As the year winds down, it’s a crucial time for retirees to shift their focus to year-end tax planning.
And ultimately, this approach is not just about saving money—it’s also about gaining control, minimizing surprises, and ensuring a comfortable and secure retirement. In the following sections, we’ll explore various strategies such as Roth Conversions, Tax Gain/Loss Harvesting, Charitable Donations, Qualified Charitable Distributions (QCDs), and more, all of which have key deadlines to consider.
We’ll also dive into contributions to retirement accounts with different deadlines, Required Minimum Distributions (RMDs), and the importance of continuously reviewing Medicare thresholds.
Remember, every retiree’s situation is unique, and what works for one might not work for another. So, it’s always wise to consult with trusted financial professionals for personalized advice.
Now, let’s make the most of these strategies and deadlines to enter the New Year with confidence and peace of mind.
Here Are 6 Year-End Tax Planning Strategies and Deadlines to Consider
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Roth Conversions | Deadline: December 31st
A Roth conversion is the process of converting pre-tax money from a traditional IRA or 401(k) to a Roth IRA.
Roth conversions can be a strategic move, depending on your situation. Taxes are due on the conversion, but the upfront tax payment can be offset by the long-term benefit of tax-free withdrawals down the road.
This not only provides a tax-free source of income in the future but also allows for more flexibility in managing your taxable income as you can draw from different sources as needed. That said, it’s vital to understand the tax implications, as the converted amount is considered taxable income in the year of conversion, which could potentially push you into a higher tax bracket.
For the conversion to count for the current tax year, you must complete it by December 31st.
For more details about this strategy, see our article: “Cut Your Tax Bill: Lower Your Taxes With Roth Conversions”
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Tax Gain or Loss Harvesting | Deadline: December 31st.
Tax gain or loss harvesting is a strategic approach to managing your investment portfolio where you realize capital gains or losses.
First, by selling investments that have lost value, you can offset your taxable income—this is known as ‘loss harvesting.’ On the other hand, ‘gain harvesting’ involves selling investments that have appreciated to take advantage of low capital gains tax rates. This strategy can play a pivotal role in a retiree’s overall tax situation, possibly reducing the amount of taxes owed over time by taking advantage of low capital gains rates.
It’s important to note that for the sales to be recognized in the current tax year, transactions must be completed by December 31st.
Here are additional details on tax gain harvesting and tax loss harvesting.
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Charitable Donations and QCDs (Qualified Charitable Distributions) | Deadline: December 31st.
Charitable donations not only provide a meaningful way to give back to causes you care about but can also offer substantial tax benefits.
When you donate to qualified charitable organizations, you can deduct these contributions from your taxable income as long as you itemize your deductions, potentially lowering your tax liability.
In addition, QCDs, or Qualified Charitable Distributions, take this advantage a step further for those over age 70½. Instead of depositing a Required Minimum Distribution into your bank account, you can donate these funds directly to a charity. This way, the distribution doesn’t count as taxable income, up to a certain limit ($100,000 in 2023 and $105,000 in 2024), potentially saving you serious money on your tax bill.
Remember, for these charitable contributions and QCDs to be deductible in the current tax year, they must be made by December 31st.
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Contributing to Retirement Accounts (With Earned Income) | Deadline: Varies by Account
If you’re a retiree who is still earning income, it’s worth exploring the possibility of making additional contributions to your retirement accounts.
Retirees can contribute to their retirement accounts as long as they have earned income. Making extra contributions to your retirement account can be a powerful strategy for growing your nest egg further, potentially lowering your tax bill, and ensuring a comfortable retirement. But, keep in mind that the deadlines for contributions differ depending on the type of account.
For IRAs, the deadline is April 15th of the following year. For 401(k)s and similar plans, contributions must be made by December 31st of the current year.
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Taking Required Minimum Distributions (RMDs) | Deadline: April 1st or December 31st.
A critical aspect of retiree tax planning involves Required Minimum Distributions (RMDs), which are mandatory minimum amounts retirees must withdraw from their retirement accounts each year, starting at a specific age, depending on when they were born.
Understanding the RMD deadline is crucial for retirees because the IRS imposes stiff penalties for missing them (25% in 2023). In addition, RMDs are taxed as ordinary income at your highest marginal rate and can grow significantly as you age, meaning it is essential to plan ahead.
Generally, the deadline for taking RMDs is December 31st each year. However, for your first RMD, you have a little more flexibility: you can delay this initial withdrawal until April 1st of the year following your starting year.
For a more complete breakdown of RMDs, see our article “Be Aware of RMDs and Create a Plan.”
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Reviewing Medicare Thresholds | Deadline: N/A
Lastly, understanding how your income impacts Medicare premiums is an important part of year-end tax planning for retirees.
The Income-Related Monthly Adjustment Amount (IRMAA), an extra charge added to your Medicare Part B and Part D premiums, is determined by your modified adjusted gross income from two years ago.
If your income surpasses certain thresholds, you could see a significant increase in your Medicare premiums due to IRMAA. Thus, managing your income strategically by considering Roth conversions, tax gain/loss harvesting, and other methods can help keep you below these thresholds and minimize your Medicare costs.
The review for Medicare thresholds is ongoing, but it becomes particularly crucial to assess this before the year-end to effectively plan for the upcoming year.
The Bottom Line
Being proactive with year-end tax planning is a key strategy for managing your tax situation in retirement.
It allows you to effectively leverage strategies like Roth conversions, tax gain/loss harvesting, and more while meeting key deadlines and avoiding penalties. Remember, every retiree’s financial situation is unique—what works best for your friends might not be the best fit for you.
That’s why consulting with a tax or financial professional for personalized advice can be invaluable. They can help customize a year-end tax plan that aligns with your financial goals, keeping you on track for a fulfilling and financially secure retirement.
