Important points
Experts recommend considering adopting certain tax-saving strategies before the end of the year, such as making charitable donations or participating in tax loss harvesting. Other investment strategies, such as Roth conversions, may result in higher taxes this year. If you’re already retired, it’s important to take required minimum distributions from your IRA. Failure to do so may result in hefty penalties.
As the end of the year approaches, it may be a good time to review your household finances. Whether it’s contributing to a 401(k) or selling an investment at a loss, what you do now can help you save money down the road.
“October and November are good times to take inventory,” says certified financial planner Adam Wojcikowski. “And in November and December, if there are deals that actually need to be done, try to get them done.”
Consider Roth IRA conversion
Catherine Valega, CFP at Green Bee Advisory, said that some of her clients are using Roth IRAs this election year because the Tax Cuts and Jobs Act of 2017 (TCJA), the law that lowers income and taxes, expires in 2025. recommended the conversion to This means that the income tax rate may jump after December 31, 2025.
A Roth conversion moves money from a pre-tax account, like a traditional IRA, to an after-tax Roth account, where it grows and your withdrawals are tax-free. This means you can effectively reduce your future taxes.
“You can lock in a historically low ordinary income tax rate by doing a Roth conversion and claiming a specific (tax) bracket,” said Brian Schmehill, managing director of wealth management at The Mother Group. , which will be beneficial by the end of the year.”
However, whenever you convert a retirement account to a Roth IRA, the converted amount is considered taxable income. This means you will have to pay income tax on the conversion and could end up paying an even higher tax bill in April. Conversions can also push you into a higher tax bracket for the year, so Wojtkowski recommends considering which tax bracket you fall into before choosing a Roth conversion. Masu.
Make the most of a portion of your investment account
Contribution limits for IRAs and health savings accounts (HSAs) are until tax day, but contribution limits or limits for some employer-sponsored accounts, such as 401(k)s, are until December 31 .
“On the employer side, if they can make the most of their contributions, they would like to do so with a limited salary between now and the end of the year,” Schmehir said.
Katherine Edwards, CFP with Mainstreet Financial Planning, also suggests using this time to evaluate your retirement strategy and increase your savings rate.
“If you haven’t maxed out[your retirement account]consider increasing the amount you put into your retirement account,” Edwards says. “You might get a raise every December and your contributions to your retirement account will increase by 1%.”
Look for opportunities to recover losses
If you sell your investments and make a profit, you will be liable to pay what is called capital gains tax. However, in a year like 2024 that saw stock market highs and turmoil, you may be able to turn some of your losing bets to your advantage.
Edwards said it’s a good idea to recover investment losses at the end of the year to reduce your tax liability, but he also recommends doing it throughout the year or when the market is down.
Loss recovery involves selling investments at a loss to offset capital gains and reduce ordinary income by up to $3,000. Capital losses over $3,000 can be carried forward to offset gains.
If you still believe that a loss-making investment may turn around, avoid repurchasing the investment within 30 days of sale to recover tax losses. If that happens, it may violate the wash sale rules.
Don’t forget to distribute the minimum necessary amount
If you’re eligible, remember to take required minimum distributions (RMDs) from your IRA by the end of the year. If you don’t, you’ll end up paying a hefty penalty.
If you’re age 73 or older and this isn’t the first year you’ve taken required minimum distributions from a retirement account like an IRA or 401(k), you have until December 31 to take your RMD.
Otherwise, you will be responsible for paying a penalty equal to 25% of the RMD amount not received by the deadline. If you’re taking an RMD for the first time, you have until April 1 of the following year.
Some retirees may need the money for expenses, but for others, there is a silver lining. You can also use the extra cash to invest.
“CDs and other liquid investments are best if your money is short-term and you plan to need it right away. “You can consider investing in a brokerage account,” said Jerica Espinosa, CFP and financial advisor at DMBA Financial Planning and Wellness.
Another option, Espinosa said, is to use these funds to make tax-efficient, qualified charitable contributions.
donate to charity
You can also receive a tax break when you donate to causes that are important to you. However, in order to deduct your charitable contributions from your income for the 2024 tax year, you must pay them by the end of the year.
To receive a tax deduction on your annual gross income (AGI), you must itemize your deductions instead of taking the standard deduction. Therefore, some experts recommend “bundling” your charitable donations.
“If someone is in a position to take the standard deduction most years, rather than making charitable contributions every year, they can collect three years’ worth of charitable contributions in that year and donate them to a donor-recommended fund. Please consider it,” he said. Wojtkowski.
Experts also say it may be beneficial to make charitable donations now rather than later, since the TCJA is set to expire at the end of 2025, potentially reducing tax benefits.
