YEAR-END PLANNING

We have now passed the October 15th tax deadline and are heading into Thanksgiving and the December holidays. While this time of year is busy and can pass quickly, it is also the best time of year for retirement and tax planning. Take time to reflect on the past year, and consider what changes, if any, to make in your finances before December 31.

HEALTH CARE PLANNING

Reassess Your Healthcare Coverage

If you are Medicare-eligible, open enrollment is underway from now until December 7. This provides the opportunity to review your prescription drug (Part D) coverage as well as your Medicare Supplemental or Advantage coverage. Note that the Inflation Reduction Act provides important changes to prescription drug coverage next year, most notably with caps on out-of-pocket outlays. This should provide some relief to older adults with serious illnesses.

Max Out Health Savings Account (HSA)

Not everyone qualifies for a Health Savings Account. But if you are eligible, take advantage of the HSA which is a triple-tax-advantaged account. HSAs allow you to contribute money tax-free. The funds grow tax-free, and the HSA allows tax-free withdrawals to cover qualified medical expenses. The balance rolls over from year to year with no year-end deadline. You can use your HSA to cover routine healthcare costs in later years, even in retirement.

Use Up your Flexible Spending Account

The other tax advantaged health account, Flexible Spending Arrangements (FSAs), operate quite differently. Most FSAs must be exhausted by year-end (“use it or lose it”). If you still have funds in your FSA, book year-end appointments and/or plan purchases where you use your FSA $. This includes dental and vision appointments; glasses/ contact lenses; and OTC medications that are FSA-eligible.

RETIREMENT PLANNING

Maximize Contributions to Pre-tax Retirement Accounts

If you are still working, check how much you have contributed so far this year to your employer plan to determine if you are on pace to maximize retirement contributions. If not on target to maximize contributions before year-end, consider increasing the amount you save this year. Extra pretax contributions should reduce your taxable income, and may help keep you in a lower tax bracket.

2024 pretax contribution limits for a 401(k) or 403(b) plan = $23,000. Individuals aged 50 or older can contribute an extra $7,500 by December 31.

If you have earned income, you may contribute up to $7,000 pre-tax in 2024 (or up to the maximum amount of your earned income) to a Traditional, Roth or SEP IRA. If age 50 or older, you may add $1,000 to a by April 15, 2025. While you can postpone funding your 2024 contributions until the 2025 tax-filing deadline, why wait? If you have the cash, get your money working for you now rather than waiting a few months. Income phaseout limits apply.
If married, your spouse can contribute to an IRA based on your income, even if your spouse has no income. You can contribute up to $7,000 on their behalf. If they are age 50 or older, they can add an extra $1,000 in catch-up contributions, and the contribution can often be deducted if you file jointly. Income phaseout limits apply.
If you are self-employed and earn income on a 1099 or K-1, you won’t qualify for employer-sponsored retirement accounts. However, consider alternatives such as a Solo 401(k) (with higher contribution limits) or a Self-Employed Pension Individual Retirement Account (SEP IRA) that allows contributions up to 25% of your net business income (up to $69,000 for 2024). Each plan has specific deadlines and requirements, so find out whether your self-employed plan must be established and/ or funded by December 31.

Take Your Required Minimum Distributions

If you are age 73 or over, you must take your Required Minimum Distributions (RMDs) from your tax-deferred accounts by December 31, 2024. Certain exceptions apply. If you turned 73 this year, your first RMD must be taken no later than April 1, 2025. There is a significant penalty assessed by the IRS if you fail to take the RMD on time. If you inherited an IRA account in 2020 or later and are NOT a spousal beneficiary, follow the new IRS rules for taking required distributions over 10 years instead of using a stretch IRA over your lifetime.

Assess Viability of Roth Conversions

Roth IRAs are generally preferable to traditional IRAs, primarily because they are exempt from RMDs and withdrawals are tax free. Determine whether or not a Roth conversion makes sense for your financial situation – it may or may not.

Plan for 2025 Retirement and HSA Contributions

Be mindful of the enrollment deadlines for all of your employer plans. Set up automatic contributions for your HSA and retirement accounts. Take note of future tax changes, including the maximum amount you can contribute to each savings account type next year.

TAX PLANNING

Maximize Tax Credit and Deductions

Plan now to maximize your deductions and tax credits for 2024.

Education: If you have a dependent in their first year of post-secondary education, you might be eligible for tax credits or deductions to offset the cost.
Energy-Efficient Home Improvements: If you installed a new heat pump, heat pump water heater, or installed energy-efficient windows/ doors, you might qualify for a tax credit. Keep in mind that energy-efficient improvements must meet certain criteria.
Clean Vehicle Tax Credits: Purchasing a new or used electric vehicle may make you eligible for a tax credit.

Depending on your tax situation, it may be beneficial to move forward with deductible items before year end. Deductible items could include expenses related to education, health/medical, your home office, and self-employment.

Review Charitable Contributions

If over age 70½, consider Qualified Charitable Distributions (QCDs) from your IRA. This can remove appreciated positions in your IRA while reducing your income tax. It will also satisfy your all or part of your RMD, reducing taxable income. The maximum QCD amount in 2024 = $105,000.

If under age 70½, you have fewer taxwise options for charitable giving, especially if you do not itemize deductions. Three options to consider:

“Bunch” charitable contributions (e.g., two years of donations into a single year) to exceed the itemized deduction threshold.
Make a charitable gift into a Donor-Advised fund. The money invested will grow tax-free and can be given to charities of your choice in future years.
Gift low-basis, highly appreciated securities to the charity of your choice. This eliminates paying capital gains tax on highly appreciated investments.

Review Tax-loss Harvesting Opportunities

Review your taxable investments to see if you can offset 2024 taxable income by harvesting capital losses. You may also have tax-loss carryforwards from prior years that can help reduce your 2024 tax bill. The IRS allows you to sell investments at a loss; the loss can be deducted against other capital gains or even taken as a deduction against your income. Realized losses can be deducted from ordinary income up to a maximum of $3,000 per year.

Balance your long-term and short-term gains with your overall tax strategy. Stock performance has been strong this year along with bonds. Consequently, most investors are unlikely to have as many losing positions as in prior years such as 2022. But you may still have opportunities, perhaps in Core Bond and Emerging Market holdings.

ASSET ALLOCATION

Review Cash Positions

Assess your overall level of cash reserves. Between six months and two years of expenses is usually recommended for emergency funding (plus living expenses in case of market downturns if you are drawing down retirement funds). Review your IRA holdings to check for uninvested cash. Many investors make annual IRA contributions but never invest the cash in equity or bond investments.

Review Your Asset Allocation

Reassess your risk tolerance:

You may have life or career changes that may change your optimal level of risk tolerance.
Compare your portfolio’s current asset allocation to your target percentages, and adjust as needed. Since the equity markets have been strong in 2024, your allocation to equities may be higher than you prefer going forward.
Consider tax impact if you sell holdings in taxable accounts.
Approach your finances with a clear, disciplined strategy and stick to your long-term investment goals. Avoid reacting emotionally or impulsively to short-term market movements, volatility, and the upcoming election.

SAVE MORE FOR YOUR CHILDREN

Make contributions to Custodial Roth IRAs, but only if your child has earned income this year. Roth IRAs offer tax-free growth, and the contributions can be withdrawn tax-free. In 2024 the maximum annual contribution = $7,000, or the total of a child’s earned income for the year — whichever is less.
Annual gifts to 529 College Savings Plans can be made up to $18,000 per individual in 2024, or as much as $90,000 if a parent chooses the 5-year election. 529 plans offer tax-free withdrawals for school-related expenses.

GET ORGANIZED FOR 2025

Establish a filing system (online or paper) to store financial documents, receipts, and statements.
Create a household budget. Using an expense tracking application or spreadsheet to record and categorize your expenses can help you better understand your annual spending.
Set calendar reminders to avoid missing important due dates (e.g., quarterly estimated tax payments).

If you have questions about year-end planning, reach out to a financial professional. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.