The 7 Essential End-of-Year Financial Tasks for Seniors
Think of the next few weeks as your financial power hour. Completing these seven tasks can have a significant impact on your financial well-being. Let’s break them down one by one.
1. Take Your Required Minimum Distribution (RMD)
This is arguably the most important deadline for many retirees. A Required Minimum Distribution, or RMD, is the minimum amount you must withdraw annually from most retirement accounts once you reach a certain age. This includes traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k)s. As of 2023, the age to start taking RMDs is 73.
Why is this so important? The penalty for failing to take your full RMD is steep. In the past, it was a staggering 50% of the amount you failed to withdraw. The SECURE 2.0 Act reduced this penalty to 25%, and it can be further reduced to 10% if you correct the mistake in a timely manner. Still, it’s a completely avoidable expense. Your RMD is calculated based on your account balance at the end of the previous year and a life expectancy factor provided by the IRS. Your account custodian (the brokerage firm where your IRA is held) usually calculates this for you and will often notify you of the amount.
Example: If your traditional IRA balance was $300,000 on December 31 of last year and your IRS life expectancy factor is 25.6, your RMD for this year would be $11,718.75 ($300,000 / 25.6). You must withdraw at least this amount before the end of this year.
2. Optimize Your Tax Situation
The end of the year is the perfect time to make moves that can lower your taxable income. For seniors, this often involves more than just standard deductions. Here are a few key tax tips to consider:
Tax-Loss Harvesting: If you have investments in a taxable brokerage account (not an IRA or 401(k)), you can sell investments that have lost value. These losses can be used to offset investment gains you realized during the year. If your losses exceed your gains, you can use up to $3,000 of the excess loss to offset your ordinary income, which can be a significant tax saver.
Qualified Charitable Distributions (QCDs): If you are 70 ½ or older, you can donate up to $100,000 directly from your IRA to a qualified charity. This is a powerful tool. A QCD counts toward your RMD for the year (if you have one), but the distributed amount is excluded from your taxable income. This can be more beneficial than donating cash and taking a standard charitable deduction, as it lowers your adjusted gross income (AGI), which can in turn reduce taxes on your Social Security benefits and lower your Medicare premiums.
Review Your Withholding: A big, unexpected tax bill in April is a nightmare on a fixed income. Look at the income you’ve received this year from pensions, Social Security, and retirement account withdrawals. If you think you might owe more than you’ve had withheld, you can ask your pension provider or IRA custodian to withhold more from your final payments of the year, or you can make an estimated tax payment to the IRS.
3. Review Your Medicare and Health Insurance Plans
Healthcare is one of the biggest expenses in retirement, so ensuring you have the right coverage is crucial. The Medicare Annual Enrollment Period runs from October 15 to December 7. This is your chance to switch between Original Medicare and a Medicare Advantage Plan, change your Medicare Advantage plan, or adjust your Medicare Part D (prescription drug) coverage.
Insurance companies change their plans every year. Your doctor might leave your network, a prescription drug you take could be moved to a more expensive tier, or a new plan might be available in your area that offers better benefits for a lower cost. Don’t assume the plan that was right for you last year is still the best fit. Use the official plan finder tool on the Medicare website to compare your options. Making a change before the deadline can save you thousands of dollars in the year ahead.
4. Rebalance Your Investment Portfolio
Over the year, the financial markets fluctuate. Some of your investments will have done better than others, which can throw your original asset allocation out of balance. For example, if you aimed for a portfolio of 60% stocks and 40% bonds, a strong year for the stock market might push your allocation to 68% stocks and 32% bonds. This means you are taking on more risk than you originally intended.
End-of-year planning is an ideal time to rebalance. This simply means selling some of the assets that have grown in value (stocks, in this example) and using the proceeds to buy more of the assets that have underperformed (bonds). This disciplined process forces you to sell high and buy low, and it ensures your portfolio’s risk level stays aligned with your comfort zone and financial goals. For retirees, managing risk and preserving capital is just as important as generating growth.
5. Update Beneficiary Designations
This is a simple but critically important task that is often overlooked. Your beneficiary designations on accounts like IRAs, 401(k)s, and life insurance policies override your will. If your will says your estate should be split between your three children, but your IRA beneficiary form only lists your oldest child, that IRA will go entirely to your oldest child upon your death.
Life events like marriage, divorce, death of a spouse, or the birth of grandchildren are all reasons to review your beneficiaries. The end of the year is a perfect reminder to log into your account portals or call your plan administrators to confirm that the people listed are still the ones you want to inherit those assets. Incorrect or outdated beneficiaries can lead to family disputes and unintended consequences, undoing years of careful financial and estate planning.
6. Evaluate Your Annual Budget and Spending
You can’t plan for the future without understanding the past. Take some time before year’s end to look back at your spending over the last 11 months. Use bank statements, credit card bills, and receipts to get a clear picture of where your money went. Tally up your expenses in major categories like housing, food, healthcare, transportation, and entertainment.
This exercise isn’t about judging your past choices; it’s about gathering information to make better ones. Were there any surprise expenses you need to plan for next year? Did you overspend in one area and underspend in another? Understanding your actual cash flow is the foundation of a successful retirement budget. This review will help you create a realistic spending plan for the new year, ensuring your income can support your lifestyle without depleting your savings too quickly.
7. Use Up Flexible Spending Account (FSA) Funds
If you or your spouse are still working and have a Flexible Spending Account (FSA) for healthcare expenses, now is the time to check your balance. Most FSAs have a “use it or lose it” rule, meaning any money left in the account at the end of the year is forfeited to your employer. Some plans offer a short grace period (until March 15 of the next year) or allow you to carry over a small amount (around $600), but you must check your specific plan’s rules.
Don’t let that pre-tax money go to waste. You can use FSA funds for a wide range of medical expenses, including prescription glasses, dental work, hearing aids, co-pays, and even over-the-counter medical supplies like first-aid kits and blood pressure monitors. Schedule that extra dental cleaning or stock up on eligible health items before the deadline.
