With the Thanksgiving holiday in the rear-view mirror and the holidays fast approaching, it is a perfect time to review your financial situation. This includes capitalizing on potential tax savings opportunities for 2024, ensuring compliance for 2024, and positioning yourself well for 2025.
Required Minimum Distributions
- For Individuals 73 and Older: If you are 73 or older, you must take a required minimum distribution (RMD) from your tax-deferred retirement accounts by December 31, 2024, to avoid a 25% penalty on any missed amount. Note that if you turned 73 in 2024, there’s a one-time extension until April 1, 2025, to take your first RMD. However, delaying your 2024 distribution until 2025 means taking two RMDs in 2025, potentially increasing your taxable income.
- For Beneficiaries of Inherited IRAs: If you are the beneficiary of an Inherited IRA, you may also have minimum distribution requirements. The distribution rules pertaining to these accounts, especially if they were inherited after December 31, 2019, can be complex. To learn more about these distribution requirements, we encourage you to refer to this article: Understanding the New Inherited IRA Distribution Requirements.
- Qualified Charitable Distributions (QCDs): If you are over 70 ½, you can choose to make gifts of up to $105,000 to qualified charities directly from your IRA – this is called a Qualified Charitable Distribution (QCD). The donation will not be subject to income tax and, if you are required to take RMDs, the amount of the gift will count toward your RMD requirement. Please note that contributions to donor-advised funds do not qualify for QCDs.
Saving Opportunities and Considerations
- Max Out Retirement Contributions:
- For employer-sponsored retirement plans, you can contribute up to $23,000 ($30,500 if age 50 or older) in 2024. If you are not able to contribute at these levels, try to contribute enough to benefit from any employer match. Determine whether saving on a tax-deferred or Roth basis is most beneficial based on your current and future tax brackets.
- If eligible, consider making IRA or ROTH IRA contributions for 2024. The contribution limit is $7,000 ($8,000 if you’re 50 or older), with a deadline of April 15, 2025. Be mindful of income limitations, as higher incomes may phase out your eligibility for deductible contributions.
- Self-Employed Retirement Plans:
- For solo 401k plans, employee contributions generally must be made by 12/31/2024, while employer contributions can be made by your tax filing deadline.
- For SEP IRAs, contributions can also be made by your 2024 tax filing deadline in 2025.
- Health Savings Accounts (HSAs):
- If you have a health savings account (HSA), you can make contributions for 2024 up until April 15, 2025. In 2024, the limit is $4,150 for individuals (or $5,150 if you’re 55 or older) and $8,300 for families ($9,300 if 55+). HSAs offer triple tax advantages: tax-free contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Balances in HSAs carry over from year to year, so there is no need to deplete the account by year-end.
- Flexible Spending Accounts (FSAs):
- If you contributed to a Flexible Savings Account during 2024, be sure to deplete the account balances by year-end. If you do not, you may lose whatever remains in the account as of the end of the year.
Evaluating IRA Withdrawal Strategies and ROTH Conversion Opportunities
Rather than solely focusing on reducing taxes in a single year, it can be beneficial to manage income levels and related tax liabilities across time. This may involve opportunistically choosing to recognize more income in one year to reduce your tax liability in future years. This can be especially effective for those who have large tax-deferred account balances that will eventually be subject to minimum distribution requirements.
Proactively taking IRA distributions before they are required and converting those funds to ROTH accounts may allow you to: (1) pay less tax on the IRA withdrawal today than you will have to pay when RMDs are required, (2) allow for the funds to continue to grow in a tax-advantaged manner, (3) enable you to better manage your income levels which is critical to control your Medicare premiums; and (4) reduce your future RMD requirements.
Charitable Gifting
If you itemize when filing your taxes, you could realize a tax benefit for donating to charity.
- Cash gifts to charities can be deducted up to a 60% of Adjusted Gross Income (AGI) cap.
- Stock gifts to charities can be deducted up to a 30% of AGI cap. Additionally, when gifting appreciated stock to charity, both you, as the donor, and the charity recipient avoid having to recognize capital gains associated with selling the stock.
Consider bunching charitable contributions in a single year or consider establishing a donor-advised fund to maximize deductions in high-income years.
Tax-Loss Harvesting
Tax-loss harvesting allows you to offset realized capital gains with investment losses, potentially reducing your tax liability. If you’ve realized capital gains throughout the year, you can sell investments with unrealized losses to offset those gains. Additionally, if your losses exceed gains, you can apply up to $3,000 to reduce ordinary income on your tax return and carry forward any excess losses to future tax years.
To comply with the wash-sale rule – which disallows the tax benefit if you repurchase a similar security within 30 days – it’s essential to carefully time your trades.
Medicare Premiums
If you are over 65, your 2025 Medicare premium will be based on the Modified Adjusted Gross Income (MAGI) you reported in 2023. If you have experienced a life-changing event, such as retirement or marriage, you can request an adjustment to your premium by filing Form SSA-44. It is also suggested that you proactively monitor your MAGI to avoid unexpected premium increases in future years.
Estate Plan Review
As you are reviewing your financial affairs, now is an ideal time to ensure that your estate plan aligns with your current intentions and objectives.
- Beneficiary Designations: Review the beneficiaries you have named on your bank accounts, investment accounts, and life insurance policies, and be sure they are consistent with your wishes.
- Wills and Powers of Attorney: Review your wills and powers of attorney and determine if any changes are necessary.
- Trusts: If you have a Trust in place, be sure that all assets that you want to pass according to the terms of the Trust are titled in the name of the Trust.
Preparing for 2025
As 2024 comes to a close, you want to be sure that you are set up for success in 2025.
- Health Insurance Coverage: Be sure that you have health insurance coverage in place, whether through your employer or by purchasing a plan on your own.
- Employer Benefits: If you are eligible for employee benefits through your employer, review your benefit elections and be sure that no changes are warranted for the coming year.
- Contribution Limits: For those contributing to workplace retirement plans, be sure your contribution limits have been adjusted to reflect the new 2025 IRS limits.
Conclusion
There are many financial planning considerations to keep in mind as the year comes to a close. Year-end tax planning can be complex, especially when multiple strategies are involved.
Partnering with a knowledgeable, fee-only financial advisor will help increase the likelihood that you are capitalizing on potential tax-savings opportunities and that you are proactively taking steps that align with your broader financial goals. At Core Wealth Management, our personalized approach helps clients make strategic, informed decisions based on their unique circumstances.
Connect with us to explore how we can offer advice to help bring you closer to reaching your goals by taking advantage of year-end financial planning opportunities.