New Year Financial Resolutions Guide

Start the New Year Right: Financial Resolutions Guide

The countdown to 2024 is over, but are your finances in order and prepared? At Sentinel Financial Planning we know that financial well-being doesn’t just happen overnight. It takes hard work, diligence, and consistency to improve your finances, strengthen your savings, and plan for the future. That’s why we’ve put together this new year financial resolutions guide. Read on to learn more about the steps you can take to jump-start your financial plan for 2024.

RETIREMENT

Maximize your TSP or 401(k)

Federal government employees have the Thrift Savings Plan. If your married to a non-federal employee, private employers offer retirement plans like 401(k)s or 403(b)s. These plans are similar to the TSP, and allow contributions up to $23,000 annually for 2024 ($30,500 if over age 50).

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. With this strategy, you can defer taxes until your retirement years when you could potentially be in a lower tax bracket.

Contribute to a Traditional IRA

Contributing to a Traditional IRA is another strategy to reduce your adjusted gross income if your income is within certain limits. By contributing pre-tax funds, you can effectively reduce your current-year tax liability. Remember, you’ll owe tax when you withdraw the funds in retirement. The 2023 contribution limit for a traditional IRA is $6,500 with an additional $1,000 catch-up contribution for individuals over the age of 50. Contributions can be made until April 15th, 2024 for the 2023 tax year. Don’t worry, there’s still time to utilize this strategy. If you’ve already maximized your 2023 contributions, start contributing for the 2024 tax year.

Understand Your RMDs

Starting in 2023, the rules around required minimum distributions (RMDs) changed again thanks to SECURE 2.0. If you turned 72 after December 31, 2022, your RMD age was be increased to 73. Your RMD age will be 75 If you turn 74 after December 31, 2023. If you are subject to RMDs in 2024, the sooner you understand the rules around your distribution, the better. Though we’re barely into the new year, you don’t want to be caught off guard come December 31. Depending on what age you’re required to start taking distributions (70 ½, 72, 73, or 75), you could face a 25% – 50% penalty on missed distributions.

If you don’t need your RMD to live on, consider donating the funds to a worthy cause. This could also reduce your tax burden for the year. To calculate your RMD, use one of the IRS worksheets.

INVESTMENTS

Review Your Portfolio

The beginning of the year is a great time to review your portfolio and retirement account asset allocation. Given market volatility and high level of inflation over the previous couple year, it’s crucial to evaluate your investments. Making sure your portfolio is properly positioned to start 2024 is a good step. We tailor our investment strategy and client portfolios based on value. Ensuring portfolios are constructed to provide long-term returns, keep up with inflation, and are not overexposed to risk. We utilize individual securities when constructing portfolios. This provides clients with a better understanding of what investments they hold. It also allows more control of the portfolio to help you reach your financial goals.

CASH FLOW

Assess Your Emergency Fund

Now is the time to ensure 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.

If you’re single, or if your household only has one source of income, consider saving on the higher end of this scale. This will help make sure you’re covered in the event of a job loss or reduction in income.

No matter the amount you save, be sure this money is held in a highly liquid account. It needs to be readily available and easily accessible. It should also be in an account that offers a competitive interest rate so you don’t lose out on potential growth.

Create and Maintain a Budget

The word “budget” seems to have a negative connotation. Many people associate a budget with being broke. Actually, budgeting allows you to spend and is a simple way to keep track of your expenses. It also helps keep track of how much you’re saving each month. If one of your goals for the new year is to improve your cash flow and make smarter financial decisions, creating and maintaining a budget is a great place to start.

RISK MANAGEMENT

Review Your Workplace Benefits

Depending on when your company’s open enrollment period is, the beginning of the year can be a great time to review your workplace benefits. If you had a major change to your family structure in 2023, like a birth, marriage, or divorce, there were specific time periods to update your insurance coverages. Many employers also offer group life insurance, like FEGLI. This can be a great addition to private coverages you may have.

Contribute to Your Flexible Spending Account

The federal government offers employees a health care or dependent care flexible spending account(FSA). FSAs allow you to set aside pre-tax money for qualified out-of-pocket medical or dependent care expenses. In 2024, you can contribute up to $3,200 in a health care FSA or $5,000 in a dependent care FSA.

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 $640. Generally, if you do not have access to an HSA, then contributing to an FSA may be a good idea.

Revisit Your Plans and Policies

The new year is also a great time to assess your insurance needs. Review your liability coverages, and update designated beneficiaries to reflect your current financial situation. For example, if your family has grown, you may need additional life insurance coverage so your family Is financially secure. You might also want to evaluate your need for other types of insurance, such as long-term care and disability insurance.

TAXES

Donate to Charity

Donating to charity doesn’t have to wait until the holiday season. In fact, charitable giving is a great tax strategy to incorporate throughout the year.

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction. This 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 the year exceed $14,600 for an individual filer, and $29,200 for married filing jointly. If your deductions fall below this amount, consider bunching your giving 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. Then take the standard deduction in the following years. This allows you to make the most out of your donation tax-wise.

Invest in a College Savings Plan

If you have children or grandchildren, contributing to a 529 savings plan is an excellent way to jump-start their college savings in the new year.

This type of education savings plan was created for families to 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 2024, you can give up to $18,000 (or $36,000 if gift-splitting with a spouse) per 529 account gift-tax-free. There’s also a special election that allows you to give 5 years’ worth of contributions as a lump sum. This means you could give up to $90,000 (or $180,000 if gift-splitting) entirely gift-tax-free!

Additionally, beginning in 2024 some 529 plan assets can be converted to a Roth IRA. There are limits on amounts that can be converted. Check the specifics of your situation before converting your plan.

Consider a Roth Conversion

Roth IRAs may be attractive savings vehicle for several reasons, including no RMDs, tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions. 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 believe you will earn less income in 2024, or your traditional IRA balance has taken a hit due to investment performance, a Roth conversion may be an opportunity for you to consider.

ESTATE PLANNING

Review Beneficiary Designations

If you had any major life events happen in 2023, like a 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 your 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 go to the person you want.

Review Your Estate Documents

Similarly, it’s important to review your estate planning documents, including your last will and testament, powers of attorney, living wills, and/or trust documents. The new year is always a good time to take another look at these documents. If you don’t have these documents, start drafting them.

Make the Most of the Annual Gift Tax Exclusion

If you’re looking to reduce your taxable estate in 2024, consider making gifts up to the annual exclusion amount. Individuals can give to each recipient (and to an unlimited number of recipients) up to $18,000 and married couples can give up to $36,000 without triggering gift tax. 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, and witness their enjoyment.

GET STARTED TODAY

Planning for the future takes more than just going down a checklist. Partnering with a qualified financial advisor can be a great first step toward financial confidence. At Sentinel Financial Planning, we have the tools and expertise to help clients get their financial house in order. When you’re a client, we don’t just tell you what to do; we work with you to come up with a plan that feels good. Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at (443) 906-1565 or mark@sentinelfp.com today!