Have you thought about your New Year’s plans yet? The holidays are probably far from your mind, but time has a funny way of sneaking up on us. December 31 will be here before we know it.
The end of the year marks an important time for retirees: 401(k) contributions are due, required minimum distributions (RMDs) must be taken and tax strategies like charitable donations or Roth conversions must be submitted.
Unfortunately, many retirees wait until the last minute to get their finances in order, which can lead to costly mistakes as the end of the year approaches. Thinking proactively about your tax strategy and other year-end financial moves gives you enough time to make the right decisions, rather than rushed decisions.
Why plan ahead?
Everyone’s financial goals and needs are unique, which means the strategies that might work for one person may not be the best fit for another. Thinking about year-end money moves now, instead of late November or December, gives you time to research strategies and go through various scenarios. For example, a financial planner can run models to confirm if doing a Roth conversion this year will save you money in the long run or if it makes more sense to wait until you’re in a lower tax bracket.
Thinking proactively about year-end financial planning helps you meet deadlines, as well. The processing times for RMD requests and Roth conversions have increased post-pandemic. Even if you get your request in by December 1, some companies operate on a “best effort” to have the request completed before the end of the year, but that isn’t guaranteed. Why wait and put yourself through the stress of potentially missing the year-end deadline?
It’s especially important to think proactively this year because of the upcoming election and the potential for federal interest rate reductions. When will the Fed cut rates? Many are predicting as soon as September, which could have a major impact on investors and savers who have been benefiting from higher-than-normal interest rates.
Elections also bring the possibility of policy changes, from taxes and trade regulations to fiscal spending. For instance, taxes are expected to increase in 2026 unless Congress extends the current tax cuts. If taxes go up, you may benefit from leveraging certain tax-saving strategies in 2024 and 2025, and you’ll want to give yourself enough time to determine the right moves for your unique situation.
Year-end money moves to consider:
1. Tax strategies
Roth conversions are a common way to lower your long-term tax liability by converting money in a 401(k) or traditional IRA into a Roth IRA. You’ll pay taxes on the converted funds at your current tax rate, but those dollars can then grow tax-free and be withdrawn tax-free in retirement. Run the numbers now to see whether you’ll save money in the long run by paying taxes today. A CPA might be able to help you with this, but they are commonly concerned with lowering your tax liability for the current year. Instead, consider meeting with a tax planner who thinks about long-term strategy. Our firm has a tax attorney on retainer to ensure we offer the highest level of expertise as our clients consider the pros and cons of a Roth conversion.
Another common tax-saving strategy is to give to charity, which allows you to help the causes you care about and lower your taxable income. If donating to charity is a priority for you, consider opening a donor-advised fund (DAF). Most people don’t think about giving to charity until the holidays roll around, but it can take several weeks to set up a DAF, so it’s best to start the process sooner rather than later.
2. RMDs
Retirees who have reached age 72 or 73, depending on the year they were born, must take their RMDs by December 31. Some financial advisers might tell you to wait until later in the year to claim your RMDs to give your account as much time to grow as possible. However, waiting until the last minute can lead to delays and mistakes. Millions of retirees will be submitting their RMD requests in November and December, and you don’t want to be competing with them for attention.
Claiming your RMDs earlier in the fall can help you strategize your tax situation. Withdrawing a large sum of money at the end of the year could unintentionally put you into a higher tax bracket, but you can plan for the extra income if you work proactively. It’s also important to avoid taking withdrawals when your accounts are down, and the election could lead to a wake of volatility at the end of the year. Thinking proactively about your RMDs will help you find a more optimal time to withdraw.
3. Investment changes
With the Federal Reserve expected to lower interest rates this fall, many investors are facing renewal rate risk. If you’ve been benefiting from the current high-interest-rate environment, those same returns may not be available to you toward the end of the year, but there are ways to decrease renewal rate risk. For example, you may have bought a one- or two-year CD that’s been performing well, but it’s maturing this fall. If you work proactively, a financial planner may be able to help you lock in your current rate of return for another 18-36 months.
You also may want to consider rebalancing your portfolio if you’re taking on more risk than necessary. While Wall Street tends to perform well in the long term following election years, investors may experience some volatility in the short term leading up to November. Now is a great time to look at your portfolio and make sure you have a long-term strategy designed to withstand market fluctuations.
Good financial planning is all about being proactive instead of reactive. Instead of having a set-it-and-forget-it approach, consider reviewing your plan now, again at the end of the year and again in another six months, at minimum. This will help you avoid the end-of-year rush and help you create a comprehensive plan designed to protect you from the inevitable ups and downs of the economy.
