Don't Miss These Year-End Financial Planning Opportunities

Key Takeaways

1. Don't Skip Open Enrollment: Actively review your benefit options each year. Changes in plan costs, coverage, and your personal circumstances can significantly impact your finances.
2. Maximize Your FSA and HSA: Contribute to your FSA and HSA strategically to minimize taxes and cover healthcare expenses. Remember that FSAs are generally use-it-or-lose-it, while HSAs offer long-term savings potential.
3. Forecast Your Taxes: Prepare a tax forecast to anticipate your future tax liability and identify opportunities to reduce your tax burden. Consider factors like retirement income, Social Security benefits, and RMDs.
4. Strategize for Tax Savings: Based on your forecast, implement tax-saving strategies like Roth conversions, tax-loss harvesting, and charitable giving.
5. Seek Professional Guidance: If you're feeling overwhelmed, consider working with a financial advisor. They can provide personalized guidance and help you navigate complex tax and benefit decisions.

The Holiday Season is Here!

As we approach the final weeks of 2024, the holiday festivities often take center stage. It's easy to neglect your finances between turkey dinners, festive lights, and shopping sprees. However, year-end is a crucial time for your financial planning. 

Two actions that are particularly important and can save you thousands of dollars over time are reviewing your benefit elections during open enrollment and preparing a tax forecast.

#1 – Review Your Open Enrollment Options and 2024 Contributions

Open enrollment season is typically in the fourth quarter, and for most companies, it’s your only opportunity to change your benefits for the coming year. Failing to review your options could leave money on the table. Here’s what to focus on:

Healthcare Plans and Flexible Spending Accounts (FSAs)

1. Plan Costs and Coverage:some text
   • Review your healthcare spending for the current year by logging into your insurer’s website to track costs. Forecast these expenses for next year while factoring in any anticipated changes, such as planned medical procedures or life events (e.g., having a child).
   • Use tools like health-plan-compare.com to evaluate your plan options. While we are not affiliated with this site, it can be a helpful resource.
2. Flexible Spending Accounts (FSAs):some text
   • FSAs are “use-it-or-lose-it” accounts. For 2024, the contribution limit is $3,200 ($3,300 for 2025). Plan to contribute enough to cover predictable healthcare expenses but avoid overfunding to prevent forfeiture of unused funds. Some plans permit the rollover of some funds. For FSAs that permit the carryover of unused amounts, the maximum 2024 carryover amount permitted by the IRA is $640.
   • Remember, over-the-counter medications and medical supplies are reimbursable under FSAs, thanks to the CARES Act.
3. Health Savings Accounts (HSAs)some text
   • Unlike FSAs, HSA funds roll over year to year and can be invested for long-term growth. The 2024 HSA contribution limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for individuals aged 55 and older. In 2025, these contributions increase to $4,300 for individuals and $8,550 for families.
   • Maximize your contributions and aim to leave the funds untouched, allowing them to grow tax-free for use in retirement. Learn more about the strategy here. 

Dependent Care FSAs

• For 2024, you can set aside up to $5,000 pretax for dependent care expenses (for MFJ). While this is lower than the temporary increase in 2021, it still offers significant tax savings for families with daycare costs.
• Generally, a dependent care FSA is more advantageous than claiming the dependent care tax credit if your adjusted gross income exceeds $43,000.

#2 – Prepare at Least a Two-Year Tax Forecast

"By failing to prepare, you are preparing to fail." — Benjamin Franklin

A tax forecast helps you identify year-end opportunities to reduce your tax burden. Ideally, your forecast should cover the next two years and extend to age 73 (when RMDs begin for most taxpayers under the SECURE 2.0 Act).

Why Forecasting Matters

Many assume their tax rates will drop in retirement, but this is not always the case. Social Security benefits, RMDs, and other income sources can push retirees into higher tax brackets. Without a forecast, you risk missing out on tax-saving opportunities.

Tax-Saving Strategies

If you expect to be in a lower tax bracket in the current year than in the future, here are some actions you may be able to take: 

• Take Roth conversions on an IRA up to an amount that will “fill up” the lower tax bracket.
• Sell investments at a gain to lock in a lower capital gains rate. To the extent you are in the 12% tax bracket, your long-term capital gains rate will be 0%.
• If over 59 ½, withdraw money from your IRA (or under 59 ½, if you qualify for one of the exceptions) and pay taxes at the lower rate. You can still contribute that year.
• If you separate from your company at age 55 or over, withdraw money from your 401K and pay taxes at the lower rate without paying the 10% penalty.
• Pay quarterly estimated income tax in January and defer payment of real estate taxes until January (tax deduction limited to $10k).

If you expect to be in a higher tax bracket in the current year than in future years:

• Make additional contributions to your tax-deferred investment accounts (401K, IRA, HSA, etc.).
• Delay deferred compensation to the following year.
• Prepay your January mortgage payment to increase your mortgage interest deduction.
• Utilize a Donor-Advised Fund to “lump” charitable deductions. Donate appreciated securities.
• Pay quarterly estimated state income taxes in December instead of January, and prepay real estate taxes, if possible (tax deduction limited to $10k).
• Sell investments at a loss (up to $3,000 can be recognized in a single year), and use the proceeds to purchase a similar (but not identical) investment to avoid a wash sale (a disallowed loss).

Long-Term Forecasting

Purpose Built’s approach involves creating up to a five-year tax forecast along with a detailed plan for age 73 (or your age when Required Minimum Distributions begin). We help clients align their income with the lowest possible tax rates over time by analyzing current paystubs, brokerage accounts, and Social Security estimates.

Good Finances Are a Journey, Not a Destination

Incorporating these two reviews into your year-end financial routine can yield significant savings. While the initial process may feel daunting, establishing a plan—or working with a professional—is well worth the effort.

We Can Help

Now is the time to take control of your financial future. Whether you need assistance with tax forecasting, optimizing your benefits, or creating a comprehensive financial plan, Purpose Built is here to help. Schedule a free consultation today, and let us guide you toward smarter decisions and greater savings. Together, we can make 2024 your most financially successful year yet.

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Happy Holidays from all of us at Purpose Built!

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Frequently Asked Questions (FAQ)

Q: What is the difference between an FSA and an HSA?

A: An FSA (Flexible Spending Account) is a use-it-or-lose-it account that allows you to set aside pre-tax money for healthcare expenses. An HSA (Health Savings Account) is a tax-advantaged savings account that can be used for qualified medical expenses. HSA funds roll over year to year and can be invested for long-term growth.

Q: How do I know if I'm eligible for an HSA?

A: To be eligible for an HSA, you must be enrolled in a High Deductible Health Plan (HDHP) and not be covered by any other health insurance plan (with some exceptions).

Q: What is a tax forecast, and why do I need one?

A: A tax forecast is an estimate of your future tax liability. It helps you anticipate your tax burden and make informed financial decisions, such as when to take distributions from retirement accounts or how to optimize charitable giving.

Q: How can I prepare a tax forecast?

A: You can prepare a basic tax forecast using online tools, tax software, or estimate based on your prior year's tax return. For a more comprehensive forecast, consider working with a financial advisor who can analyze your specific circumstances and goals.

Q: What are some common tax-saving strategies?

A: Some common tax-saving strategies include contributing to tax-deferred retirement accounts, maximizing your HSA contributions, taking advantage of tax credits and deductions, and strategically timing income and expenses.

Final Thoughts

Year-end is a time for reflection and planning, both personally and financially. By taking the time to review your benefits and prepare a tax forecast, you can set yourself up for a more secure and prosperous future.

Remember, financial planning is not a one-time event; it's an ongoing journey. At Purpose Built, we're here to guide you every step of the way. Whether you need help navigating open enrollment, creating a tax strategy, or developing a comprehensive financial plan, our team of experts is ready to assist you.

Schedule a consultation today, and let's make 2025 your best financial year yet.

About the Author

Sean Lovison, CPA, CFP®, is a flat fee-only financial planner based in Moorestown, New Jersey, serving clients virtually nationwide. After spending 14 years as a corporate chief financial officer (CFO), receiving and designing compensation plans, he decided to help others navigate their plans.

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