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End of Year Financial Checklist for High Earners

By Jimmy Turner, MD
The Physician Philosopher

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!
Further Reading: If you’ve never done this, here is a step by step guide on how to complete your first 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 the recommended insurance agents for doctors listed on The Physician Philosopher. 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!
Furhter Reading: If you need further reading on this topic, make sure to check out The Top 10 Things Every Doctor Must Know about Disability Insurance.

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 to automate 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”.
Further Reading: If you have filled up all of your tax-advantaged space, you may need to open a brokerage account.  Click here to find a step by step guide to opening a brokerage account at Vanguard

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 rules are different where you work!
Furhter Reading: If you’d like to know whether you should use your Health Savings Accounts (HSA’s) read this guide here.

6. Change Next Year’s Contributions

For 2021, contributions to many tax-advantaged accounts are staying the same.  This includes 401Ks, 403B, and 457 accounts.  The new employee contribution limit is $19,500, which is $500 higher than 2019.  This needs to make your end of year financial checklist for obvious reasons. For 401K/403B accounts, the total (including employer matching and contribution) is up to $57,000.  And, don’t forget that if this is the year you turn 50, you can now contribute an additional $6500 through “catch up” contributions.
Further Reading: Not sure if you should participate in your non-governmental 457?  Find the answer here.

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.

TPP

4 Comments

  1. FiPhysician

    What about calculating Savings Rate? I think that is important to do yearly as well!

    Reply
    • ThePhysicianPhilosopher

      That’s a good point. I usually do that when I do out networth analysis in the first quarter and calculate how much we have saved versus our Gross and Adjusted income. I don’t know what my total gross income is until after the quarter ends.

      Reply
  2. Anonymous

    Is this an old post? #6 discusses 2020 contribution limits, which is old news. Both 2020 and 2021 401k/403b/457 limits are $19,500. No change needed to be made for 2021.

    Reply
    • RIKKI R RACELA

      Yeah I think it was an old post.

      btw, I took advantage of Personal Capital calling me and talked about backdoor roth, federal and state income taxes, small cap value, etc! It was awesome 🙂 Had no intention of working with them, but thought I should learn as much as possible from my free session 🙂

      Reply

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