The other day, I finally got around to finalizing my taxes for 2023. If you’re wondering why I’m filing my taxes so late, it’s because I got a tax extension back in April. I always file for an extension since I never get a tax refund anymore (so there’s no urgency for me to file) and I like giving myself more time to organize my stuff.
I’ve been writing about money and financial independence for 8 years now, and during that time, I’ve spent an inordinate amount of time trying to optimize my finances. Unfortunately, even with the extra time I gave myself to file my taxes, a combination of being overwhelmed with family duties, some disorganization, and a little bit of laziness meant that I messed up fairly badly this year, forgetting to do a bunch of stuff I usually do and leaving money on the table as a result.
It happens though. So if you’re ever feeling bad about not doing everything perfectly, you can look at all the stuff I didn’t do this year and maybe feel a bit better about what you may not have done.
Forgot To Do A Backdoor Roth IRA
This was definitely my worst mistake for the year.
My wife and I have been taking advantage of the Backdoor Roth IRA for many years now since our income is too high to contribute to a regular Roth IRA. If you aren’t familiar with the Backdoor Roth IRA, it’s a way you can contribute to a Roth IRA even if your income is too high for a normal Roth IRA. There’s more that goes into a Backdoor Roth IRA than I can go into with this post, but essentially, what you do is make a nondeductible contribution to a traditional IRA, then immediately roll over your contribution to a Roth IRA. By doing this, you’re able to contribute to a Roth IRA, even if your income is too high to directly contribute to one.
Taking advantage of the Backdoor Roth IRA is important because it allows me to put thousands of dollars each year into a tax-advantaged account. That money can grow tax-free and I can withdraw the money tax-free as well. For last year, the contribution limit was $6,500 per person (if under 50). That means my wife and I could have contributed $13,000 total to our Roth IRAs as a Backdoor Roth IRA contribution.
The deadline for making this contribution, however, was the regular tax filing deadline and not the tax extension deadline. That means I needed to make this contribution back in April 2024, which I completely forgot to do.
It’s a fairly expensive mistake to make too. $13,000 invested in a Roth IRA could grow to around $50,000 in 20 years and to $98,000 in 30 years. As you can see, that’s a lot of tax-free income I left on the table due to my forgetfulness. It won’t ruin me by any means, but it does hurt to lose out on that much potential money.
Didn’t Max Out My 529 Tax Deduction
Another minor thing I forgot to do was max out my state 529 plan tax deduction. As a quick background, a 529 plan is a tax-advantaged account that provides tax-free growth if used for qualified educational expenses – usually college tuition for most people. In many ways, a 529 Plan is like a Roth IRA where you contribute to it using after-tax money and can then withdraw the money tax-free later.
Depending on which state you live in, contributing to a 529 plan could also qualify you for a state tax deduction. I live in Minnesota, which gives households up to a $3,000 state tax deduction for 529 plan contributions to any state’s 529 plan (i.e. I don’t have to contribute to the Minnesota 529 plan to qualify for the state tax deduction). In this case, I contribute to the New York 529 plan since I find that plan easy to use, it uses Vanguard funds, and most importantly, it has low fees (just 0.12% expense ratio as of when I write this).
For some reason, I only ended up contributing $2,800 to my 529 plan last year, which really makes no sense. It’s not a huge deal that I didn’t get to that max of $3,000, but as someone who likes to optimize everything, seeing that I randomly forgot to contribute an extra $200 for no particular reason hurts. At a minimum, I should always be contributing at least $250 per month to a 529 plan so I can maximize that state tax deduction (I’ve since gone ahead and updated my auto-contributions to be $250 per month).
Did A Terrible Job Keeping Track Of My Expenses
A big advantage of being a business owner is that a lot of your everyday expenses can qualify as business expenses, allowing you to reduce your taxable income and essentially pay for things using pre-tax income. There are a lot of things I already pay for that can qualify as a business expense. Things like my phone and internet or the bike maintenance I do on my bikes are good examples of things I’m already paying for that can qualify as business expenses. Even going out to eat can qualify as a business expense since I’m usually going out to lunch with my business partner.
The catch, of course, is that you need to actually track these expenses. And this is where I’ve been really bad lately because I’ve been doing an awful job of tracking my potential business expenses. As a result, at the end of the year, I’m always underreporting my expenses because I’ve simply forgotten what I spent money on.
This is something I need to work on improving because by not reporting all of my expenses, I’m for sure leaving money on the table. Even if I’m worried about stretching what is a business expense, I can’t even consider whether to include it if I never tracked it in the first place.
Final Thoughts
We’re still in October as I write this, which means I have plenty of time to optimize things this year. For contributions to tax-advantaged accounts, it’s important to think about when the contributions need to be made. It’ll either be by the end of the calendar year or by the tax filing deadline. But you have to pay attention because even if you get an extension, the deadline might still be with the original tax filing deadline and not the extension deadline.
As we head into these last two months of the year, I have time to at least make sure I don’t miss out on some of these easy things I missed last year. With my 529 Plan, I noticed I was coming up short again on the contributions, so I changed it so it’ll at least hit $3,000 in contributions by the end of the year.
For the Backdoor Roth IRA contributions, I’m planning to make my contribution soon after I write this. I’ve always been 1 year behind, where I make my contribution for the previous year in the current year (i.e. I’d normally make my 2024 Backdoor Roth IRA contribution at the beginning of 2025). I’m planning to get on track and make my contribution for the current year in the same year, just to simplify my thinking a bit.
So yeah, as much as I’d like to optimize everything, I don’t always do it. And this past year was probably my worst year when it came to optimizing things because I was so busy and forgetful.
It’s not the end of the world, but if I can optimize my finances, I’d rather do that.
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