Tax Moves You Can Still Make After Year End
Even though 2023 is over, there are still some tax moves you can make for the 2023 tax year.
Make an IRA Contribution
You have until the tax filing deadline to make Traditional or Roth IRA contributions for 2023, of up to $6,500 (or $7,500 if age 50+). Before contributing, make sure you're aware of the contribution and income limits for Roth IRA contributions and deductible Traditional IRA contributions. You can check out Important Numbers for 2023 and this guide for calculating your MAGI (Modified Adjusted Gross Income) to determine your eligibility.
If your MAGI is over the limit to be eligible to contribute to a Roth IRA, you could consider a backdoor Roth IRA strategy. This is completed by first making a non-deductible contribution to your Traditional IRA and then converting it to your Roth IRA. Be aware that you may not want to execute this strategy if you have other pre-tax IRA balances, as some of your conversion would be taxable due to the pro-rata rule. It may be best to work with an advisor to make sure this strategy is right for you and to ensure it is completed correctly.
If you’ve made any Traditional IRA contributions, be sure to tell your tax preparer or enter it into your tax software if you self-prepare. If your MAGI is under the limit for the contribution to be deductible, you’ll see a deduction for it on your tax return. If the contribution is non-deductible, it needs to be reported on Form 8606.
Roth IRA contributions aren’t reported on your tax return, but it’s still a good idea to keep track of your contributions. You have the ability to withdraw your contributions at any time, without taxes or penalties (although Roth IRAs are generally best when they are left to grow tax-free for a long time).
Recharacterize Your IRA Contribution
If you already made a Traditional IRA contribution for 2023, but have since changed your mind and wish you made a Roth IRA contribution instead (or vice versa), you have until the tax filing deadline to "recharacterize" or switch that contribution.
Some reasons you might want to recharacterize from a Traditional IRA to a Roth IRA are...
Your income was higher than expected and you are not eligible to make a deductible Traditional IRA contribution, but your income is not over the limit to make a Roth IRA contribution.
Based on your personal situation, you would prefer to not get a tax deduction on this contribution now, in exchange for tax-free growth/withdrawals in the future.
Some reasons you might want to recharacterize from a Roth IRA to a Traditional IRA are...
Your income was higher than expected and you are not eligible to make a Roth IRA contribution, and you want to make a non-deductible Traditional IRA contribution as the first step to facilitate a backdoor Roth IRA contribution.
You are eligible to make a deductible Traditional IRA contribution based on your MAGI, and based on your personal situation, you would prefer to get a tax deduction now.
If you happened to over-contribute to a Traditional and/or Roth IRA, or you were not eligible to contribute, you have until the tax filing deadline to remove the excess contributions.
Make a Health Savings Account (HSA) Contribution
You have until the tax filing deadline to make HSA contributions for the previous tax year. It's usually most beneficial from a tax savings perspective to make HSA contributions through payroll deductions during the year through your employer, if possible (as it allows you to save on payroll taxes in addition to income taxes). However, if you don't have that option and you are enrolled in an eligible high-deductible health plan, you can open and contribute to an HSA on your own.
Despite the name “Health Savings Account,” HSAs make great retirement savings vehicles, due to being triple tax-advantaged. You receive a tax deduction on the money you contribute, you can invest the money within the account which grows tax-deferred, and withdrawals are tax-free as long as they are used for qualified medical expenses. If your cash flow allows, you can make the most of your HSA by paying for medical expenses out of pocket, saving your receipts, investing the funds within your HSA, and letting it grow for future tax-free withdrawals. As long as you hold on to those receipts, you can reimburse yourself from your HSA for medical expenses paid out of pocket at any point in the future. Planning to use HSA funds to pay for medical expenses in retirement can also be a great idea.
HSA contribution limits include both employee and employer contributions. For 2023, the contribution limits are $3,850 for an individual account, $7,750 for a family account, and you can contribute an additional $1,000 catch-up if age 55+.
Make a Self-Employed Retirement Plan Contribution
If you're self-employed, you may still have time to establish and fund a retirement plan, like a Solo 401(k) or SEP IRA.
Solo 401(k) - If you have self-employment income and no employees (other than a spouse), you may be eligible to open and contribute to a Solo 401(k), up until the tax filing deadline. Contributions are made on the employee and employer side, even though both are you! You can contribute up to the lesser of these three criteria:
100% of earned income
401(k) contribution limit ($22,500 for 2023 or $30,000 if age 50+) [employee portion] PLUS 20% of net income for sole proprietor/partnership (or 25% gross income for a corporation) [employer portion]
Aggregate defined contribution plan limit ($66,000 for 2023 or $73,500 if age 50+)
SEP IRA - You can establish and fund a SEP IRA by the tax filing deadline. This plan only allows employer contributions, and the employer generally must make uniform percentage payments to all participants. You can contribute up to the lesser of:
25% of compensation
Aggregate defined contribution plan limit ($66,000 for 2023 or $73,500 if age 50+)
Depending on your situation, there are other types of retirement plans you may want to consider as well.