Year-End Tax Planning Checklist for Savvy Investors
As the year-end approaches, it’s a crucial time for investors to fine-tune their financial strategies. Proactive tax planning not only helps reduce your tax liability but also strengthens your overall financial position for the upcoming year. Here’s a deeper dive into key steps every savvy investor should consider before December 31.
Maximize Retirement Contributions
Retirement accounts are one of the best tools for reducing taxable income while building long-term wealth. Ensure you’re contributing the maximum allowed amounts to your 401(k), IRA, or Health Savings Account (HSA). For 2024, 401(k) contributions are capped at $23,000, with an additional $7,500 allowed for those 50 or older. If eligible, IRA contributions can also provide tax-deferred or tax-free growth depending on whether it’s a traditional or Roth IRA.
Harvest Capital Losses
For investors who’ve experienced losses this year, tax-loss harvesting offers a way to offset taxable capital gains. By selling underperforming assets, you can balance gains and reduce your overall tax burden. Just remember the wash-sale rule: avoid buying back the same or a substantially identical asset within 30 days, or the IRS will disallow the loss deduction.
Consider a Roth IRA Conversion
For those in lower tax brackets this year, a Roth IRA conversion can be an excellent strategy. By converting funds from a traditional IRA or 401(k) to a Roth IRA, you’ll pay taxes on the converted amount now but enjoy tax-free withdrawals in retirement. This strategy works particularly well if you expect your future tax rate to increase.
Optimize Charitable Giving
Charitable contributions are a meaningful way to support causes you care about while securing tax deductions. For an added benefit, donate appreciated stocks or securities instead of cash. Doing so allows you to deduct the fair market value of the asset without paying capital gains taxes. If you’re over 70½, consider using a Qualified Charitable Distribution (QCD) to make a direct gift from your IRA.
Meet Required Minimum Distributions (RMDs)
Investors aged 73 and older are required to take RMDs from traditional retirement accounts. Missing this deadline can result in a 25% penalty on the amount not withdrawn, so confirm your RMD calculation and ensure timely distributions to avoid costly mistakes.
Review Flexible Spending Accounts (FSAs)
FSAs often come with a “use-it-or-lose-it” policy. Check your remaining balance and spend funds on eligible healthcare or dependent care expenses before the deadline to avoid losing money.
Evaluate Tax Withholding
If you’ve had significant changes in income this year, revisiting your tax withholding can prevent surprises at tax time. Use the IRS withholding calculator or consult a professional to adjust accordingly.
Prepare for Next Year’s Tax Changes
Anticipating changes in income, tax brackets, or regulations can help guide decisions such as deferring income or accelerating deductions. Stay informed and use this knowledge to strategize effectively.
Consult a Professional
The complexities of tax planning can vary significantly based on your financial situation. A financial advisor or tax expert can provide customized advice, ensuring you make the most of the opportunities available while avoiding pitfalls.