By Trina Paul
Oct. 28, 2024
Key Takeaways
- Before the end of year, experts recommend thinking about employing certain tax-saving strategies such as making charitable donations or partaking in tax-loss harvesting.
- Other investment strategies, like doing a Roth conversion, may result in a higher tax bill this tax year, but could mean substantial savings in the long run.
- If you’re already retired, it’s important to take your required minimum distribution from your IRA—otherwise you could get hit with a large penalty.
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As the end of the year approaches, it might be a good time to take stock of your finances. Whether you’re contributing to your 401 (k) or selling one of your losing investments, what you do now could help you save money in the future.
“October and November are good times to sort of take inventory,” said Adam Wojtkowski, a certified financial planner. “And then in November and December, if you have actual transactions that you need to make, try to get them done.”
Consider Roth IRA Conversions
Catherine Valega, a CFP at Green Bee Advisory, has recommended Roth IRA conversions to some of her clients this election year because the Tax Cuts and Jobs Act (TCJA) of 2017—a law that lowered income and tax brackets—will expire in 2025. That means that the income tax rates could jump after December 31, 2025.
With a Roth conversion, you move money from a pre-tax account like a traditional IRA into a post-tax Roth account where your money grows and withdrawals are tax-free as well. That means you’re effectively reducing taxes in future years.
“Locking in the historically low ordinary income tax rates by doing a Roth conversion and claiming a specific [tax] bracket would also be beneficial before year end,” said Brian Schmehil, Managing Director, Wealth Management at The Mather Group.
However, whenever you convert a retirement account to a Roth IRA, the amount you convert is considered taxable income. That means you’ll owe income taxes on the conversion and could face a higher tax bill come April. Doing a conversion could also bump you up to a higher tax bracket for the year, so Wojtkowski recommends considering what tax bracket you’re in before opting for a Roth conversion.
Max Out Some Of Your Investment Accounts
While the contribution limits for IRAs and Health Savings Accounts (HSAs) are up until tax day, you'll have until December 31 to contribute to or max out some of your employer-sponsored accounts, like your 401(k).
“On the employer plan side, if you're able to maximize your contribution, you [want to] do it with the limited paychecks that you have between now and year end,” said Schmehil.
Katherine Edwards, a CFP at Mainstreet Financial Planning, also suggests using this time of the year to evaluate your retirement strategy and boost your savings rate.
“If you're not maxing out [your retirement accounts], consider increasing how much you're putting in your retirement account,” Edwards said. “Maybe you get a raise and you increase your retirement account contributions by 1% every December.”
Look For Tax-Loss Harvesting Opportunities
If you sell your investments for a profit, you owe what is called a capital gains tax. However, in a year like 2024 that saw stock market highs as well as turbulence, you could use some of the loss making bets to your advantage.
Edwards said harvesting losses on your investments at the end of the year is a good idea in order to reduce your tax bill, though she also recommends doing it throughout the year or when the market is down.
With tax-loss harvesting, you sell an investment at a loss to offset your capital gains and reduce your ordinary income, up to $3,000. Capital losses that exceed $3,000 can be carried over to future years to offset your gains.
If you still think that losing investment could turn around, make sure you don’t repurchase it within 30 days of the sale you make for tax-loss harvesting purposes. That could run you afoul of the wash-sale rule.
Don't Forget To Take Required Minimum Distributions
Don't forget to take required minimum distributions (RMDs) from your IRAs before the end of the year, if you're eligible, or else you'll be on the hook to pay a hefty penalty.
If you're age 73 or older and it’s not your first year taking a required minimum distribution from your retirement account—like an IRA or 401 (k)—you’ll have until December 31 to take your RMD.
Otherwise, you're liable to pay a penalty worth 25% of the RMD amount not taken by the deadline. If it’s your first time taking an RMD, you have until April 1 of the next year.1
Some retirees may need that money for expenses but if they don't, there's a silver lining. You could use the extra cash to invest.
"CDs and other liquid investments are great if their goal to use the money is short term and they plan to need it soon. If they aren't planning to use it for at least 5-10 years, they can consider investing it in something more aggressive in the brokerage account," said Gerika Espinosa, a CFP and financial advisor at DMBA Financial Planning and Wellness.
Another option, according to Espinosa, is to use those funds to make tax-efficient qualified charitable contributions.
Donate to Charity
When you give to a cause that’s important to you, you can also score a tax break. However, in order to deduct a charitable contribution from your income in the 2024 tax year, you’ll want to make the contribution by the end of the year.
To receive the tax deduction on your annual gross income (AGI), you must itemize your deductions instead of taking the standard deduction.2 Therefore, some experts recommend ‘bunching’ charitable contributions.
“If somebody is in a position to take the standard deduction in most years—rather than making charitable contributions year after year—[consider] potentially bunching and making three years worth of charitable contributions into a donor advised fund in a given year,” said Wojtkowski.
With the TCJA set to expire at the end of 2025, experts also say it may be beneficial to make charitable contributions now rather than later as tax concessions might decline.
Article Sources
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- IRS. "Retirement topics - Required Minimum Distributions (RMDs)."
- IRS. "Charitable contribution deductions."
