What Tax Moves Should I Consider Before the End of the Year?
According to a recent study, 46% of Americans say tax season is the most stressful financial time of the year. The good news is that there are several proactive steps you can take before year-end to make tax filing more efficient. In some cases, these strategies can create long-term tax benefits for years to come.
In this week’s Money Wisdom Question Series, Heath Grossman, CFP® discusses important December 31 deadlines and shares year-end tax planning opportunities.
Contributions to Workplace Retirement Plans
One of the most important year-end deadlines involves contributions to workplace retirement plans, such as 401(k)s and 403(b)s. Make sure you’re contributing as much as possible before year-end to maximize your current-year tax benefits.
Contributions to 529 Plans
If you’re saving for a child, grandchild, or other loved one’s education, you may also want to contribute to a 529 plan. Depending on where you live, these contributions could qualify for annual state income tax benefits. For example, Connecticut and Massachusetts offer tax advantages for eligible in-state 529 plan contributions.
RMD Withdrawals
Your first required minimum distribution (RMD) is due by April 1 of the year after you reach RMD age. All subsequent RMDs are due by December 31 each year. If you’re taking RMDs this year, be sure to make those withdrawals on time. Missing an RMD can result in a penalty of up to 25% of the amount not withdrawn.
Roth Conversions
Other tax strategies worth considering before December 31 include Roth conversions. Transferring pre-tax retirement account funds into a Roth account may provide future tax benefits. But keep in mind, whether Roth conversions make sense for you will depend on your individual goals and circumstances.
Gifting and Charitable Giving
Year-end is also a common time for gifting and charitable giving. You may choose to make annual gifts to children or grandchildren as part of your estate planning strategy. Or you may be interested in supporting causes you value through charitable contributions, which can potentially provide tax advantages.
Tax-Loss Harvesting
Another strategy to evaluate is tax-loss harvesting. This involves reviewing your investment portfolio and selling investments that have declined in value. This tactic can help offset gains realized from investments that have appreciated. By pairing gains and losses strategically, you may be able to reduce or even eliminate taxes on those gains.
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Taxes Simplified
Reducing your tax liability is one of the most effective ways to save money in retirement. Working in tandem with a tax planner or financial professional, you can create a custom, tax-efficient financial plan that aligns with your retirement goals.
