A Few Things To Do Before 2024 Ends

Believe it or not, 2024 is almost in the bag. It’s been quite a year. The S&P is up over 25%, but we’re being inundated with drones.

Whether it was a great year or a bummer for you, there are a few things we can do before 2024 ends to get a jump on 2025.

We Spent How Much???

While I highly recommend that everyone have a budget, I know most folks don’t. And that’s cool – it’s my job to educate, not scold. But even if we don’t, now is a good time to take a look at what we spent in 2024. Why do this? This gives us some insights into where our money is going, and may give us some insights into tweaks we may want to make in 2025.

For those who use an account aggregator, this is easy. You can read more in the post on budgets, but essentially an aggregator pulls all of our bank, brokerage, loan and card transactions together into one spot. It generally offers tools to compare year over year spending by category and get a nice breakdown of what we spent money on.

For those who don’t use an aggregator, it’s time to download transactions, pull out the checkbook, or otherwise hunt down all of our accounts and spending data.

Total Spend

The first thing I look at is total spend. Excluding major 1 time items, for me, this is eerily consistent year over year. If I look at utilities, shopping, home improvement, transportation…I spend about the same total amount each year with 2 exceptions.

Inflation

Inflation was, and is, a big deal. Prices are up. And this is reflected in my spending. When I adjust for inflation, my 2024 total expenses were quite similar to expenses in 2019 (before the pandemic and inflation).

Large Items

In 2023, I bought a new car. In 2022, my wife and I spent a month in the warm weather. We also did some major home projects, adding a covered deck and a pool. These aren’t things that we can absorb in our budget. We save for them and put the money aside. They show up as an expense for the year, but I pull these out of the annual total for comparison.

How Does it Look?

If there are big fluctuations year over year, we need to drill down a bit. I’ll then group transactions by spending category – did I go overboard on Amazon? Did my electricity bill spike – beyond inflation?

If I’m spending more, I look at where that money went and decide if that was a good idea or not. Was it required? Did it make me happy – like the trip to Florida did? If it wasn’t or it didn’t, it may be a good time to make some changes.

Taxes

Yuck! The less said about taxes, the better. But a couple of quick things to think about.

Roth Conversions

I have a sneaking suspicion that taxes will be higher in the coming years. Look at the US debt. Someone has to pay for this and that someone is us. And we do it through taxes.

Traditional v. Roth

Back in the day, traditional IRAs and traditional 401ks were the only choice. They are a great savings vehicle, where:

1. participants get a tax break in the current year for any contributions
2. investments grow tax free so we didn’t have to report dividends and cap gains and pay taxes on them
3. we pay ordinary income tax rates when we take our money out in retirement. We expect to be in low-income mode in retirement and our tax rate should be lower.

Nice Deal

Enter the Roth. While we’d like to think it was introduced to help the average Joe, I suspect the fact that the government gets ahold of its tax dollars early played a big part. But Roth is truly a win-win. There is no tax break on contributions. Participants contribute after tax dollars. But those dollars grow tax free and are 100% tax free at withdrawal.

Roth is a bet that tax rates will be higher in the future when we take our retirement money out. We forego the tax break in the year we contribute and pay our current tax rate on all money contributed. But from that point forward, we pay no taxes on this money.

And with the US debt what it is and government spending being all the rage, I’d like to have some money set aside that will not be taxed. Roth conversions are a great way to do this.

It’s not all or nothing. We can convert a bit every year if we like.

Executing Roth Conversions

Pretty simple…we open a Roth IRA, we calculate the amount we want to convert, we execute the conversion online and the broker sends us a 1099-R tax form to record this.

We need to carefully calculate the amount we can afford to convert because we’ll need to pay those taxes before April 15, 2025. I’d love to convert it all, but to do so, I need to pay taxes on the converted amount. This money went in untaxed. I need to pay taxes today to allow it to grow tax free and be withdrawn tax free in the future.

I did my first Roth conversion this year. I converted some of my 401k money into my Roth IRA. I’ll pay taxes on the full amount of the conversion in 2024, but from this point forward, that money will grow tax free. I will not be taxed when I take it out. Yay!

But I need to put aside a large chunk of change (I’m estimating 30% of the conversion amount) to pay taxes. We need a strategy to pay these taxes before we do the conversion.

Retirement Contributions

I’ve been retired for 5 years and my wife joined me in retirement this year. We’re both making Roth IRA contributions this year.

If I’m married and filing jointly, and one of us has earned income this year, we can each make an IRA contribution. My wife worked for 4 months so she has earned income. We can’t contribute more than she’s earned, but we can contribute this year. But this will be our last year – unless one of us starts earning some income.

And how am I allowed to contribute? I haven’t worked in 5 years? That’s the married, filing jointly part. My spouse can fund my retirement contributions even though I have no income. I feel like a bit of a free-loader seeing that I’m not bringing in any income and I’m asking her to contribute some of hers to my retirement, but I’ll go play some golf and feel better about myself.

Funding an IRA, Roth or traditional, is a great way to save because of the tax advantages.

Health Savings Account (HSA)

Do you have a High Deductible Health Plan (HDHP)? If so, you may be eligible to make HSA contributions. Why would I do this?

Triple Tax Advantage

No tax on the money going in – we can deduct it on this year’s taxes. No tax as the money grows. No tax when you take it out as long as we use it for qualified medical expenses – and trust me, as we age, we’ll have these.

You can read more here, but I made the mistake of contributing to my HSA, keeping the money in cash, and then using my HSA debit card to pay for doctor’s visits. Just like it was advertised.

But no one tells us that we can instead put the money in a low-cost S&P 500 fund or other investment and let it grow. Triple tax advantage.

If you have an HDHP that allows an HSA, you can open up an HSA account with your broker in minutes, and make an annual contribution.

Wrap-Up

There are lots of article about tax loss harvesting and spending our Flexible Spending Account (FSA – very different than an HSA) money at year end, so I tried to touch on some of my favorites that see less publicity.

I am a big fan of budgets, but I know I’m often alone here. If not a budget, at least we need to assess where our money went and whether this was what we intended. The end of the year is a great time for this.

Taxes are, and will continue to be, a burden. Roths and HSAs both offer a compelling strategy to potentially reduce our tax liability.

Happy New Year.