End of Year Financial Checklist | White Coat Investor

[Editor’s Note: Today’s WCI Network post is by The Physician Philosopher. If you haven’t been over to that site lately, be sure to check it out. Tons of awesome financial and wellness content there. I love this post that helps you wrap up your financial year and make sure you took care of everything.]

At work, my nickname is “Dory”, which comes from the famous yet forgetful fish from the animated motion picture Finding Nemo. While I was born with a proclivity towards complex problem solving, I was also born with an innately terrible memory. Due to my memory deficits, the only way that I can get things done is through a checklist. If you are a high-income earner, don’t miss this financial checklist for your end of the year planning.

While this isn’t an exhaustive list, hopefully it will at least get your gears turning on financial tasks for year-end. Here are 7 items you should check off before year-end!

 

1. Backdoor Roth IRA

Each year, you can place $6,000 into a Traditional IRA and then convert it through the backdoor into a Roth IRA. If you are married, you can do the same for your spouse, even if they are a non-working spouse. This allows for $6,000-$12,000 of tax-advantaged Roth IRA money.

If you are a high-income earner (defined here as $139,000 if single and $206,000 if married for 2020), there is a chance that you need to take part in a Backdoor Roth IRA each year to fill up all of your tax-advantaged space and meet your annual savings goals.

If you’ve taken part in this, you must make sure that all of your non-Roth IRA space is at “zero” by 12/31 each year. In other words, if you performed a backdoor Roth IRA this year, you cannot have any Traditional IRA, Rollover IRA, or SEP-IRA money by the end of the year. Otherwise, you’ll get hit with the “pro rata” rule, which will essentially steal any potential benefit a backdoor Roth IRA would have provided.

Don’t miss this crucial step as the year ends!

Recommended Reading

If you’ve never done this, here is a step-by-step guide on how to complete the backdoor Roth IRA.

 

2. Life and Disability Insurance

Speaking of crucial steps for your financial checklist, asset protection is likely the most important part of your financial plan.

If you have a high income, then you need to protect it. You can accomplish this through disability insurance obtained through one of these recommended insurance agents.

If you are married or have children, then you likely need term-life insurance, too. You can obtain this from the same list of insurance agents linked to above. Just remember, I always recommend getting quotes from 2-3 agents to make sure you get the best product at the best price!

 

3. Charitable Giving 

If you have a charitable giving goal, this is the time of the year to make sure you’ve met that goal. Why? Because charitable giving must occur prior to 12/31 if you want to take advantage of the tax benefit for the current tax year.

This becomes important as there are not a lot of things a high-income earner can deduct from their taxes. Outside of tax breaks through investing in real estate, it really amounts to the State and Local Tax (SALT deduction limit of $10,000), mortgage interest, and charitable giving. Make sure to take advantage before the end of the year by giving to something you feel called to help!

If you have a certain goal for you, your family, or your business—make sure to make your gift before year-end!

 

4. Annual Savings Goal

As the year winds down, this is also a great time to check over your annual savings goal. When I took a peek at ours, I realized that we were a bit behind schedule at the beginning of December. Then, I remembered we hadn’t performed our Backdoor Roth IRA for the year. Procrastination gets me every time!

Of course, you should be meeting most of this goal automatically, because you’ve learned that automating your wealth-building is a key to financial success. Let the money come automatically out of each paycheck. Ideally, this will occur before you even see it or as soon as possible once it hits your bank account. This is what people mean when they say “pay yourself first”.

 

5. Flexible Spending Money

Unlike a Health Savings Account (HSA)—which allows you to roll over any unused money in the account—Flexible Spending Accounts (FSA) money must be consumed by a pre-determined date, which means it needs to be on your financial checklist. The actual date depends on which type of FSA we are discussing.

According to FSAfeds.com, your Dependent Care FSA (DCFSA) can be used later than your Health Care Flexible Spending Account where the expenses must be incurred by 12/31.

Of course, make sure to check with your employer to see if the rules are different for where you work!

 

6. Change Next Year’s Contributions

For 2021, contributions to many tax-advantaged accounts are staying the same. This includes 401(k)s, 403(b)s, and 457 accounts.

For 401(k)/403(b) accounts, the total (including employer matching and contribution) is up to $58,000. And, don’t forget that if this is the year you turn 50, you can now contribute an additional $6,500 through “catch up” contributions.

 

7. Net Worth Progress

The end of the year is a great time to check in on your annual financial progress. My favorite tool for doing this is personal capital. After you link all of your accounts, it will produce a net worth estimate automatically for you.

[Note: If you have >$100,000 in assets, Personal Capital will call you to ask you to manage your account—based on my Do-It-Yourself Investing Page you might guess that I said “no” when they called me… you can/should, too!]

If you don’t like linking your accounts to other software, feel free to use a good ol’ Excel sheet. That’s what I’ve done in the past when making the most recent Physician Philosopher Net Worth Updates.

 

Take-Home: Financial Checklist

Being a high-income earner comes with some financial hoops you should jump through each year. In fact, I’d argue that most people should jump through many of the hoops mentioned above.

While you may be more like Nemo and less like Dory, I hope this list still proves helpful to you in remembering your financial tasks for the year before it is too late.

Have you checked off all of the items listed above? Are there any that I didn’t mention that should have made the list? Leave a comment below.