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Essential year-end planning: 5 steps to consider now

Sep 19, 2023

Avoid the December rush. Start your year-end financial review now and discuss your tax strategy with your J.P. Morgan team.

Despite economic volatility this year, we believe 2023 can still finish strong. Consider starting your year-end planning now to help ensure your finances end on a high note.

Giving yourself ample time to review your balance sheet and portfolio can help you make thoughtful adjustments to your financial picture, if needed. It will also allow time for you to incorporate annual tax-savings opportunities. To make the most of this process, involve your personal and professional advisors in your review.

Here’s where we suggest focusing your attention.


Assess your cash needs and holdings

Do you have the right amount of cash on hand?

We advise you to have enough liquidity to cover one to five years of operating cash flow, provide a psychological safety net, fund large capital expenditures and allow for opportunistic investments.

With interest rates at high levels, implementation for your cash and fixed income matters. Review your cash and fixed income holdings to make sure they match your specific time horizon and liquidity needs.

Additionally: Consider establishing a portfolio line of credit. Even if you never use it, having immediate access to cash can create peace of mind and help you avoid selling investments at the wrong time or unnecessarily realizing capital gains. Delayed gain realization coupled with ongoing returns might outweigh the cost of debt despite higher interest rates. 
 

Right-size your risk exposure

Are you taking on risk in the right places of your balance sheet?

Review your portfolio to see if you’ve allocated efficiently across your balance sheet with risk in the right places. Assets earmarked for achieving longer-term goals or those not needed to directly support your lifestyle can often take on more risk; funds set aside for your children or grandchildren, for example. Ask your J.P. Morgan team for help analyzing the risks across your balance sheet, using our proprietary Wealth Plan Plus planning tool.
 

Position your portfolio for what’s ahead

Are you invested optimally in equities, fixed income and alternatives?

While volatility may resurface at the end of this year, we expect corporate profit growth and equity returns to get stronger. Consider positioning your portfolio for this potential upside, staying invested for your long-term goals, and think about investing excess cash.

For equities, consider repositioning from sectors, such as large cap tech, that outperformed this year to those, like industrials, that haven’t rallied as much. For fixed income, look at adding longer-duration vehicles for portfolio diversification with attractive yields. In alternatives, we see opportunity in sectors like distressed pockets of real estate.


Complete your annual to-dos

Have you taken care of year-end essentials?

Among the important steps to take by December 31:  

  • Fully fund retirement accounts to take advantage of tax deferral benefits. Evaluate the advantages of converting traditional IRAs to Roths
  • Take required minimum distributions (RMDs) from your retirement accounts before year end—or face a hefty penalty. Note: In 2023, the starting age for mandatory withdrawals was raised to 73 (previously it was 72)
  • Consider making annual exclusion gifts to family members or donating to charitable organizations. In 2023, the annual gift exclusion amount is $17,000 per person ($34,000 for married couples)
  • Investigate the potential state tax savings of changing trustee or other fiduciary appointments. Also, carefully time distributions to ensure that trusts are as income tax efficient as possible
  • If you have a private foundation, make sure it fulfills its 5% annual distribution requirement

 

Maximize your portfolio’s tax efficiency 

How tax-aware is your investment strategy?

We recommend taking a multipronged approach. First, make sure you hold assets in the right places for your long term strategy. As a general rule, tax-inefficient assets are best held inside tax-advantaged accounts, such as 401(k) accounts or IRAs. 

Next, consider the tax benefits of selling positions at a loss to offset realized gains. As you do, be careful not to violate the “wash sale rule.” Using a strategy built to continually harvest losses can help you retain more of your returns throughout the year.1

Strategically manage portfolio withdrawals. For example, clients who are in the top tax bracket generally take RMDs first (if applicable). Then they may make withdrawals from other sources in this order: first from taxable accounts; then from tax-deferred accounts; lastly, from accounts that are tax free. If 2023 was an unusually low income year for your family, consider withdrawing funds from tax-deferred accounts now, while you are in a lower tax bracket, or converting traditional IRAs to Roths.
 

Review life insurance policies

Does your life insurance coverage need updating?

Death benefits are calculated according to interest rate assumptions at the time a policy is purchased—assumptions that likely differ from those currently in force, given Federal Reserve rate hikes this year. Review your policy to determine whether it continues to meet your initial intent, or whether changes need to be made. Beyond cash value, check that the owner, beneficiaries and death benefit are optimal for tax purposes.


Make a plan to support the causes you care about

How strategic are your charitable donations?

Before contributing significant time or resources to a charitable organization, be clear about why you are giving and what you hope to achieve. Understanding your “why” will help structure your philanthropy.

Then consider how to make your donation and when. Donor-advised funds allow you to both give today and prefund years of giving. This flexibility can help you gain time to identify organizations and causes that align with your values, while allowing you to claim deductions now. This can serve you particularly well in a high-income year, or if you have a long-term highly appreciated position that is overweight in your portfolio.  


Consider large gifts to family

Do you have a desire to share your wealth?

In 2023, the lifetime transfer tax exclusion amount is $12.92 million per person ($25.84 million for married couples). This amount is set to decrease in 2026, likely to between $6-7 million per individual. If you have the capacity and desire to make a substantial gift to family during your lifetime, consider doing so before the current limits expire.

Further, if you’re considering making a gift in trust, meet with your estate attorney now to allow enough time to put the right structure in place and avoid a last-minute rush. 


Communicate family values

Have you started talking to the next generation about your wealth?

It’s never too early to start discussing money and family values with children and grandchildren, with those conversations adapted to each child’s level of understanding and responsibility. End-of-the-year holiday gatherings, in addition to more formal family meetings, can be effective venues for aligning on values, disclosing age-appropriate information and building financial literacy skills.


Be mindful of social engineering scams

Are you taking proper cybersecurity measures?

With rapid technology advances, especially the use of Artificial Intelligence (AI) tools, there has been an uptick in vishing (phone) and smishing (text message) scams. To protect yourself, always take the time to verify who is calling or texting you, even if you think it is a friend or family member.

One way to ensure the identity of a caller is to use a “safe word” with trusted contacts. Also, be very cautious about clicking links or attachments sent to you in text messages or emails.

Effective year-end planning involves timely decision making. Your J.P. Morgan team will work closely with you and your other professional advisors to help you bring 2023 to a close and prepare for the year ahead. 

 

1Under the U.S. tax code, so-called wash sale regulations disallow an investor who holds an unrealized loss from accelerating a deduction into the current tax year, unless the investor is out of the position for some significant length of time.

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