Maximize Your Wealth: Year-End Tax Strategies for $1 Million Retirees!
When it comes to tax planning, there are two pivotal dates you need to circle on your calendar: December 31 and April 15. The countdown begins now, and it’s crucial to recognize that many of the strategies we’ll discuss must be executed before that December deadline. Why? Because we’re diving into the realm of tax planning, not just tax prep.
So, what’s the big difference? Tax planning is your year-round game plan for minimizing your tax liability, while tax prep is all about gathering and organizing your information for the IRS. Both are essential, but proactive tax planning can lead to reduced tax bills and a smoother tax prep experience.
Action No. 1: Explore a Roth Conversion
One powerhouse strategy gaining traction is the Roth conversion. Why is this strategy gaining a spotlight? Because we’re currently experiencing some of the lowest tax rates in history! With the Tax Cuts and Jobs Act set to potentially expire at the end of 2025, now might just be the golden opportunity to convert your tax-deferred accounts — think 401(k) or traditional IRA — into a tax-free Roth account.
Here’s the scoop: When you convert to a Roth, the amount you transfer is considered ordinary income and taxed accordingly for the year of conversion. But here’s the kicker: once that money is in a Roth, future withdrawals are tax-free. Talk about a win-win!
This strategy shines particularly for folks aged 55 and up with hefty tax-deferred savings of around $1 million or more. Why? Because you’re likely facing required minimum distributions (RMDs) starting at age 73 or 75, depending on your birth year. These RMDs are taxed as income, potentially hiking your tax bill. A Roth conversion allows you to sidestep future RMDs and their associated taxes.
Just a heads up: to make this work, you’ll need to get the conversion done by December 31. Don’t forget, custodians might take longer to process requests as the deadline approaches. Collaborating with a knowledgeable advisor can help you navigate this process and optimize your conversion amount for the year.
Action No. 2: Make Charitable Donations
Looking to give back while simultaneously benefiting your tax situation? If you’re 70½ or older and hold an IRA, consider making a qualified charitable distribution (QCD). This option lets you donate directly from your IRA to a charity, reducing your taxable income and allowing the charity to benefit without incurring taxes on your donation.
For those under 70½, a donor-advised fund (DAF) could be your next best friend. With a DAF, you can bunch donations into one year to maximize your itemized deductions, which can lead to significant tax savings. Plus, you can donate appreciated non-qualified assets directly into the DAF, avoiding capital gains taxes when those assets are sold.
Action No. 3: Contribute to Your Retirement Plan
If you’re still in the workforce, keep the momentum going by contributing to your Roth or employer-sponsored retirement plan (like a 401(k) or 403(b)). Make sure to check your contributions to fully capitalize on any employer match available to you — it’s like free money!
Many individuals with substantial savings are opting for a Roth 401(k) if their employer offers it. This allows for tax-free growth, balancing your portfolio with funds saved in traditional tax-deferred plans. If you’re 50 or older, you can contribute up to $30,500 to your employer-sponsored plan for the 2024 tax year, including a catch-up contribution!
Action No. 4: Contribute to an IRA
The final strategy you can consider won’t need to be completed until April 15, but it’s a powerful one! If you find yourself with unexpected income or more of your Social Security benefits are taxable, contributing to a traditional IRA can help lower your taxable income for that year. Alternatively, consider a Roth IRA for tax-free growth in the future.
Remember, these strategies are only as effective as your commitment to act! Implementing them now can significantly enhance your retirement planning efforts. Ensure your financial planner and accountant are in sync to maximize your benefits. A cohesive financial planning team can streamline your experience and leave no stone unturned.
