Here are a couple of deadlines you should be aware of that occur at year-end which can affect your taxable income:
Required Minimum Distributions (RMD)
If you are over age 72, RMDs are required annually by the IRS to be made from qualified retirement accounts and are most associated with IRAs (except Roth IRAs).
The RMD for each account is determined by the IRS based on the balance of the account as of Dec. 31st of the prior year and your age, among other factors. If you have an adviser who assists you with your financial planning, you can task them with ensuring that your RMDs are made, but if you manage your accounts yourself, this is a withdrawal you must remember to make every year. If you don’t, you’ll be hit with a 50% penalty on the amount not withdrawn.
Max out employer-sponsored retirement plan contributions
For all employer-sponsored retirement plans, there are annual contribution and salary deferral limits. These caps vary from account to account, and in some cases, depending on the age of the employee, but for many people planning for retirement, maximizing their contributions for the year is an important part of the plan. The deadline for your annual contributions is Dec. 31, but since these contributions are generally made as a percentage of your gross income withheld, to make any year-end adjustments, you’ll need to coordinate with your HR department and leave enough time for your change to be implemented and make an impact.
Tax loss harvesting
Tax-loss harvesting is a strategy where an investor sells a position for a loss to generate a tax deduction and offset other realized capital gains. Also, if your losses exceed your gains, you can use up to $3,000 of leftover losses to offset other income. Anymore than that can be carried over to the next year.
Roth IRA conversions
If you want to convert your traditional IRA to a Roth IRA, it must be completed by the end of the year. All contributions to the traditional IRA for which you received an income tax deduction and all associated growth will be taxed as ordinary income in the year you convert to a Roth IRA. If you have a large sum of money in your IRA that you want to convert to a Roth IRA, you may wish to spread out the conversion over a number of years to minimize the tax consequences.
Charitable donations
If you itemize your taxes, you can still reduce your taxable income through charitable contributions. But you should keep in mind that it takes the charitable organization time to process the donation. So, don’t wait until the last minute, especially if you’re contributing stocks or bonds, which take longer to process than cash.
529 contributions
These accounts are treated like a Roth IRA as far as taxes go, as long as you use the distributions for qualified expenses. Also, some states even allow a state tax deduction on contributions. Contributions to a 529 college savings account need to be completed by the end of the year to count for that tax year.
.Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
