2024 Year End Financial Planning Tips
By: Brian Seay, CFA
In this episode of the podcast, I cover the impact of the Republican election win on tax and financial planning plus our usual tips for planning ahead of year end. As I like to say, TAX TIME IS NOW! Not in March of next year. Once the year closes, there are only a few things you can do to change your taxes for 2024. So, now that the election is over and we have a slightly clearer view of the future, here are a few practical steps you can take to reduce your taxes and get your financial house in order before year end. Read the planning tips below, watch the video or listen the podcast version anywhere you listen to podcasts.
Let’s start with the election. I covered Trumps proposed economic policies in detail in a prior episode, so I’m not going to dive into taxes, the fiscal deficit and Tariffs again in detail here, I’ll stick to the things that impact you as you plan for the end of 2024. We can circle back on those things as we work on the outlook for next year and beyond. My view on the market is that a Trump win was already being priced in. So the day after we are seeing a bit of a bump in markets, but I would expect the market to shift back to changing based on earnings and economic data fairly quickly now that the election is over.
Trump’s win – and more importantly what appears to be a Republican sweep of congress and the Presidency likely means an extension of the existing low tax rates. Perhaps they are able to push through even lower corporate rates, but for investors, the most important thing is that low capital gains and income tax rates will likely remain in place over the next 4 years. So the biggest implication is that I don’t think there is a rush to realize capital gains or revisit estate plans, which would have occurred if the election result had been different. So the real impact of the election is that you can likely keep doing what you have been doing the past 5-6 years.
You May Be Able to Contribute More to Retirement Accounts Than You Think!
One of the most powerful tools for reducing taxable income is contributing to retirement accounts. Remember, retirement account contributions are generally tax deductible. For 2024, the employee contribution limits for 401(k) plans have increased. The limit for those under 50 is $23,000, and for those 50 and older, the catch-up contribution allows for an additional $7,500, bringing the total to $30,500.
Remember, that is only your contribution, your employer’s contributions can go beyond your employee contribution. A total $69,000 can be put into retirement accounts on your behalf. The most common form of additional contribution is employer matching contributions. But, if you have a side gig or own a business, you might be able to contribute to a retirement plan as an employer. That potentially means additional deductions for your business and personal taxes. So don’t forget to think about all of your income and the different ways you can contribute to retirement plans as both the employee AND the employer.
Remember Those Required Minimum Distributions (RMDs) On Your Retirement Accounts and Inherited IRAs
If you are 73 or older, ensure you take your RMDs from retirement accounts before the end of the year. Proper planning can help manage the tax impact of these distributions by spreading them out over time. Additionally, you can give to charity directly from your IRA, so perhaps consider this as a way to meet your RMD requirement while minimizing your taxable income.
If you own an inherited IRA, make sure you review the distribution rules with your tax and planning professionals. The IRS clarified the distribution rules early this year. If you don’t meet certain eligibility requirements, you may need to distribute all of the assets in that Inherited IRA over 10 years, regardless of your age. Careful planning is required here and the rules have been in flux since the Secure Act passed congress in 2020, so don’t forget to review your distribution requirements with your tax advisor.
Consider ROTH Conversions…plural.
A Roth conversion involves moving funds from a traditional IRA or 401(k) to a Roth IRA, paying taxes on the converted amount now to enjoy tax-free growth and withdrawals later. This can be particularly advantageous if you expect to be in a higher tax bracket in the future. Even if overall tax rates remain low under the next Trump administration, your income may go up and increase your tax bracket. Further, when you get into retirement, the required minimum distributions in your 80s and 90s can drive your taxable income more than you expect. This unnecessary increase in income is often the rationale for converting funds to a ROTH prior to or early in retirement.
It’s essential to do long-term planning and income forecasting with your financial planner and tax professional to get this right.
Remember, ROTH conversions generally work best over multiple years to spread out the tax impact. So, think about this as a series of ROTH conversions, not a one-time event.
Take Advantage of HSAs…the only “triple tax advantaged” account that exists.
Health Savings Accounts are not only a way to save for medical expenses but also a strategic tool for tax savings. Contributions to HSAs are tax-deductible, and the money grows tax-free. When used for qualified medical expenses, withdrawals are also tax-free. That’s right, taxes are never paid on HSA contributions that are used for healthcare expenses.
For 2024, the contribution limit is $4,300 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older. That’s a lot of tax deferral power, especially for families with health care expenses. So don’t miss out on this one.
Eliminate “Phantom” Mutual Fund Tax Distributions with ETFs.
If you are investing through mutual funds, you may receive those “phantom” year-end capital gains distributions. These distributions occur when mutual funds sell stocks for a profit, or a gain. The capital gains taxes on those investment gains must be paid by taxable investors in the fund. Typically, funds “distribute” those gains to investors in December, which may increase the total amount of gains you take for the year unexpectedly.
If you are receiving capital gains regularly from a fund, it may be worth considering using ETFs instead of mutual funds, especially if the mutual fund is underperforming. In that case, you’re paying the taxes but not getting the results! In an ETF, you only pay capital gains taxes on your actual realized gains in the fund. This is one of the main reasons why ETFs are more “tax efficient” than mutual funds. The proliferation of ETFs mean that you can probably come close to replicating your existing mutual fund strategy with better tax outcome and perhaps a lower cost by using an ETF instead.
Think Before You Give.
First, I encourage you to be generous to your church, to your family and to your community. I always suggest defining your giving goal before you start planning for taxes. Your philanthropic goal should be the main driver, not takes. But once you figure out where to give, think about potential ways to maximize your gift or reduce your taxes before write a check.
Markets are up significantly this year, so consider donating appreciated assets such as stocks or mutual funds. This not only provides a deduction based on the asset's fair market value but also avoids capital gains taxes on the appreciation. Most organizations know how to facilitate these transactions, so just reach out to the gifts coordinator or financial manager and they can help you transfer assets directly.
Additionally, if you are 70½ or older, you can make a Qualified Charitable Distribution (QCD) from your IRA. This allows you to donate up to $100,000 directly to a charity, which counts towards your Required Minimum Distribution (RMD) but is not included in your taxable income. So you can meet your RMD requirement, and help out a good cause.
So Give! But think before you do it!