Year-end tax and financial planning considerations 2024

The end of the year provides a time to review your financial plans and see how they should adapt, particularly amidst rapid change.

This overview highlights ideas to take advantage planning strategies for individuals, before the end of the year.

Planning strategies for individuals

Changes that affect IRAs and retirement plans

During 2024, the IRS confirmed that annual required minimum distributions (RMDs) will be required for inherited IRAs beginning in 2025. The IRS waived penalties for failure to take RMDs for the 2020 to 2024 tax years for IRAs inherited by non-eligible designated beneficiaries after 2019. Beneficiaries of inherited IRAs should consider efficient withdrawal strategies knowing they must fully distribute the IRA by December 31st of the 10th year after the original IRA owner’s death. For example, an individual with low taxable income for 2024 may consider drawing an inherited IRA RMD for 2024 even though it is not required.

Required minimum distributions beginning age
Required minimum distributions begin at age 73 for individuals born in 1951 to 1959. The RMD start age will increase to age 75 in 2033. While the vast majority of Americans take distributions from retirement accounts before RMD age, the increase in RMD age allows some people to continue with tax deferrals on their retirement accounts. This also provides an expanded time frame for strategic Roth conversions.

Reduced penalty for missed RMDs

If an RMD is not satisfied for the current year, a 25% penalty can be assessed on the amount not withdrawn.

If the missed RMD is taken within two years, the penalty is reduced to 10%.

Planning for required minimum distributions

Be thoughtful about required minimum distributions (RMDs) to ensure that you comply with the rules. Be sure to speak with your advisor to ensure you’ve met your obligations for the year.

A few reminders for future distribution planning:

• RMDs can be automated with your advisor to help ensure you don’t miss applicable deadlines.
• Your first RMD can be delayed until April 1 of the year after you reach age 73. If you delay, however, you must also take your second RMD in the same tax year. This can inflate your income, which may affect your tax bracket. Check with your advisor to determine what is applicable and best for you.
• Subsequent RMDs must be taken no later than December 31 of each calendar year.
• Be mindful of how taking a distribution will impact your taxable income or tax bracket. If you are in a low tax bracket, discuss with your financial advisor and tax professional about taking an additional strategic distribution at that lower rate.

Advanced tax planning and strategies

Explore the benefits of taking a ROTH conversation

A Roth conversion moves all or part of your traditional pretax IRA to a Roth IRA. Roth conversions are used as a tax planning strategy by accelerating income taxes due on the converted amount to create tax-free retirement account growth.* Generally, amounts converted will be subject to ordinary income tax in the year converted. If your traditional IRA has after-tax contributions, any distributions, including distributions as a result of a Roth conversion, will be subject to the pro-rata rule. Some of the benefits include:

• Tax diversification in retirement. Roth IRA distributions are generally tax-free, whereas traditional IRA distributions are taxable.
• A planning opportunity to create tax-free income* for beneficiaries. It may also be used if the beneficiary is, or plans to be, in a higher tax bracket than the IRA owner when the account is received.
• When moving to a high-tax country like Canada, completing a Roth conversion before the move may provide more after-tax retirement wealth than a traditional IRA.

Since the income limits on Roth conversions were removed in 2010, higher-income individuals who are not eligible to make a Roth IRA contribution have been able to make an indirect “backdoor Roth contribution” instead by simply contributing to a non-deductible IRA – which can always be done regardless of income – and converting it shortly thereafter.

Portfolio and tax planning opportunities

While keeping in mind your long-term investment goals, meet with your advisor and coordinate with your tax professional to examine nuances and changes that could impact your typical year-end planning.

Manage your income and deductions
Those at or near the next tax bracket should pay close attention to anything that might bump them up and plan to reduce taxable income before the end of the year.

• Determine if it makes sense to accelerate deductions or defer income, potentially allowing you to minimize your current tax liability. Some companies may give you an opportunity to defer bonuses and so forth into a future year as well.
• Certain retirement plans also can help you defer taxes. Contributing to a traditional 401(k) allows you to pay income tax only when you withdraw money from the plan in the future, at which point your income and tax rate may be lower or you may have more deductions available to offset the income.
• Evaluate your income sources – earned income, corporate bonds, municipal bonds, qualified dividends, etc. – to help reduce the overall tax impact.

Tax-loss harvesting
Evaluate whether you could benefit from tax-loss harvesting – selling a losing investment to offset gains. If your capital losses exceed your capital gains, your excess losses up to $3,000 (single or married filing jointly) can be used to offset ordinary income. Any additional losses can be carried forward to future years. With your advisor, examine the following subtleties when aiming to decrease your tax bill:

• Short-term gains are taxed at a higher marginal rate; aim to reduce those first.
• Don’t disrupt your long-term investment strategy when harvesting losses.
• Be aware of “wash sale” rules that affect new purchases before and after the sale of a security. If you sell a security at a loss but purchase another “substantially identical” security – within 30 days before or after the sale date – the IRS likely will consider that a wash sale and disallow the loss deduction. The IRS will look at all your accounts – 401(k), IRA, taxable, etc. – when determining if a wash sale occurred.

Qualified charitable distribution
Recent changes to RMDs did not impact your ability to make a qualified charitable distribution from your retirement plan. With a qualified charitable distribution, an IRA owner or beneficiary older than 70 1/2 can distribute up to $105,000 from an IRA directly to a qualified charity and exclude that distribution from federal income tax. You are not required to itemize deductions to take advantage of this type of distribution, so it may be an effective strategy for those who take the standard deduction. This strategy is also applicable to IRA owners living in Canada who want to make qualified charitable distributions to Canadian charities. Canadians will receive a donation tax receipt in addition to excluding the distribution in Canadian taxable income.

Evaluate life changes
From welcoming a new family member to moving to a new state, any number of life changes may have impacted your circumstances over the past year. Bring your financial advisor up to speed on major life changes and ask how they could affect your year-end planning.

• Moving can significantly impact tax and estate planning, especially if you’ve relocated from a high income tax state to a low income tax state, from a state with a state income tax to one without (or vice versa), or if you’ve moved to a state with increased asset protection. Note that moving expenses themselves are no longer deductible for most taxpayers.
• Give thought to your family members’ life changes as well as your own – job changes, births, deaths, weddings and divorces, for example, can all necessitate changes – and consider updating your estate documents accordingly.

Annual exclusion and lifetime gifts

When valuations are low and volatility is high, it can be advantageous to make annual exclusion gifts with lower-value securities.

Making large gifts with cash or securities allows a taxpayer to remove assets from a taxable estate while retaining more of the estate tax, gift tax and generation-skipping transfer tax exemptions. This can be an efficient wealth transfer strategy. If you’re concerned the exemptions will be lowered after the upcoming federal election, you may choose to use more of the $13.61 million exemption sooner rather than later.

The gift and estate tax exclusion amounts are set to sunset after 2025, barring an extension, and are set to return to pre-2018 levels. The IRS has stated it will not recapture these gifts for taxation if the exemption is lowered.

Next steps

Consider these to-do’s as you prepare to make the most of year-end financial moves, and discuss with your financial advisor and tax professional.

* In order for earnings to be tax- and penalty-free, converted funds must be held in the Roth IRA for five years and distributions must occur after age 59 1/2 or as a result of death, disability, or first-time home purchase of $10,000. A separate five-year period applies for each conversion.