BiggerPockets Money Podcast - 477: Year-End Tax Planning Tips You NEED to Know Before the 2024 Tax Season

Episode Date: December 6, 2023

With 2024 right around the corner, it’s time for a final year-end tax planning push! There are all kinds of ways to pay less to the IRS, and today’s guest is here to help you save as much money as possible! Welcome back to the BiggerPockets Money podcast! Today, we’re joined by certified public accountant and financial planner Sean Mullaney. In this episode, Sean delivers a thorough breakdown of everything you should be doing to lower your tax burden for not only 2023 but also over your entire lifetime. While there are many moves you can make before this year’s filing deadline, you don’t have to make them all at once. Sean shares how most tax moves fall into one of three “buckets”—moves that should be handled urgently, by year-end, or in early 2024. Whether you’re rushing to tie up loose ends in 2023 or looking to maximize retirement savings, Sean offers a variety of helpful tax tips for those in different phases of life. You’ll learn how to reap the tax benefits of donor-advised funds, how to time a Roth conversion, and how to avoid giving the IRS a large interest-free loan! In This Episode We Cover Tax moves to make immediately, by year-end, and in early 2024 New tax-saving strategies to start implementing next year Lowering your total lifetime tax burden with the Roth conversion strategy How to get a tax deduction and avoid capital gains tax with a donor-advised fund The BEST retirement accounts for entrepreneurs and self-employed individuals How to choose the perfect health insurance plan for you in 2024 And So Much More! DISCLAIMER: "The discussion is intended to be for general educational purposes and is not tax, legal, or investment advice for any individual. Scott, Mindy, BiggerPockets, and the BiggerPockets Money podcast do not endorse Sean Mullaney, Mullaney Financial & Tax, Inc. and their services." Links from the Show BiggerPockets Money Facebook Group Network with Other Investors on the BiggerPockets Forums Finance Review Guest Onboarding Join BiggerPockets for FREE Scott on BiggerPockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Money Moment What You Need to Do NOW to Pay Fewer Taxes in 2024 I’m Over Paying Taxes, So Here’s How I Plan to Significantly (and Legally) Lower My Liability The FI Tax Guy Click here to check the full show notes: https://www.biggerpockets.com/blog/money-477   Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Email us: [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast where I interview Sean Malaney and talk about year-end tax planning. Hello, hello, hello. My name is Scott Trench, and I am here to make financial independence less scary, less just for somebody else, to introduce you to every money story and every tax tip because I truly believe that financial freedom is attainable for everyone, no matter where or when you're starting. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or save a few thousand dollars at tax time, or go. get your plan into gear for 2024 will help you, I'll help you, reach your financial goals and get money out of the way so you can launch yourself towards your dreams. The reason I'm solo today, unfortunately, is because Mindy is feeling really under the weather. And this is a huge bummer because taxes are legitimately her favorite subject. And I don't mean that as a joke. I mean that literally, that's something unique about Mindy. I too love taxes, though, and I hope that will come

through. And Sean definitely does as well, our guest today. So looking forward to it, I think you'll have a great time. I'm listening to it and I'm looking forward to learning from him. All right. Now I'm going to bring in Sean. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going. And more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance.

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Sean Mullaney is a financial planner and certified public accountant licensed in California and Virginia. Sean runs the tax blog, Phi Tax Guy, where he gives advice and insights on tax planning and personal finance. Sean, welcome to the Bigger Pockets Money podcast. We, I am so excited to have you. Scott, thanks so much. We're looking forward to our conversation today.

Well, look, for many people, taxes are a pretty dreadful task that they start thinking about in the new year or even. like right before the tax deadline and April. Obviously, folks listening to the Bigger Pockets Money podcast might be a little bit more planning and paying more attention to their finances. Are there any things to think about that we should, you know, first, are there reasons to change that mindset and be thinking about taxes either year-round or especially here towards the end of the year?

Absolutely, Scott. So I think the big word is opportunity, right? Taxes can be a bear, but they can also be a real opportunity. and it depends on where you are in your life, but regardless of whether you're still working, or maybe you're in early retirement, maybe you're in late retirement. In all those phases, we have significant opportunities to reduce our total lifetime taxation. And sometimes that comes with a nice tax benefit this year. Other times, that's going to be more of a long-term play.

But regardless, we have great opportunities if we do some tax planning. And yes, some of it can be complicated, but some of it isn't all that complex. It's just having some awareness, doing some own thinking, some thinking for yourself. And sometimes, yes, it does require working with a professional. But sometimes it can be DIY. So yeah, I think there's just a lot of opportunities on the table here, particularly as we get to year end. Now, I do think the best planning is more holistic. But absolutely, there's opportunity in terms of year end planning. Sean, you said something there about reducing your total lifetime tax burden, right? I might have butchered that. What was your phrase? Total lifetime tax. Just as we're going to spend most of the time today on your end tax planning and the things we can do and think about right now. But is there, are there a couple of themes that we should have in the back of our mind or a framework you have that will guide someone towards outcomes that are most likely to reduce total lifetime tax burden? I think a lot of that comes when we're thinking about retirement tax savings. We have a system in the United States that

heavily incentivizes retirement tax savings. And that can be a great opportunity. when we combine retirement tax savings with our progressive tax system. So I think most of the listeners out there are familiar with the concept that if you make $50,000, the last dollar is taxed at a certain rate. If you make a million dollars, that last dollar is going to be taxed at a much different rate. That's called a progressive tax system. So you have to think about your different phases, your low working years, your high working years, and then your early retirement and your late retirement, particularly if we're in our high earning years, but even if we're in our lower earning years, we're going to have plenty of opportunity to set ourselves up for reducing total lifetime tax,

perhaps by maxing out a traditional 401k at work, and then we get to early retirement or even mid to late retirement, and we have opportunities to take that money out at a much lower tax rate because we tend to have much higher taxable income in our higher working years. When we're retired, we don't tend to show a whole lot of. taxable income on our tax returns, which sets up some really good planning opportunity. So that's the sort of the theme here is, yeah, we have this year and we have year end and we should be thinking about year end and maybe there's a quick one-off benefit and great, grab it. But we want to be thinking more holistically about, well, where am I today and where might I be tomorrow and what does that tell me about my tax planning? And particularly with the way the retirement contributions

can be structured, it may be that we can get really good upfront tax deductions, save money and play the game in terms of later on, maybe we do tax advantage Roth conversions at a time where at a low tax rate, which could happen in early retirement, or maybe even just through a withdrawal strategy in retirement, we might be able to have a relatively modest effective tax rate on our living expenses, which could be really powerful. Look, just to recap that, a lot of the philosophy of what we're going to discuss today, I'm sure, is going to be grounded in the idea, hey, a low tax, a low income, earner early in their career, maybe you're making less than 50K, getting started or whatever,

there's a different strategy. Maybe the Roth is higher prioritized or maybe there's a less of an emphasis on shielding current income from paying taxes today because of a low tax bracket. Higher income earners later in their career, there's a big emphasis on shielding that, 401Ks and these other types of things to avoid paying those high taxes today. Early retirement, it's about, you know, maybe you're spending less or whatever, and it's about kind of paying some of those taxes at the lower marginal tax bracket as well. we move things out of a 401K, for example.

And late retirement, maybe we're so wealthy that we're really valuing the stuff that's in Roth IRAs or Roth 401Ks or Roth accounts. How am I doing on this? Not bad, Scott, right? I will say it's personal finance, so it is going to be personal to each situation. But, yeah, I think the way you're looking at it as a lifetime planning strategy is a really productive way to do it. Now, I will say this.

Some folks out there maybe haven't done a whole lot of. up planning, but that's okay. You can get on the ride midway through, right? You don't only get on the ride at the beginning, right? It's not like we have to decide all this at age 22. And we're going to change things along the ride as our circumstances change as well. But yeah, Scott, I think your way of looking at it where we're looking at each phase of our life and how that connects with later phases of our life is very impactful. Awesome. So now, you know, we're here at the end of 2023. We're thinking about year end tax planning. Can you, you, you, you're You break down this process into three categories, I believe.

The urgent, the year end, and they can wait. Can you frame that for us and give us an idea of what fits in those buckets? So most things fit in one of the first two buckets, right? Urgent and year end deadline. And to my mind, that all has a December 31st deadline, but there's a big difference between urgent and year end. And that's this execution time, right? So we'll talk about a donor advised fund and maybe giving appreciated stock to a donor advised fund can be a very powerful strategy for this year.

That generally requires implementation time. If you're getting up New Year's Eve morning and saying, oh, I'm going to move some appreciated stock to a donor advised fund, I wish you a lot of luck. It's probably not going to happen. In fact, it probably won't even happen if you wake up a week or two before New Year's Eve and try to do that. So that's those urgent things. Well, yeah, technically we have a December 31st deadline, but we probably want to be acting. sooner rather than later on those. There are other things that are going to be a lot easier where, okay, we just know it's a December 31st deadline. Let's just make sure, you know, a day or two before

New Year's Eve, we've got our ducks in a row on that. And then there are things that we can do in early 2024 that can reduce our 2023 taxes. So that's a third bucket where, hey, you know what, we actually can wait until after year end and still get some good benefits for the 2023 tax year. Awesome. Let's go through some of these. What is a donor advice? fund and why would I want to use it in general? And then why do I want to get it done before the end of this year if I'm thinking about it? Yeah, donor advised fund is a great way to give to charity. So, you know, a lot of folks in the audience probably take the standard deduction. That's the current structure. 90% of Americans now take the standard deduction, which means you're not getting a

benefit for giving to charity out of your checkbook or on your credit card. Well, there's something called a donor advised fund where folks affirmatively move either cash or usually a appreciated assets, appreciated stock, could be an ETF or a mutual fund, you move an appreciated asset into that donor advised fund. And it's sort of a bunching or timing strategy. So let's just say, Scott, you're sitting on a thousand shares of Apple stock. And we're not giving investment advice here and don't quote me on the price. Let's just say the price is $175 a share. What you could do is you could take a few hundred of those Apple shares at $175 a share, move them into a donor advised fund, and maybe you bought those Apple shares many years ago. So you have a big built-in gain.

So what you could do this year, Scott, is move a bunch of Apple stock into a donor-advised fund, take a one-year big tax deduction, itemize your deductions for this year, 23, if you can do this before your end. You get the capital gain on those shares. off your, they'll never be taxed, right? The donor advised fund takes those Apple shares. And by the way, it's got to be those Apple shares. Don't sell first, right? Move in kind, those Apple shares to your donor-avise fund. You get a big tax deduction. First benefit. You wipe away the capital gain, second benefit. What is the tax benefit 175,000 in this case? We have to do some men. So if it's a thousand shares at 175 bucks, it's a 175,000. It's the entire value of that portfolio.

That's the initial tax deduction. You have to remember, though, there are, There is a 30% limitation. So, Scott, we're going to need you to have some significant income just because if your income is only, say, 200,000, you can deduct 60,000 this year. And then the unded amount moves forward to the next five years. So we want to make sure you have a good amount of income so that we get you below that 30% threshold. But even if you go over the 30% threshold, it's not the end of the world. You just don't get to deduct that this year. That goes to the next five years.

Okay. So the other thing about the donor advised fund, is it sort of normalizes the experience that you and the charity have, right? So a lot of folks might use a donor-dvised fund to say give $500 a month to their church. Not too many people want to say, hey, church, here's 500 shares of Apple stock, enjoy them, use them for your mission, and don't be in touch for the next three years. I'm not giving for the next three years. What folks want to do is they want to give that, you know, $250 a month, $500 a month, $1,000 a month. And the way this works is that it comes now out of the donor advised fund.

You get the tax deduction up front and then go back to the standard deduction in the next few years. And then the church, though, sees sort of their normal income stream. They get cash every month. It just comes from the donor advised fund, not from you, but they know it's your donor advised fund. So it gets us some really good tax benefits. It's a great answer to, oh, boy, I have this old employer stock that has a big built-in gain or old Apple stock that has a big built-in gain.

And I want to use that, and I don't want to trip the capital gain. And we get a nice tax deduction to boot. So I'm a big fan of it. I will say, for those thinking about getting that deduction on their 20-23 tax return, you probably need to move sooner rather than later. You're moving an asset. You're not just writing a check. So that can take some implementation time.

and the different financial institutions are going to have different deadlines for that happening. So that's something if you want to do it for the end of 2023, you want to be acting sooner rather than later. Is this a DIY exercise or do you recommend hiring this at getting professional help to assist? This absolutely can be a DIY exercise. Now, there can be some measurement in terms of what's my income this year? What's my 30% limitation? That may benefit from some professional analysis. But maybe you say, look, I'm just going to give something that I know is five or

10% of my income. You then want to make sure that you're not selling first, that you literally are transferring that, you know, 100 shares of Apple stock, 200 shares of Apple stock, 10 shares of Apple stock, whatever it is, from your brokerage account to the donor advised fund, I will say as a practical matter, this is going to be easier if your brokerage account and your donor revised fund are with the same financial institution. That said, I myself have done it where I've got appreciated asset with one brokerage company and a separate financial institution has the donor revised fund. That can happen. It's just going to require a little more paperwork and dotting the eyes and crossing the T's a little more closely. Let's transition to Roth conversions. This is a second

item you list as urgent in your post. Can you remind us what a tax or a Roth conversion is, why someone would do it, and then why it's urgent to do right now? All right. So Roth conversions are a big thing, say, in the financial independence community, it's a big thing for those who are early retired, but can be a big thing even in mid and even late retirement. So what are we doing in a Roth conversion? We're taking an asset or an amount of money that's in a traditional deductible 401K or IRA, those tax deferred accounts and we are going to affirmatively move them from the traditional retirement account to a Roth retirement account. And we are affirmatively triggering tax. That's a taxable transaction.

What we're thinking is, look, I happen to have a relatively artificial low taxable income this year. So what I'm going to do is when that income is low before year end, I'm moving the money affirmatively from traditional account to Roth account. I'm affirmatively taxing that money, but I'm doing it at a time where I believe my tax rate's going to be really low. Maybe my income is so low I don't have, I haven't used all my standard deduction. That could be a reason to do it. Maybe even if I do it, it's just going to be tax at 10% or 12%. Now, why do I say that's urgent versus just a December 31st deadline for two main reasons. One, it requires some analysis. You're going to need to look at how much income have I had this year? How much capital gain have I triggered? Interest, dividends. What do I

estimate December is going to look like on interest and dividends. And I'm going to have to look at that versus the standard deduction and the tax brackets. So it requires some analysis. So that's why I say, you know what, that's urgent. That's not the sort of thing to do on December 30th or December 31st. The other thing is the institution might need at least a little time to process that so that you're sure it occurs in the year 2023. So it's a great opportunity because it moves that money from those traditional accounts to the Roth accounts when we know we're in a low tax bracket, and it reduces our future. They call them RMDs, requiring minimum distributions, right? So it's a strategy to reduce the size of my traditional retirement account so that when I reach

age 73 or 75, whatever it might be, my RMD, that taxable amount is going to be lower. So that's another benefit of these Roth conversions. Yeah, it goes back to the kind of what we talked about earlier where there's this lifetime game of trying to minimize your tax burden. And the game, if you're a typical, you know, a typical, you know, typical air quotes here, but you earn low at first, high in later years, and then, you know, retire earlier, whatever, the theory is you're going to have a really high income. You want to shield from taxes by using the 401K or a pre-tax contribution.

And the game is how efficiently can I move the funds that are in that pre-tax account to a post-tax or tax you know, after tax, growth tax free account like a Roth. And the way to do that is to either wait until you have no income and you're retired, you're making no money for a few years, traveling the world, use those years to roll over a lot. Or in the case of a business owner or potentially a real estate investor, if you happen to have a huge loss one year, that's a really good time to take advantage of that. I think it's like, I think there was a story about Mitt Romney a few, you know, a decade ago or something like that where he had some sort of big business loss was able to use that as a way to potentially move a ton of money from.

a 401k into a Roth. Yeah, Scott, it's opportunistic planning. I'm going to add one little wrinkle here. So some commentators are out there saying, you know what? Taxes are going to go up in 2026, which if you look at the rules, the Internal Revenue Code, that is true. But we have to think, is that really going to happen? And I tend to think on retirees, they're not looking to raise tax rates. Look, you need to do your own assessment on this. My assessment of the landscape is those tax rates are scheduled to go up in 2026, but it's probably not going to happen because the incentive in Congress is to keep taxes low on retirees. So, you know, I would make my decision based on my personal circumstances now and not on

a fear of future tax hikes, if that makes sense. Yeah, but in general, that comes back to the theme of if you have lower income this year and you have money in a 401k or you have a loss, now is a really good. good time to consider going after that Roth conversion and get that done before you're at. Absolutely. Awesome. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your taxed refund

can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good

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Yes. So, Sky, a big one, and this is big in the personal finance community, the financial independence community. There are a lot of folks who have done so-called backdoor Roth IRAs this year, right? That's a two-step transaction where we're getting around the Roth IRA contribution limit. There's an income limit on Roth IRA contributions. So we do a two-step transaction, right? Step one is a traditional non-deductible IRA contribution followed soon in time by step two, which is a Roth conversion of that amount.

And if properly done, it's a great way of getting money into Roth IRA. is usually while we're working, right, because we need earned income for that concept. Where we run into problems is where we've done that, but we remember, oh yeah, you know, I've got an old rollover IRA from an old 401K. It's $100,000 and it's just sitting there. And that creates a problem with that back to a Roth transaction, which we can't take back. We can't undo Roth conversions. If we have that old rollover 401K that's now in an IRA, What's going to happen is a large part of our backdoor Roth IRA is going to be taxed, right? There's something called the pro rata rule.

I don't want to bore the audience with that. I've blogged about it on my blog if you're interested. There is a remedy to this problem, though, if we did a backdoor Roth and then we realized, oh, yeah, you know, we have a old 401K in a traditional IRA. If we can by year end, get that money into our current employer 401K through a, usually through a direct trustee to trustee transfer, we can solve that problem. I think depends on when you listen to something like this. You got to be careful. And you have to assess the totality of the circumstances. Maybe your 401k doesn't have good investment choice. Maybe it has high fees. And you say,

nah, I'll just pay some tax on this one time back door Roth and I'll move on with my life. That's not the end of the world either. But that is one of those where, hey, maybe if I have a good 401k at work and it's easy to move that money in. Maybe I do that. One other thing I think that would be helpful for the audience is think about your withholding. Some people just get way too much in terms of a tax refund every year. And that's an interest-free loan to the IRS. That's not a great way to manage our affairs, not the end of the world. But what you might want to do is take a look at last year's tax return, see how much tax you paid. And then take a look at your most recent pay stuff. And how much tax, have you already paid to the IRS? And if it's significantly more this year, maybe for your

last couple paychecks in 2023, you give them a new W4 form and say, hey, withhold less money from my paycheck every week for the next couple, or, you know, every pay period for the next month or so, so that I'm not massively overpaying the IRS. If you do that, you're going to need to then refile a W4 in the beginning of January to get your payroll withholding right for 2024. But that's absolutely something to be thinking about. And then for the solopreneurs out there, I myself, I'm a solopreneur. There's something called the solo 401k. That is a great tax savings opportunity.

It's such a great opportunity. I wrote a book about it. That's how great it is. That requires some upfront thinking in most cases. And I think that just benefit, even in those cases where you could do it after year end, it still benefits from some thinking now. So if I'm out there and I'm a solopreneur, I'm going to start thinking about a solo 401k much sooner rather than later because that can be just a tremendous tax savings opportunity.

Yeah, and I'll seal you your solo 401k and raise you for if you have employees and own your small business, then you really need to be thinking about this because there's a whole another layer of opportunities there for tax deferred retirement contributions. Let's go to the year-end deadline items here. What are some of the big heavy hitters here that you suggest people look into, though they're not immediate, you know, act today. They're get it done in the next couple weeks. There's a concept called tax loss harvesting. And this is where we have a built-in loss in some asset in our portfolio.

So maybe we bought an ETF two, three years ago for $100 a share and now it's worth $90 a share. So we have a $10 built-in loss in that asset. What we can do is we can sell that asset. and trigger the loss. That loss can do two things for us this year. One, it can offset any capital gains we happen to have incurred during the year. That's a good outcome. The second thing it can do is it can offset ordinary income up to $3,000 this year. If there's more loss than that, then that just gets carried forward to the future. But say we earned $200,000 from our W-2 job. If we have a $3,000 loss, we could sell that asset, trigger the loss, and now we're only taxed.

on $197,000. Not the greatest planning in the world, but every little bit helps, right? So why not trip that loss and, you know, get a little tax benefit at your end for that? Awesome. And can you tell us a little bit about the wash sale rule? Yes, Scott. So this is something folks worry about. So I think if you step back and say, well, why would you have a wash sale rule? You'll sort of understand the rule. Because in theory, what I could do is on day one, you know, December 1st, I can wake up and say, hey, look at that big loss on my portfolio position, you know, Acme stock, right? So I just sell that stock on day one. Day two, I wake up and say, oh, I'll just go buy it back.

I got the cash in my brokerage account, right? Because I sold it yesterday. I'll just buy it back today. And now what I've done is I have the same portfolio position, but I took a tax loss on my tax return. They say, no, we're not going to allow that. So what they say is, all right, 30 days before the sale, 30 days after the sale. If you repurchase that stock or ETF mutual fund, whatever it is, they defer the loss. They basically say, look, you're not going to be able to claim the loss on this year's tax return.

And you can only, they step up the basis to make up for that. So you may never get to use that loss, right? So the way around that is just navigating the wash sale. If you want to re-buy, make sure more than 30 days pass and make sure you haven't purchased in the last 30 days other than what you're selling. and you're allowed to sell that. That's a short-term capital loss. Now, sometimes people get a little worried about dividend reinvestment. So maybe you sell a piece of a portfolio position in December, but then before December 31st, the rest of that portfolio position pays out a dividend that you then reinvest. Yes, that is technically a wash sale, and that will slightly reduce the amount of loss that you can claim.

But you do have to remember, the wash sale rule is a to the extent of rule. So if you sell a thousand shares of a portfolio position and then at year end they pay a dividend of that's worth say $10 or 10 shares and then you reinvest that, well, they're going to disallow the loss on 10 shares of the thousand shares. So it's a to the extent rule. So perhaps that dividend reinvestment is not the end of the world from a tax loss harvesting wash sales. perspective. Awesome. So IRS, totally fine for you to pay them taxes, you know, sell a gain, capture, recognize the gain and then pay them taxes on the, on the, on the on the on the on the on the on the tax gain harvesting side of things. But on the tax loss harvesting side, you got to wait 30 days to avoid this. They're not allowed. They're not allowed. They're not letting you claim the

loss. That's right, Scott. It just it is what it is. Well, let's keep let's keep rolling through these other kind of year end items that we should that you, you've, you've checked off. here. Yeah, a couple of big ones that I think increasingly we're going to see out there in the world are RMDs from our own retirement accounts. Now, we need to be in our 70s or older for that to apply, but you want to take that before year end to avoid a penalty for not taking it, right? So make sure that comes out before year end. The other one that's out there for some of the listeners is inherited retirement accounts. I think this one's going to grow and grow and grow. We're going to see a big transfer of retirement accounts. And there's two things going on here. One is some of those

have, they call them, required minimum distributions. A bunch of them actually don't. And this is an area where there's some confusion in the law. The IRS has sort of made a bit of a mess about it. Many people who inherit in 2020 or later are subject to a 10-year payout window. And now the IRS has said, well, for 2023, you don't have to take an RMD from that if you're subject to the 10-year payout window, but stay tuned for 2024. But you might want to take out before your end because you don't want to wait till year 10 on a traditional retirement account that you inherited because you have to empty it by the end of the 10th year. If you wait and just say, I'm going to defer all of it to the end of the 10th year, now you have a tax time bomb. You probably in most cases would rather just take it out

in dribs and drabs with some intentions. This might be an area to work with a professional and say, you know, I don't want that year 10 tax time bomb. Even if I don't have an RMD this year, heck, I want to take some out now so that I can sort of mitigate the tax time bomb that waits at the end of year 10. Awesome. Let's go through. What are some things I can wait till next year? Yeah, the big one here is IRA contributions, right? So, you know, the folks in the audience are probably familiar with. If you have earned income, you're able to contribute to a traditional IRA and the 2023 limit is $6,500, goes up to $7,500 if we're 50 year older. That does not need to happen until April 15th of 2024. If you decide, you know, the cash flow isn't there right now,

I'll do this in January, February, March, that's fine. The one big thing there is, if you're going to make that contribution, you're going to want to code it as being for the year 2023 because it defaults to, well, you made it in 2024, so it's a 2024 contribution. You just want to make sure that if the financial institution offers a radio box or a checkdown box, that it's specifically coded as being for the year 2023. So that's one of them. The second is backdoor Roths. Technically, there's no deadline on a backdoor Roth, but there is a deadline on that first step, the so-called non-deductible traditional IRA contribution. That's April 15, 2024. it's not the end of the world to say, you know, I'm on that borderline of that income threshold for an annual Roth IRA contribution. So maybe what I do is I take a wait and see approach.

You know, I get to the end of the year, see what any bonuses look like, any dividends, those sorts of things, see where my income comes out. Actually, maybe start doing my tax return, get my income sort of nail down, and then make the decision, oh, I qualified for a Roth IRA, so I'll just do the annual Roth or no, I didn't qualify. I'm just going to do a backdoor Roth for 2023, which you can start in 2024. That is very possible. And then the last one I'm going to mention is those health savings account contributions. Folks, you know, especially in the financial independence community, love HSAs. Those can wait until the 2024, until April 15th of 2024. I will say this, though.

Most folks are going to want to do those through payroll withholding during the year at work, not wait till 2024. The reason is, one, it just gets it in there sooner, on regular schedule, which is fantastic. But two, there's payroll tax savings if you do it that way. If you just write a check to your HSA at any time during the year from your checkbook, there's no payroll tax deduction. There's only an income tax deduction.

So we tend to like to do that at work. But yeah, if you didn't do it at work for whatever reason during 2023, you can do it in early 2024 and just make sure. sure it's coded as being for 2023. What about, you know, from a planning perspective and getting my ducks in a row for next year? Any tips there? Yeah, right. So for some of the listeners, we still might be an open enrollment in terms of benefit season at work. And so, you know, if you found, hey, I've been healthy the last few years and I don't need to go to the doctor all that often, you might want to think about, hey, this is the year to sign up for the high deductible health

plan. There's several reasons you might want to sign up for the high deductible health plan. One, it tends to have lower insurance premiums. And two, it opens the door to the potential HSA, which has tax savings. So you might want to say, okay, for open enrollment in late 2023 for 2024, I'm going to sign up for the HSA based on my experience with my medical bills. It's not for everybody, right? But if you're young and you have relatively low medical bills, a high deductible health plan combined with the HSA can make a lot of sense, something to think about. Another thing to think about is self-employed tax planning, right? So, you know, it's not about we're going to get every last benefit for 2023 before December 31st, right? It's about reducing total lifetime tax. And you might say, you know,

year-ends a little complicated for me, but one thing I'm going to start thinking about and perhaps with some professional assistance is setting up my retirement planning and even maybe business structure for 2024 now, you know, I'm not going to worry about winning this little battle about 2023. I'm going to think about going forward planning and setting up 2024 for success. And I could be thinking about things like maybe it's a solo 401K. Maybe it's a safe harbor 401K if I've got a smaller business, right? Maybe it's an S corporation election. I tend to think those are a little oversold in the world, but depending on the right circumstances, absolutely could be powerful. And so maybe I'm going to focus some of my time and attention in November and December of 23

on some structuring for 2024 and going forward. Well, look, this has been a thorough accounting of things you can do at the end of this year and heading into 2024, Sean. Any kind of like last tips that you'd leave us with before we kind of adjourn here? Thanks so much, Scott. Yeah. I think the big thing is think about total lifetime tax. Yes, there's some great opportunities at the end of 2023, but it's not the end of the world if you don't grab every last one of them, right? This isn't like a pinball game where you've got to hit every last thing, right? If you can get one or two of them now, great.

But the real value, I think, comes in that mentality about, hey, you know what? I'm going to make things better going forward. And I'm going to improve going forward. And so now might be a great time to step back and say, is there anything in my life financially that I could improve in 2024 and set that up in late 2023? You know, look, I think these have been fantastic. I want to throw in two more items for folks' consideration. It's not really necessarily tax related, but just as you think about the year end. You know, one of those is if you're going to invest in a 401k or a Roth IRA or one of these tax-advantaged accounts are in HSA, I think,

then why not take it to his logical extreme and max them as early in the year as you possibly can, right? So at the beginning of each year, I deduct 100% of my paycheck and put it into these, my Roth 401K. Various reasons for that. I'm sure we can get into a whole argument about whether I should be doing a 401K. And then my HSA, because I've elected to do them, 100% of my paycheck goes into them until those are funded. And I plan for that by having a larger cash balance at the end of the year. And that's something I do. There are also a number of little, you know, tiki-tack things that you can be thinking about here.

Not tic-y-tac. One of them that's actually fairly substantial is my one-year-old has a, there's a Colorado program that matches 529 contributions up to $1,000 per year for the first five years of her life. Really important to remember to either do that at the end of the year or same thing, max it out on January 1st. so that it has the whole year to compound with the match included. So just like things like that can be really, can make a small difference as well. And if you're going through the exercise of putting together a year end checklist and planning, if you're reading Sean's good article there, you might as well do, you know, but try to plan ahead for those types of things

and get those extra few points of growth in the tax advantage accounts. Scott, can I add one more thing to the 401K discussion on that? So you always want to be thinking about that employer match. Okay. And I bet bigger pockets has a different structure than my former employer had. So at my former employer, in order to get the employer match, you had to contribute, and I'm forgetting the exact percent. Let's just call it 6%. You had to contribute 6% of your paycheck every pay period.

So if you maxed out in January, you would actually leave some money on the table because you wouldn't have any, you know, you'd be at the $23,000 is going to be the limit for under $50. in the year 2024. So at that employer, you wanted to even it out over the year so that you captured the full employer match. There are other 401K plans, though, that have a mechanism like that, but then say, well, if you maxed out in January or February, we'll just, they call it true you up. They'll say, well, you know, you didn't, you, you know, we contribute 6% or 4% per pay period or 2% whatever it is. And you maxed out in January, so you have no more contributions. But we know you maxed out. So we'll just make it up to you later in the year, right? But my old employer didn't make it up to you later in the year. So you just want to make sure that you're coordinating your max out strategy. If you choose to max out, not everybody should max out. But if you choose to max out, you're coordinating the max out strategy with whatever the provisions are on the employer match. Well, yeah, look, you know, bigger pockets, we have a non-elective safe harbor contribution, which means that you get 3% added to your 401k, regardless.

regardless of whether you contribute or not. So it's not a match. It's just, it's there, right? Into your 401k. So that doesn't apply in my situation. But yeah, it's a really good point for folks that are thinking they want to do something similar. Make sure it doesn't come at the cost of that match. Yeah, you know, it's funny too, Scott. Like folks like me are so used to saying the employer match. But you're absolutely right, Scott. You know, bigger pockets isn't the only 401k in the world structure that way where it's non-discretionary. It doesn't matter if you put the max into the 401k or you put nothing. thinking the 401K, you just get that employer contribution. So that's a great point. My experience has been most employers have a matching program, but certainly not all employers. And some employers even do a little bit of both. They do some match and they do some non-discretionary where it's just going in no matter what you do. And broader point is there are other things outside of the specific, outside of the things that will actually change your tax bill that you could be thinking about now while you're also

doing your year-in tax planning. You know, take those, take that match, look through, look for these benefits. You know, another good one is, you know, there's an FAA, we have a dependent care FSA plan here at bigger pockets. Spend it, right, before the end of the year. And take that, right? Like, I need to make sure I get my, all of my ducks in a row, make sure that my daycare bills, for example, have completely used up that benefit because I know I've spent more than the FSA with the dependent care FSA on, on those things. So just like thinking through those things and looking, going through the benefits and, you know, the various opportunities you have across your portfolio, across your benefits, your employer's offering,

any programs your state has, or anything else, if you take advantage of those, you're going to lose, if you don't take advantage of those, you're going to lose the opportunity. And now's the time to do that. And it's probably a several thousand dollar per hour activity. Sean, thank you so much for coming on the Bigger Pockets Money Show today. Really appreciate having you here. Where can people find out more about you? Scott, thanks so much. Really enjoyed our conversation. You could find me at my financial planning firm, Malaneyfinancial.com. You can find me on YouTube,

Sean Malaney videos, and my blog, Phi Tax Guy.com. Well, really appreciate it. I hope you have a wonderful rest of your week. And I think you

helped a lot of people here, plan and save a little bit of money as we head into 2024. Thanks so much, Scott. All right, that was Sean Mullaney with the Phi Tax Guy. I thought it was a fantastic episode and really learned a lot there.

I love his logical flow of here the things to do first. And then here are the things things they need to do before your end. And here are the things that can wait until next year. I think it's a great logical way to think through it. And I think that the idea of planning for a couple of those things and looking through the other considerations around what type of benefits

am I signing up for. What am I going to need next year is a great additional topic there that's really nuanced. And you can tell that a lot of this is guesswork, really, right? The whole fundamental to Sean's, the whole fundamental basis of Sean's approach to tax planning in a long term. scenario is this concept of where tax rates are today, where they'll be long term, where your income is today, whether you're in a high or low tax bracket, where you expect to be downstream. So remember that there's a lot of right ways to win here.

There's an endless debate. There's probably no right answer. We all have strong opinions. But as long as you understand what you're doing and why and can live with it, and you're taking advantage of many of the opportunities that are out there, even in a pre-tax or tax-deferred, either on a tax deferred or post-tax basis, you'll probably have a great shot at winning here because you understand more and are taking advantage of more than most. So good luck to you. Really appreciate you listening. And that wraps up this episode of the Bigger Pockets Money Podcast.

I am Scott Trench saying that's that, Bobcat. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at YouTube.com slash biggerpockets money. BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaelin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the bigger pockets team for making this show possible.