5 Wise Financial Choices to Make Today

Key Takeaways: Year-End Tax Strategies to Consider

As the year draws to a close, it’s an opportune moment to reassess your financial situation and implement strategies that could lead to significant tax savings. Financial experts suggest several key actions, including making charitable donations, engaging in tax-loss harvesting, and ensuring compliance with required minimum distributions (RMDs) from retirement accounts. Each of these strategies can help optimize your tax situation, potentially saving you money now and in the future.

1. Roth IRA Conversions: A Strategic Move

One of the most talked-about strategies this year is the Roth IRA conversion. Financial planners like Catherine Valega recommend this approach, especially considering the impending expiration of the Tax Cuts and Jobs Act (TCJA) in 2025, which could lead to higher tax rates. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount now, but future withdrawals will be tax-free. This strategy allows you to lock in current lower tax rates and can be particularly beneficial if you anticipate being in a higher tax bracket in the future.

However, it’s crucial to consider the tax implications of a Roth conversion. The amount converted is added to your taxable income for the year, which could push you into a higher tax bracket. Therefore, it’s advisable to evaluate your current tax situation and consult with a financial advisor before proceeding.

2. Maximizing Contributions to Investment Accounts

While you have until tax day to contribute to IRAs and Health Savings Accounts (HSAs), the deadline for employer-sponsored accounts like 401(k)s is December 31. Financial experts recommend maximizing your contributions to these accounts before the year ends. This not only reduces your taxable income for the current year but also boosts your retirement savings.

Katherine Edwards, a certified financial planner, suggests evaluating your retirement strategy during this time. If you’re not already maxing out your contributions, consider increasing your savings rate. Even a small increase, such as 1% of your salary, can make a significant difference over time.

3. Tax-Loss Harvesting: Offset Gains with Losses

In a volatile market, tax-loss harvesting can be a valuable strategy. This involves selling investments that have lost value to offset capital gains from profitable investments. By doing so, you can reduce your overall tax liability. Katherine Edwards emphasizes that while year-end is a good time to harvest losses, it’s beneficial to monitor your investments throughout the year.

When engaging in tax-loss harvesting, be mindful of the wash-sale rule, which prohibits repurchasing the same security within 30 days of selling it at a loss. This rule is designed to prevent taxpayers from claiming a tax deduction while still maintaining their investment position.

4. Required Minimum Distributions (RMDs): Don’t Miss the Deadline

For retirees, taking required minimum distributions (RMDs) from retirement accounts is a critical year-end task. If you’re 73 or older and it’s not your first year taking an RMD, you must withdraw the required amount by December 31 to avoid a hefty penalty of 25% on the amount not withdrawn. If it’s your first RMD, you have until April 1 of the following year.

Some retirees may need these distributions for living expenses, while others may choose to reinvest the funds. Gerika Espinosa suggests considering short-term investments like CDs if you plan to use the money soon, or more aggressive investments if you don’t need the funds for several years.

5. Charitable Donations: Give Back and Save on Taxes

Making charitable contributions before the year ends can provide both personal satisfaction and tax benefits. To deduct these contributions from your taxable income, you must itemize your deductions. For those who typically take the standard deduction, “bunching” donations into a single year can maximize tax benefits. This strategy involves making several years’ worth of contributions in one year, potentially through a donor-advised fund.

With the TCJA set to expire in 2025, experts recommend considering charitable contributions now, as future tax benefits may diminish.

Conclusion

As the year comes to a close, taking proactive steps to manage your finances can lead to significant tax savings. Whether it’s converting to a Roth IRA, maximizing contributions to retirement accounts, engaging in tax-loss harvesting, ensuring compliance with RMDs, or making charitable donations, each strategy offers unique benefits. Consulting with a financial advisor can help tailor these strategies to your specific situation, ensuring you make the most of your financial opportunities before the year ends.