Scott: Welcome to the BiggerPockets Money Podcast where I interview Sean Mullaney 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 bigtime investments in assets like real estate, start your own business, or save a few thousand dollars at tax time or get your plan into gear for 2024. We’ll 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 that is a huge bummer because taxes are legitimately her favorite subject. And I don’t mean that as a joke. I mean that literally. Uh, that’s, you know, something unique about Mindy. I too love taxes though and hope that will come through. Um, and Sean definitely does as well, our guest today. So looking forward to it. I think you’ll have a great time. Um, listening to it and um, um, and I’m and I’m looking forward to learning from him.
Scott: All right. Now, I’m going to bring in Sean. Sean Mullaney is a financial planner and certified public accountant, licensed in California and Virginia. Sean runs the tax blog, FI Tax Guy, where he he gives advice and insights on tax planning and personal finance. Sean, welcome to the BiggerPockets Money podcast. We, I am so excited to have you.
Guest: Scott, thanks so much. Really looking forward to our conversation today.
Scott: 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 in April. Obviously, folks listening to the BiggerPockets Money podcast might be a little bit more planning and more paying more more attention to their finances. Are there any things to think about uh, 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?
Guest: Absolutely, Scott. So I think the big word is opportunity, right? Um, 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 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 complicated. It’s just having some awareness, doing some own thinking, you know, 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.
Scott: Sean, you said something there about reducing your total lifetime tax burden, right? I might I might have butchered that. What was your phrase?
Guest: Total lifetime tax.
Scott: Just as we’re going to spend most of the time today on the year-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?
Guest: 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 opportunities. So that’s the 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 now and play the game in terms of later on, maybe we do tax advantaged Roth conversions at a time where we’re 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.
Scott: Look, just just to recap that, we’re we’re, you know, a lot of the 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 or low income earner earlier in their career, maybe making less than 50k and getting 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 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 um those high taxes today. Early retirement, it’s about, you know, uh you’re maybe you’re spending less or whatever and it’s about kind of paying some of those taxes, um uh at the lower marginal tax bracket as we move things out of a 401k for example. And late retirement, maybe we’re so wealthy uh that we’re really valuing the stuff that’s in Roth Roth IRAs or um uh or you know, Roth 401Ks or or or or Roth accounts. How am I doing on this?
Guest: 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 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 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.
Scott: Awesome. So, now, you know, we’re here at the end of 2023. We’re thinking about year end tax planning. Can you you break down this process into three categories, I believe, the urgent, the year end and the can wait. Can you frame that for us and and give us an idea of what fits in those buckets?
Guest: 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 could 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 the third bucket where, hey, you know what, we actually can wait till after year end and still get some good benefits for the 2023 tax year.
Scott: Awesome. Let let’s go through some of these. What is a donor advised fund and why would I want to use it in general? And then why do I want to have gotten it done before the end of this year if I’m thinking about it?
Guest: Yeah, donor advised funds 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 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 appreciated assets, appreciated stock, could be an ETF or a mutual fund. Um you move an appreciated asset into that donor advised fund and it’s sort of a bunching or a timing strategy. So let’s just say Scott, you’re sitting on a thousand shares of Apple stock. And, you know, 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 your deductions for this year, 2023, if you can do this before year 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 advised fund, you get a big tax deduction, first benefit. You wipe away the capital gain, second benefit.
Scott: What is the tax benefit 175,000 in this case?
Guest: Uh, we I have to do some math. So, that’s the initial tax deduction. You have to remember though, 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 the undeducted 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 advised fund to say give $500 a a month to their church. Um not too many people want to say, hey church, here’s 500 shares of Apple stock. Um 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, $1000 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 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, you know, it’s your donor advised fund. So it 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 to boot. So I’m a big fan of it. I will say for those thinking about getting that deduction on their 2023 tax return, you probably need to move sooner rather than later. It it, you know, 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.
Scott: Is this a DIY exercise or do you recommend hiring getting getting professional help to assist?
Guest: This absolutely can be a DIY exercise. Now, there can be some measurement in terms of well 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 5 or 10% of my income. Um you then want to make sure that you’re not selling first, that you literally are transferring um 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 advised fund are with the same financial institution. That’s said I myself have done it where I’ve got a appreciated asset with one brokerage company and a separate broke separate financial institution has the donor advised fund. That can happen. It’s just going to require a little more paperwork and and dotting the eyes and crossing the tees a little more closely.
Scott: 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 a someone would do it, and then why it’s urgent to do right now.
Guest: All right, so Roth conversions are a big thing saying 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 taxed 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 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, required minimum distributions, right? So it’s a strategy to reduce the size of my my traditional retirement accounts 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.
Scott: Yeah, and it goes back to the kind of what we talked about earlier where there’s this lifetime gain of trying to minimize your tax burden. And the game if you’re if you’re, you know, a typical, you know, FI journey where, you know, typical in air quotes here, but you earn low at first, high in later years and then, you know, retire early or whatever. The theory is you’re going to have really high income, you want to shield from it, um, 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 uh uh uh or or tax, you know, after tax, 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, a potentially a real estate investor, if you happen to have a huge loss one year, um that’s a really good time to take advantage of that. That’s like I think it’s like I I 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 a ton of money from a 401K into a Roth.
Guest: Yeah, Scott, it’s opportunistic planning. I’ll just going to 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. Um so, you know, I would make my decision based on my personal circumstances now and not on a a fear of future tax hikes if that makes sense.
Scott: Yeah, but but in in general, that 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 time to consider going after that Roth conversion and get that done before you’re in.
Guest: Absolutely.
Scott: Awesome. Um, let’s look at a couple what are a couple of the other things that you have you put in this urgent bucket? And maybe we can touch on those just a few a few moments each um before moving on to the um year end.
Guest: Yeah, so Scott, 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 a two-step transaction, right? Step one is a traditional non-deductible IRA contribution followed uh 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 IRAs usually while we’re working, right? Because we need to earn 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 backdoor Roth transaction, which we can’t take back. We can’t undo Roth conversions. If we have that old rollover 401k that’s now an IRA, what what’s going to happen is a large part of our backdoor Roth IRA is going to be double is going to be taxed, right? Um there’s something called the pro rata rule. I don’t want to bore the audience with that. I blogged about it on my blog if you’re interested. Um there is a remedy to this problem though, if we did a backdoor Roth and then we’ve realized, oh yeah, you know, we have an old 401k and a traditional IRA. If we can by year end, get that money into our current employer 401K through a usually through a direct trusty to trusty transfer, we can solve that problem. Um, you know, I think it 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 backdoor Roth and I’ll move on with my life. That’s not the end of the world either. Um but that is one of those where, hey, maybe if if I have a good 401K at work and it’s easy to move that money in, maybe I do that. Um one other thing I think that would be helpful for the audience is think about your withholding. Um 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. Um 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 stub 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 tax 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 solo entrepreneurs out there, I myself am a solo entrepreneur. There’s something called the solo 401k. That uh 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 require some upfront thinking in most cases. and I think that just even in those cases where you could do it after year end, it still benefits for from some thinking now. So if I’m out there and I’m a solo entrepreneur, I’m going to start thinking about a solo 401K much sooner rather than later uh because that can be just a tremendous tax savings opportunity.
Scott: Yeah, and I’ll see you your solo one for your solo 401K and raise you for if you have employees and own your small business, then you really need to to to be thinking about this because there’s a whole another uh layer of of of opportunities there for um tax deferred deferred uh retirement contributions. Um let’s go to the year end deadline uh items here. What are some of the big uh heavy hitters here that you suggest people look into, um though they’re not immediate, you know, act today, they’re get it done in the next couple of weeks.
Guest: 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. Well, 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 uh up to $3,000 this year. If there’s more loss than that, then that just gets carried forward uh to the future. But say we earn $200,000 from our W2 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 um you know, get a little tax benefit year end for that.
Scott: Awesome. And can you tell us a little bit about the wash sale rule?
Guest: Yes, Scott. So this is something folks worry about. So, I think if you step back and you 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 uh portfolio position, you know, acme stock, right? So I just sell that uh 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, nope, we’re not going to allow that. So they 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 uh 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 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 passed and make sure you haven’t purchased in the last 30 days other than what you’re selling. You’re allowed to sell that. That’s a short-term capital loss. Um 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 uh pays out a dividend that you then rein- vest. Yes, that is technically a wash sale and that will slightly reduce the amount uh 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, you know, 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’s not the end of the world from a uh tax loss harvesting wash sale perspective.
Scott: 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 um on the, um, 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 um to avoid this. They’re not allowed, they’re not letting you claim the loss.
Guest: That’s right, Scott. Um, it is what it is.
Scott: Well, let’s keep let’s keep rolling um through these other kind of year-end uh items that we should that you’ve you’ve checked off here.
Guest: Yeah, a couple big ones uh that I think increasingly we’re going to see out there in the world. uh 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. and I think this one’s going to grow and grow and grow. We’re going to see a big transfer of 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. Um, many people who inherit in 2020 or later are subject to a 10-year payout window. And now the IRS is saying, 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 year end because you don’t want to wait till year 10 on a traditional retirement account that you inherited اه, 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, might be some 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.
Scott: Awesome. Let’s go through what are some things that can wait till next year.
Guest: 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 or 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, you know, if the financial institution offers a radio box or a check down box that it’s specifically coded as being for the year 2023. So that’s one of them. Um the second is backdoor roth. 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 and that’s April 15th, 2024. Um it’s not the end of the world to say, you know, I’m on the borderline of that income threshold for a 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, uh any dividends, those sorts of things. See where my income comes out, actually maybe start doing my tax return, get my income sort of nailed down and then make the decision, oh, I qualified for a Roth IRA, so I’ll just do an 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. Um those can wait till the 2024 till 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 and on a a reg, you know, a 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, uh and just make sure it’s coded as being for 2023.
Scott: Um, what about, um, you know, for from a planning perspective and getting my ducks in a row for next year? Any tips there?
Guest: Yeah, right? So for some of the listeners, we still might be in 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. Um 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. Uh 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 end is 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 um retirement planning and even maybe business structure for 2024. Now, you know, I 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 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.
Scott: Well, look, this has been a uh a thorough accounting, see what I did there, uh of uh of things you can do at the end of this year and and heading into 2024, Sean. Any kind of like last tips that you you’d leave us with um before we we kind of adjourn here?
Guest: Thanks so much, Scott. Yeah, I 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 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 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?
Scott: You know, look, I I I think these have been these have been fantastic. I want to throw in two more items for folks’ consideration. It’s not really necessarily tax related, but just your as you’re thinking about the year end, you know, one of those is I if you’re going to invest in a 401K or a Roth IRA, one of these tax advantaged accounts or an HSA, I think then why not why not take it to its 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 uh my my Roth 401K. I I uh various reasons for that. I’m sure we can get into a whole argument about whether I should be doing a 401K. Um and then my HSA because I’ve elected to do them, 100% of my paycheck goes into them until those are funded. Um and I plan for that by having a larger cash balance at the at the end of the year and that’s what that’s something I do. There are also a number of little, you know, uh ticky tack things that you can be thinking about here. Not ticky tack. One of them that’s actually fairly substantial is, uh my one-year-old has a um there’s a Colorado program that matches um um what 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, um or same same thing, max it out on January 1st so that it has the whole year to compound um with the match included. So just like things like that can be really um can make us 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, try to plan ahead for those types of things um and and get those extra few points of growth in the tax advantaged accounts.
Guest: Scott, can I add one more thing to the 401k discussion on that? So, uh, you always want to be thinking about that employer match, okay? And, um, I bet Bigger Pockets has a different structure than my former employer had, right? 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, right? So if you max 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 uh have a mechanism like that but then say, well, if you maxed out in January or February, we’ll just they call true you up. They’ll say, well, you know, you didn’t, you, you know, we we contribute 6% or 4% per pay period or 2%, whatever it is. Um, 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 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.
Scott: Love it. Yeah, look, I you know, Bigger Pockets, we have a non-elective safe harbor contribution, which means that you get 3% uh uh added to your 401k regardless of whether you contribute or not. So it’s not a match. It’s that’s just that’s there, right? Um um uh into your 401k. So that that doesn’t apply in my situation, but um yeah, it’s a really good point for folks that are are thinking they want to um do something similar. Make sure it doesn’t come at the cost of that match.
Guest: 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 structured that way where it’s non-discretionary. It doesn’t matter if you put the max in the 401K or you put nothing in 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 it’s 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.
Scott: Again, broader point is there are other things outside of this 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 end tax planning, you know, take those take that match, look through look for these benefits. You know, another good one is, you know, we have an FA, we have a dependent care FSA plan here at Bigger Pockets, spend it, right? Before the end of the year, uh uh and and and take that, right? Like I make sure I get my all my ducks in a row and make sure that my daycare bills, for example, have completely used up that benefit because I know I spent more than the FSA, um, with the dependent care FSA on on those things. So just like thinking through those things and looking going through the benefits and and and, you know, the the various opportunities you have across your portfolio, across your benefits your employer’s offering, any programs your state has, um, or 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 and now’s the time to do that and this is probably a several thousand per hour activity. Sean, thank you so much for coming on um uh the Bigger Pockets Money show today. Really appreciate having you here. Where can people find out more about you?
Guest: Scott, thanks so much, really enjoyed our conversation. You can find me at my financial planning firm, Mulaneyfinancial.com. You can find me on YouTube, Sean Mulaney videos and my blog fitaxguy.com.
Scott: Well, really appreciate it. Hope you have a wonderful rest of your week and um, hope, I think you should helped to help a lot of people here plan and and save a little bit of money as we head into 2024.
Guest: Thanks so much, Scott.
Scott: All right, that was Sean Mullaney with The FI Tax Guy. I thought it was a fantastic episode and really and really learned a lot out there. I love his logical flow of here are the things to do first, and then here are the things that need to do before year end, um 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, um and looking through your other, you know, the the other considerations around what type of benefits am I signing up for? what am I going to need next year? um is a great additional topic there that’s really nuanced. And you can tell that a lot of this is guesswork really, right? Um the whole fundamental to Sean’s the whole fundamental basis of Sean’s approach to tax planning in a long-term uh uh 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 to 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, either on a pre-tax or um tax-deferred um either on a tax deferred or post-tax basis, um you probably have a great shot at winning here because you understand more and are taking advantage of more than than most. So, good luck to you. Really appreciate you listening. And um 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/biggerpocketsmoney.
Mindy: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kalyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
