Weekend Read: End-of-Year Tax Planning Strategies for 2024
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I can’t believe I’m saying this, but as the end of the year approaches, it’s time to take a look at our tax planning strategies. People have several key opportunities to optimize their tax situation before the calendar flips to 2025. Here are a few strategies to that I consider.
Maximize Retirement Account Contributions
If you haven’t already done so, consider maxing out contributions to your retirement accounts. In 2024, the contribution limit for 401(k) plans is $23,000, with an additional $7,500 catch-up contribution allowed for those age 50 and older. IRAs allow up to $7,000 in contributions, with a $1,000 catch-up provision for those over 504.
Maximizing contributions not only helps you save for the future but also reduces your taxable income, potentially dropping you into a lower tax bracket.
Take Advantage of Tax-Loss Harvesting
If you have investments in taxable accounts, tax-loss harvesting can be a useful strategy. By selling losing investments to offset gains elsewhere in your portfolio, you can reduce the amount of capital gains taxes you owe. Plus, if your losses exceed your gains, you can deduct up to $3,000 from your ordinary income and carry forward any remaining losses to future years. This is a useful strategy at year end where losses provide opportunities, unfortunately with this year’s market those losses may be few. I like to take advantage of pull backs in the market during the year and “bank” them for later use3.
Consider a Roth IRA Conversion
For some, converting traditional IRA assets into a Roth IRA before year-end can be a smart tax move. Roth IRAs allow for tax-free qualified withdrawals in retirement, and do not force RMDs at 73 like traditional IRAs do.
A Roth IRA distribution is considered qualified and therefore tax-free if it meets two conditions. First, the account must have been open for at least five years. Second, the withdrawal must occur under certain circumstances, like being at least 59½ years old, disabled, or $10,000 for a first-time home purchase. If both conditions are met, the distribution is qualified and tax-free. Otherwise, earnings may be taxed and could face a 10% penalty.
However, the conversion itself is a taxable event. I wrote a more detailed explanation of how this strategy works here that you can read if you’re curious.
Review Charitable Contributions
If you’re charitably inclined, donating to qualified charities can reduce your taxable income while supporting causes you care about. For those over 70.5, qualified charitable distributions (QCDs) allow you to donate up to $100,000 directly to charity without recognizing the distribution as taxable income. This strategy can help satisfy your RMD requirements while lowering your taxable income1.
Evaluate Your Distribution Strategy for Inherited IRAs
bit different from those for traditional IRAs. Thanks to the SECURE Act, most non-spouse beneficiaries now have to withdraw the entire balance within 10 years of inheriting it. While that might seem straightforward, it can lead to a hefty tax bill if you wait until the last year to take everything out. A smarter approach could be to spread those withdrawals over the full 10 years, which can help you manage your taxable income each year and potentially keep you in a lower tax bracket. Whether you’re planning to retire soon, your spouse is stepping back from work, or you have Social Security or RMDs from other accounts kicking in, year-end is a great time to revisit your strategy, especially if you’ve had any changes in income or retirement plans2.
Here is a more thorough article I wrote on inherited IRAs.
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2 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary
3 https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp
4 https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
5 https://smartasset.com/retirement/roth-ira-qualified-distribution
Individuals are encouraged to consult their tax and legal advisors (a) before establishing or changing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
Steward Partners, its affiliates, and Steward Partners Wealth Managers do not provide tax or legal advice. You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.
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