As the end of the year approaches, it's a good time to take a closer look at your financial situation and consider whether any adjustments should be made before December 31.
While financial planning is an ongoing process, certain opportunities are tied to the calendar year. Taking a proactive approach now may help you make more informed decisions and better prepare for the year ahead.
Here are five areas worth reviewing before year-end.
1. Consider Roth Conversion Opportunities
A Roth conversion involves moving money from a traditional IRA or other eligible retirement account into a Roth IRA. While the amount converted is generally taxable in the year of conversion, future qualified withdrawals from the Roth IRA can be tax-free.
For individuals experiencing a lower-income year or anticipating higher tax rates in retirement, a Roth conversion may be worth considering.
However, conversions can also create a current-year tax liability and affect Social Security taxation, Medicare premiums, and other aspects of your financial situation. It's important to evaluate the potential benefits and trade-offs before making a decision and consult with your CPA.
2. Review Capital Gains and Losses
Year-end is a natural time to review investments held in taxable brokerage accounts.
If certain investments have declined in value, realizing those losses may help offset capital gains elsewhere in your portfolio. Alternatively, individuals in lower tax brackets may have opportunities to realize long-term capital gains at favorable federal tax ra:tes.
These strategies, commonly referred to as tax-loss harvesting and tax-gain harvesting, should be evaluated alongside your broader investment objectives. Investors should also be mindful of wash-sale rules, which can limit the deductibility of certain investment losses.
3. Evaluate Your Charitable Giving Strategy
For those who regularly support charitable organizations, the way contributions are made can have important tax implications.
Donating appreciated investments rather than cash may offer tax advantages in certain circumstances. Additionally, IRA owners age 70½ or older may be eligible to make qualified charitable distributions (QCDs), allowing them to donate directly from their IRA to an eligible charity without including the qualifying distribution in taxable income. For those subject to required minimum distributions (RMDs), QCDs can also count toward satisfying that requirement.
Whether you're considering a one-time gift or an ongoing charitable giving strategy, reviewing your options before year-end may help you align your charitable goals with your broader financial plan.
4. Review Retirement Account Contributions
If you're still working, consider reviewing your contributions to employer-sponsored retirement plans, such as a 401(k) or 403(b).
Depending on your circumstances, increasing contributions during the final months of the year may provide an opportunity to increase retirement savings and potentially reduce current taxable income.
It's also worth reviewing IRA contributions and applicable eligibility requirements. While employee contributions to many workplace retirement plans must generally be completed by year-end, IRA contributions can typically be made until the following year's federal income tax filing deadline.
5. Check Required Minimum Distributions and Medicare Considerations
For retirees, reviewing required minimum distributions (RMDs) is an important year-end planning consideration.
Individuals who have reached the applicable RMD age generally must withdraw a minimum amount from certain retirement accounts each year. Most annual RMDs must be completed by December 31, although certain first-year distributions have a later deadline. Inherited retirement accounts may also have distribution requirements.
Additionally, retirement distributions, Roth conversions, and other sources of income can influence Medicare premiums. Because Medicare's income-related adjustments generally rely on tax returns from two years earlier, decisions made today may have implications beyond the current year.
Looking Ahead
Not every financial planning strategy will be appropriate for everyone, but taking time to review these areas can help identify opportunities that might otherwise be overlooked.
At Aspen Investment Management, Inc., we believe effective financial planning involves understanding how investments, taxes, retirement income, and personal goals fit together.
As the year comes to a close, a thoughtful review of your financial plan can help you prepare for the opportunities and challenges ahead.
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