As the year winds down, now’s the time to review your investment accounts and tax strategy to make sure you’re making the most of every opportunity. Here are five important end-of-year tax planning tips:
1. Required Minimum Distributions (RMDs)
If you have a retirement account, you’ve probably heard about Required Minimum Distributions (RMDs). Thanks to the SECURE Act the rules around RMDs have changed. It’s important to know when to start taking them. Whether the account is your own or an inherited IRA, you must take your RMD before the year ends to avoid a steep IRS penalty—(up to 25% of the amount you missed). Not sure when you need to begin taking RMDs? Check the updated chart or talk to your financial advisor to get clear on the rules for your specific situation.
Also, if you’ve inherited an IRA from someone who passed away after 2019, be sure to follow the original RMD schedule set when the account was established.
2. Tax-Loss Harvesting & Capital Gains Offsets
Have you looked at your capital gains for the year? If you’ve sold profitable investments, you might be on the hook for some taxes. But there’s a way to offset some of those gains: tax-loss harvesting. This involves selling investments that have lost value to “harvest” the losses. The losses can be used to offset your taxable gains. Essentially, you’re reducing your tax bill by balancing your wins with your losses. It’s a great strategy if your portfolio includes investments that are currently down.
3. ROTH Conversions: A Long-Term Strategy
A ROTH conversion allows you to move money from a pre-tax retirement account (like a 401(k) or traditional IRA) to a Roth IRA, where future withdrawals can be tax-free. But there’s a catch: the amount you convert is taxable as ordinary income in the year you make the transfer. So, if you’re considering a Roth conversion before year-end, it’s essential to assess how it will affect your tax situation and potential Medicare premiums.
A well-timed Roth conversion can lower your tax bill long-term, but it’s key to plan ahead with your financial advisor to avoid any surprises.
4. Charitable Contributions & Annual Gifting
One of the most rewarding ways to reduce your tax burden is by giving to charity. If you make your donations by December 31st, you can deduct those gifts from your taxable income. Just make sure the charity is eligible to receive tax-deductible donations.
You can also gift up to $18,000 per person in 2024 without triggering gift taxes—and if you’re married, both spouses can each give that amount. It’s a great way to share your wealth with family or friends and can also help reduce future estate taxes.
5. Review Your Tax Return & Plan Ahead
Before you close out the year, it’s a good idea to have your tax return analyzed by your financial advisor. By reviewing your current tax situation, you can identify any last-minute opportunities you might have missed—because once the year is over, it’s too late to take advantage of them. A good tax strategy should be built throughout the year, but this review is essential to making sure you’re not leaving money on the table.
Final Thoughts:
End-of-year tax planning is about more than just cutting your tax bill—it’s about creating a smart, long-term financial strategy. By reviewing things like RMDs, tax-loss harvesting, Roth conversions, charitable contributions, and your overall tax return, you can take control of your finances and make informed decisions for the future.
Don’t wait until the last minute! Take advantage of these opportunities now and work with your financial advisor to ensure you’re on track. A little planning today can lead to big savings and set you up for financial success in the new year.
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