Physical mail has become a downer, outside of the occasional and appreciated postcard. There are only two types of mail: the kind that asks you to donate money and the kind that forces you to pay money, such as for a parking ticket or for a medical bill. When the latter type comes in the mail, there is usually a big, bold due date. For retirees, most of the tax planning you should be doing comes with a big, bold due date of December 31, not April 15. Here’s the catch: Most of the custodians have deadlines a few weeks or even a month earlier to ensure that the transactions are completed by December 31.
The end-of-year tax planning we do for our clients typically starts on October 1. Here are five of the December 31 deadlines we are evaluating.
1. Required minimum distributions (RMDs)
This is essentially Uncle Sam sticking his hand out, demanding you pay the tax bill you’ve been deferring for 50 years. RMD rules and ages have become very complicated since the SECURE and SECURE 2.0 Acts. Those acts shifted the starting age from 70½ to 72, 73 or 75, based on your year of birth. You must take your first RMD by December 31 of the year you hit that age and by December 31 of every subsequent year.
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First-year exception: In that first year, you are allowed to delay your distribution until April 1 of the following year. For example, if I hit 73 this year, I could delay my distribution until April 1, 2025. Here’s the catch: I’d have to take another by December 31, 2025. Taking two RMDs in one year doesn’t make sense in most situations, unless you see a significant income drop in that year.
2. Roth conversions
The sweet spot for most retirees doing Roth conversions is between their retirement and when they start Social Security and RMDs. It’s like seeing a yellow sale tag on your tax bill. However, unlike Roth (and traditional) IRA “contributions,” Roth “conversions” have a December 31 deadline.
This can be quite a complicated calculation if done properly. You should be considering current vs future income tax brackets, capital gains brackets and Medicare IRMAA (income-related monthly adjustment amount). However, the actual conversion should be fairly easy if you have a traditional IRA and Roth IRA at the same custodian. If the accounts are with different institutions, it’s better to get an early start.
If you’re trying to figure out whether a conversion makes sense for you, you can use a free version of our planning software.
3. Realizing losses and gains
As of this writing, 2024 has been a very good year for the stock market. But for all you stock pickers out there, you likely have some losers. Maybe you bought Nike before it admitted that cutting out many of its retail partners was a bad idea. Or perhaps you bought Amazon before it announced the consumer economy was softening. The silver lining is that you can realize some of those losses. This will help to offset the gains from all those winners you picked.
For retirees, there can be significant opportunity if you are no longer earning an income. Those in the 10% and 12% income tax brackets pay a 0% capital gains rate. For our clients in this situation, we calculate how much they can sell to stay in this bracket.
4. Charitable giving
With the doubling of the standard deduction under the Tax Cuts and Jobs Act (TCJA), also known as the “Trump tax cuts,” and the TCJA’s caps on state and local income taxes, very few retirees itemize deductions these days. However, that does not mean there isn’t any tax benefit to giving. If you’re 70½, you can realize a tax benefit by giving directly from your IRA. Regardless of age, you can give multiple years at once using a donor-advised fund, to get above the standard deduction. You can also give shares of appreciated stock to avoid capital gains taxes.
Regardless of the strategy you use to give, the deadline for all charitable giving is December 31.
5. Rollovers take advantage of IRA RMD aggregation and QCDs.
This one definitely doesn’t make most of the December 31st lists. However, it is important if you want to simplify your RMDs in retirement. IRAs generally allow for aggregation for RMD purposes. However, employer-sponsored plans do not.
Example: You have $2 million across three IRAs and one 401(k). You calculate your total RMD to be $80,000. You can take the IRA portion from any of the IRAs. However, the portion from the 401(k) must come separately from that account based on that balance. If your money was in four IRAs, you would be able to take just one RMD from any of the accounts. Not only does this simplify the process, but it allows you to defer distributions on accounts where the investments are down that year.
As mentioned in the charitable giving section, you can give money directly from your IRA to charity via a qualified charitable distribution (QCD). You cannot do this from an employer-sponsored plan. If you want to do this in 2025, the plan must be rolled into an IRA by December 31, 2024. You can learn more about QCDs in the article When RMDs Loom Large, QCDs Offer a Gratifying Tax Break.
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