize Your Retirement Savings
Before the end of the year, aim to max out your retirement contributions. Many employers offer retirement plans like 401(k)s, 403(b)s, and 457s, which allow you to contribute up to $22,500 for 2023 ($23,000 for 2024).
These contributions are automatically deducted from your paycheck and won’t show up as part of your annual income, so the more you can maximize your contributions during the year, the less taxable income you will have come April 15th. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket.
Keep in mind that the SECURE 2.0 Act will increase catch-up contributions starting in 2025. At that point, individuals between ages 60 and 63 will be able to contribute up to $10,000 or 150% of the regular catch-up contribution to their retirement plan.
Contribute to an IRA
Contributing to a traditional IRA is another strategy to reduce your AGI if your income is within certain limits. By contributing pre-tax funds, you can effectively reduce your current-year tax liability, but you will owe tax on both the contributions and the account growth when you withdraw the funds in retirement. Alternatively, you can contribute to a Roth IRA, where taxes are paid up front but distributions are tax-free at retirement as long as the first contribution was made at least five tax years ago. The 2023 contribution limit for IRAs is $6,500 ($7,000 for 2024) with additional $1,000 catch-up contributions for individuals over the age of 50. Contributions can be made until April 15th, 2024, for the 2023 tax year, but the sooner they are made, the less likely you are to forget.
Understand Your RMDs
At the start of 2023, the rules around required minimum distributions (RMDs) changed thanks to the SECURE 2.0 Act. If you turn 72 after December 31, 2022, your RMD age will be increased to 73. If you turn 74 after December 31, 2032, your RMD age will be 75. If you are subject to RMDs in 2024, the sooner you understand the rules around your distribution, the better. Depending on what age you are required to start taking distributions (70½, 72, 73, or 75), you could face a 25% - 50% penalty on missed distributions.
If you don’t need your RMD money to live on, consider donating the funds to a worthy cause, which could also lessen your tax burden for the year. To calculate your RMD, use one of the IRS worksheets.
Assess Your Emergency Fund
Now is the time to confirm you have enough money set aside in your emergency fund or create a plan to build this up over the next year. An adequate emergency fund should cover 3-6 months of necessary living expenses, including mortgage or rent, utilities, groceries, transportation, etc.
With all the stock market uncertainty and recession fears, many experts have suggested maintaining a larger emergency fund, closer to 8-12 months of expenses. If you’re single, or your household only has one source of income, consider saving on the higher end of this scale to make sure you’re covered in the event of a job loss or reduction in income.
However much you save, keep this money in a highly liquid account. It needs to be readily available and easily accessible, but it should also be in an account that offers a competitive interest rate so you don’t lose out on potential growth.
The SECURE 2.0 Act has made saving for emergencies a bit easier. In 2024, participants will be allowed to contribute up to $2,500 annually to an “emergency fund” within the 401(k) plan. These contributions can be accessed before retirement and will not be subject to the 10% early withdrawal fee.
Create and Maintain a Budget
The word “budget” seems to have a negative connotation; many people think that if you budget, you’re broke. Budgeting actually gives you permission to spend, and is a simple way to keep track of your expenses and be aware of how much you’re actually saving each month. If one of your goals for the new year is to improve your cash flow and make better financial decisions, creating and maintaining a budget is a great place to start.
Contribute to a Health Savings Account
If you’re enrolled in a high-deductible health plan, consider contributing to a health savings account (HSA) before the end of the year. HSAs offer triple tax savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for medical expenses.
The 2023 IRS contribution limits for HSAs are $3,850 for individuals and $7,750 for families ($4,150 and $8,300 for 2024, respectively). If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You have until April 15th for your contributions to count for the previous year’s tax return, but the sooner, the better to ensure you don’t forget.
Review Your Workplace Benefits
The end of the year is a great time to review your workplace benefits and take advantage of any remaining sick days, vacation time, or deductibles before they reset.
Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any expiration dates. If your sick or vacation time does expire, take advantage of a last-minute vacation or a staycation before the end of the year.
Similarly, if you’ve hit your deductible for the year, now would be a good time to incur additional medical expenses before your deductible resets in 2024. Take the time to get that dental work, blood test, or other medical procedure you’ve been putting off. Dental plans in particular often have a maximum coverage amount. If you haven’t used up the full amount and anticipate any treatments, make an appointment before December 31st.
Use Up Your Flexible Spending Account
Your employer may also offer a healthcare flexible spending account, which allows you to set aside pre-tax money for qualified out-of-pocket medical expenses. The 2023 contribution limit is $3,050; 2024 has a slight increase up to $3,200.
Unlike HSAs, FSAs do not require that you participate in a high-deductible health plan, but they are not as versatile either. For instance, HSAs allow you to carry over any unused funds to the next plan year, whereas FSAs only allow you to carry over up to $610. Generally speaking, if you do not have access to an HSA, then contributing to an FSA is likely a good idea.
Revisit Your Plans and Policies
Your insurance needs may also change as the year goes by, so periodically review your coverages and designated beneficiaries to bring them up to date to reflect your current financial situation. For example, if you paid off debt, you may not need as much life insurance coverage since your family’s liabilities have decreased. You might also want to evaluate your need for other types of insurance, such as long-term care or disability insurance.
Donate to Charity
Donating to charity doesn’t have to wait until the holiday season. In fact, charitable gifting is a great tax strategy to incorporate throughout the year.
Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction and can be a great way to give back at the end of the year while also minimizing your tax bill. With the higher standard deduction, you’ll need to make sure your total itemized deductions for 2023 exceed $13,850 for an individual filer, and $27,700 for married filing jointly. (These numbers will rise in 2024 to $14,600 and $29,200, respectively.) If your deductions fall below this amount, consider or doing several years’ worth of giving in one year.
Donor-advised funds are another option that allow you to contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.
Invest in a College Savings Plan
If you have children or grandchildren in your life, contributing to a 529 savings plan is an excellent way to jump-start their college savings in the new year.
This type of educational savings plan was created so that families can receive tax benefits for saving toward qualified higher-education expenses. After-tax money is invested in a 529 plan where it grows tax-free. When the money is later taken out for qualified expenses, there are no federal taxes due.
In 2023, you can give up to $17,000 per 529 account gift-tax-free ($18,000 for 2024 or $36,000 if gift-splitting with a spouse). There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum, meaning you could give up to $85,000 entirely gift-tax-free!
What’s more, remaining 529 balances can be rolled into a Roth IRA for the account beneficiary starting in 2024, so you won’t have to worry about losing the funds if your child chooses not to go to college or doesn’t use the full account amount. Keep in mind that the account must be at least 15 years old and the maximum lifetime rollover limit is $35,000. Contributions made in the last 5 years will not be eligible for rollover.
Consider a Roth Conversion
Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions, and you may not be able to open an account outright if you are above certain limits.
To get around this threshold, consider a Roth conversion. Using this strategy, you will pay tax on money contributed to a traditional IRA, thereby converting it into a Roth. If you have earned less income in 2023, or your traditional IRA balance has taken a hit due to recent market volatility, a Roth conversion may be a great opportunity for your specific situation. Converting to a Roth also allows your money to grow tax-free for as long as you’d like.
Consider Tax-Loss Harvesting
Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return.
Given the continued market volatility throughout 2023, this can be a great way to make the most out of a losing situation by using an investment loss to offset your tax liability. Even though the deadline for this to count toward the 2023 tax year has passed, there will likely be ample opportunity to revisit this strategy in 2024. Talk with your advisor about potentially harvesting your losses and if it makes sense for you.
Review Your Asset Allocation & Invest With Impact
The beginning of the year is also a great time to review your asset allocation strategy and incorporate ESG and impact investing if desired. Given the dramatic market volatility and historic levels of inflation over the last year, it’s crucial to evaluate your investments and make sure your portfolio is properly diversified in 2024. It should also be tailored to your specific risk tolerance level, ensuring you earn enough returns to keep up with inflation but you’re not overexposing yourself to risk.
If you are interested in using your funds to support environmental, social, or governmental issues (ESG), you can also consider impact investing as a way to earn returns while also promoting change on causes you care about.
Review Beneficiary Designations
If you had any major life events happen this year, like the birth of a child, marriage, divorce, or a death in the family, make sure you review your beneficiary designations. There are several assets, including retirement accounts, bank accounts, and life insurance policies, that are distributed based on beneficiary designation and not the terms of the will. If you have an updated will but an outdated beneficiary listed on one of these accounts, there is a chance your assets will not pass according to your wishes.
Review Your Estate Documents
Similarly, it’s important to review your estate planning documents, including your last will and testament, any powers of attorney, living wills, and/or trust documents. The new year is always a good time to take another look at these documents or start drafting them if you don’t already have them in place.
Make the Most of the Annual Gift Tax Exclusion
If you’re looking to reduce your taxable estate, consider making gifts up to the annual exclusion amount. For 2023, individuals can give to each recipient (and to an unlimited number of recipients) up to $17,000 and married couples can give up to $34,000 without triggering gift tax. (These numbers increase in 2024 to $18,000 and $36,000, respectively.) Not only that, but the beneficiary of your gift will not have to report it as income. This is a great way to spread your wealth amongst family and friends.
A Partner to Help You Prepare
Are you feeling overwhelmed as you work through this financial checklist? The Terra Nova Asset Management team has got you covered. With years of industry expertise, we are equipped with the tools and knowledge to assist you in creating a financial strategy that meets your specific needs. Our goal is to empower our clients to optimize their financial plans so they can make the most out of life.
If it seems like we may be a good fit, we invite you to reach out to us directly at 212-355-1234 or email@example.com for the New York office (Petra) or 855-248-6630 or firstname.lastname@example.org for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.