As the year draws to a close, December is the perfect time to take a step back and assess your financial situation. The final month of the year offers a unique opportunity to make moves that can pay off in the long run. Whether you’re preparing for tax season, making sure you hit your savings goals, or looking for ways to optimize your investments, there are several key financial moves you can make in December to start the new year on the right foot. Here are the top three:
- Max Out Your Retirement Contributions
If you haven’t already reached the annual contribution limits for your retirement accounts, December is your last chance to do so before the year ends. For example:
- 401(k): The contribution limit for 2024 is $23,000 (or $30,500 if you’re 50 or older). If you’re not yet at the max, contributing as much as possible before the year ends can help reduce your taxable income for the current year and increase your retirement savings.
- IRA: The contribution limit for a Traditional IRA or Roth IRA is $7,000 (or $8,000 for those age 50 and older). While contributions to these accounts are not tax-deductible if you’re contributing to a Roth IRA, Traditional IRA contributions may be, depending on your income and whether you participate in an employer-sponsored retirement plan.Maxing out your retirement contributions not only helps you save for the future but can also lower your taxable income for the year, potentially resulting in tax savings. So, take advantage of this opportunity to boost your retirement fund and ensure you’re on track to meet your long-term financial goals.
- Take Advantage of Tax-Loss Harvesting
December is also a good time to assess your investment portfolio. If you have taxable investment accounts, you may want to consider tax-loss harvesting, a strategy used to offset gains by selling investments that have lost value. Here’s how it works:
- Sell losing investments to realize a capital loss.
- Use those losses to offset any capital gains you’ve realized during the year.
- If your losses exceed your gains, you can use the remaining losses to reduce up to $3,000 of ordinary income ($1,500 if married filing separately).
Tax-loss harvesting is especially useful if you’ve had a year with substantial investment gains, as it can help reduce your tax liability. However, be mindful of the wash-sale rule, which prohibits you from buying back the same or a substantially identical security within 30 days of selling it for a loss. This could disallow the tax loss, so be strategic with your trades.
By taking advantage of tax-loss harvesting, you can help lower your tax bill while ensuring your investment portfolio remains aligned with your financial goals.
- Review and Adjust Your Budget for the New Year
While December may feel like a month of holiday spending and indulgence, it’s also an excellent time to review your budget and financial plan for the upcoming year. Reflect on your financial goals and make adjustments where necessary:
- Look at your spending habits: How did your spending compare to your budget this year? Were there any areas where you overspent, or could you have saved more? December is a great time to identify areas to cut back on in the new year.
- Set savings goals: Are you saving enough for short-term goals (e.g., vacation, home improvements) and long-term goals (e.g., retirement, emergency fund)? Consider increasing your monthly savings amount if possible.
- Review your debt: If you’ve accumulated credit card debt or loans, how can you pay it down faster in the new year? Setting a debt payoff plan or refinancing high-interest loans might be a good strategy to explore.
Creating a financial plan for the year ahead helps you enter January with clear intentions and financial direction. Whether it’s paying down debt, building your emergency fund, or saving for a big purchase, having a solid budget in place can give you confidence as you tackle your financial goals in the new year.
Wrapping Up
The end of the year is the perfect time to make strategic financial decisions that can have a lasting impact on your finances. By maxing out retirement contributions, leveraging tax-loss harvesting, and reviewing your budget and financial goals, you can set yourself up for success in the year ahead.
Make December count—it’s your last chance to finish the year strong and position yourself for financial success in the future.
