As the end of the year approaches, many people scramble to complete their holiday shopping, send out greeting cards or plan the next year’s vacation. But it is also important to prepare for the upcoming year by ensuring that your financial portfolio is aligned for success. To help reach your financial goals next year, be sure to add the following tips to your end-of-the-year checklist.
Take full advantage of tax-advantaged plans
Traditional IRAs and employer-sponsored plans like 401(k) allow participants to contribute funds on a deductible or pre-tax basis. Besides helping you put aside money for retirement (often with an employee match for your contributions) these plans also let you reduce your annual taxable income.
In 2024, you can contribute up to $23,000 if you’re under 50, or $30,500 for participants 50 and older. Before the year ends, make sure you’ve utilized these plans to their maximum benefit, if one is available to you.
Consider Roth Conversions
This time of the year is good for evaluating whether it makes sense to convert a tax-deferred savings plan, such as traditional IRA or 401(k), into a Roth account.
When you convert a traditional account to a Roth account, the converted funds are generally subject to federal income tax in the year that you make the conversion. If a Roth conversion does make sense, you’ll want to give some thought to the timing. For example, if you believe that you’ll be in a better tax situation this year than next (meaning you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is right for you depends on many factors, including your current and projected future income tax rates.
New 529 Plan Rollover Options
2024 is the first year 529 funds can be rolled over into a Roth IRA in the beneficiary’s name. This is a big breakthrough for those concerned with recouping their 529 funds in the event that the beneficiary does not go to college or use all of the funds for educational purposes.
For 529 plan funds to qualify for a Roth rollover, several conditions must be met. First, the Roth IRA receiving the rollover funds has to be in the same name as the beneficiary of the 529 plan. The 529 plan must also have been maintained for at least 15 years, and any contributions to the 529 plan made in the last five years (as well as any earnings on those contributions) are ineligible to be moved to the Roth IRA. There is also an annual limit, currently $6,500 for those under 50 years of age, which counts toward the beneficiary’s total annual contribution limits for that account, and a lifetime maximum of $35,000. Lastly, the beneficiary has to have earned income for 529 funds to be rolled into their Roth IRA.
Carry Forward Capital Gains or Losses
The end of the year is also a good time to consider the tax consequences of any capital gains or losses you’ve experienced throughout the year. Although reducing your taxable income shouldn’t be the leading factor of your investing decisions, there are some steps you can take before the end of the year to minimize any tax impacts from your investments.
If you have realized capital gains from selling securities at a profit with no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those capital gains. Any losses over and above your gains can be used to offset up to $3,000 of ordinary income (this changes to $1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. For example, if you sold stock in company A this year for $2,500 more than you paid when you bought it four years ago, you can sell company B stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. By doing so, you offset your $2,500 capital gain and $3,000 of ordinary income tax this year, and you can carry forward the remaining $1,500 to be applied in future tax years.
This practice of selling losing positions for the tax benefit they will provide this coming April is a common financial practice known as “harvesting your losses.”
Don’t Forget Your RMDs
If you are age 73 or older, you’re generally required to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans. For most individuals, RMDs are required to be taken before the end of the calendar year. The penalty of failing to do so, even though it was recently reduced by SECURE Act 2.0, is still a substantial amount: 25% of the amount that wasn’t distributed. If corrected in a timely manner, this penalty drops to 10% of the amount that wasn’t distributed.
If you’re still working and participating in your employer’s retirement plan, there are some special rules that apply.
Don’t hesitate to ask for help
If you’re feeling overwhelmed or confused by any of these tips, it is always a wise decision to consult a professional to help evaluate your situation, learn about any legislative changes and determine whether any year-end actions are appropriate for your situation.
For more information about how L.M. Kohn can help you prepare for the end of the tax year, please contact us.
