The end of the year brings several deadlines that could be costly for investors to overlook. Chief among those are tax-related deadlines for retirement account contributions and capital gains harvesting.
Staying vigilant about these year-end tasks not only saves you money in penalties for missed deadlines but also helps you utilize the benefits of the tax code. These year-end retirement deadlines include:
— Qualified account contribution deadlines.
— Mandatory withdrawal deadlines.
— Deadlines for conversion or recharacterization.
— Deadlines for catch-up contributions.
— Deadline for charitable contributions.
— Medicare and Social Security deadlines.
[Related:What Is the Outlook for Retirement in 2024?]
Qualified Account Contribution Deadlines
If you intend on contributing to your employer-sponsored 401(k) plan, your deadline is Dec. 31.
However, if you intend to contribute to an individual retirement account, you have until the tax filing deadline in April 2024.
If you are a business owner and would like to set up a simplified employee pension, or SEP IRA, that deadline is also April 2024, notes Stefan Greenberg, managing partner at Lenox Advisors in Stamford, Connecticut.
“If you plan to contribute to a solo 401(k), your employee contributions need to be made by Dec. 31, but the employer contributions can be made before the business files their taxes,” Greenberg said in an email.
Mandatory Withdrawal Deadlines
One of the most important year-end withdrawal deadlines concerns required minimum distributions, or RMDs, from IRAs. Those withdrawals must be made before Dec. 31 or the account owner faces a penalty.
The SECURE 2.0 Act, which was signed into law in December 2022, reduced the penalty for a missed RMD or incomplete withdrawal to 25% from 50%, and the penalty may be reduced to 10% if the mistake is corrected within two years.
A U.S. House of Representatives Ways and Means Committee report from March 2022 found that many failures to take an RMD are inadvertent rather than attempts to avoid taxation. The committee said it wanted to take steps to reduce the penalty on retirement savers who attempt to correct an honest mistake.
The SECURE 2.0 Act brought other changes to RMDs.
Starting in 2023, the age to take RMDs was increased to 73 from 72.
“If this is your first time taking an RMD, you get a little extra time,” Greenberg said. “You can take your distribution by April of the following year. Your RMDs thereafter would adhere to the Dec. 31 deadline.”
[READ: How the 2024 Social Security COLA May Impact Retiree Tax Bills]
Deadlines for Conversion or Recharacterization
The deadline for converting a traditional IRA to a Roth IRA is Dec. 31.
A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth account, with the converted amount subject to income tax. Investors use this strategy to benefit from tax-free withdrawals in retirement.
According to brokerage Fidelity, a Roth recharacterization typically occurs for one of three reasons:
— An investor wants the tax deduction from a traditional IRA.
— An investor wants tax-free earnings from a Roth.
— An investor’s income is too high to qualify for a Roth.
The timetable for recharacterizing a Roth IRA contribution back to a traditional IRA contribution differs from some of the other retirement account cutoff dates.
“The deadline for recharacterizing a Roth IRA contribution back to a traditional IRA contribution is Oct. 15 of the year following the year in which you need to make the adjustment,” said Aaron Cirksena, founder and CEO of MDRN Capital in Annapolis, Maryland, in an email.
Deadlines for Catch-Up Contributions
According to the Internal Revenue Service, retirement savers who are age 50 or older at the end of the calendar year can make annual catch-up contributions.
The catch-up contribution limit for 401(k) and similar employer-sponsored plans is $7,500 in 2023.
The IRS allows catch-up contributions of up to $1,000 to your traditional or Roth IRA. Catch-up contributions to an IRA are due by the due date of your tax return in April or in October for those who extend their tax filing.
Deadline for Charitable Contributions
These days, fewer Americans itemize their taxes, but it’s still possible to deduct up to 60% of adjusted gross income when you make a cash donation to a qualified charity. If you donate appreciated securities, you may be able to deduct 30%.
But to get those deductions, you must make those contributions by Dec. 31.
If you don’t itemize your taxes, you could still get the deduction using a strategy called bunching. That involves clustering charitable deductions in a single year, then skipping the following year or even a few subsequent years.
According to Fidelity, “This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions.”
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Medicare and Social Security Deadlines
The enrollment period for Medicare begins three months before a new recipient turns 65 and ends three months after his or her 65th birthday.
The open enrollment period runs from Oct. 15 through Dec. 7. “You can apply during this time if you missed the initial enrollment period, but keep in mind you may have to pay a late enrollment penalty,” said Kendall Meade, a certified financial planner at San Francisco-based SoFi, in an email.
Social Security has no particular deadlines pegged to year’s end. New recipients can apply for their Social Security retirement benefits up to four months in advance and begin receiving benefits as early as age 62, said Meade.
“The Social Security Administration will reduce your benefit if you do not wait until full retirement age, which is 67 for most,” she added. “Some people may choose to delay until age 70 to receive the maximum benefit. There is no benefit to waiting past age 70.”
Importance of Adhering to These Deadlines
Missing these crucial deadlines could result in penalties as well as opportunity costs.
Adhering to end-of-year investing and tax deadlines is crucial if you want to maximize the benefits of saving and minimize penalties.
By taking action in a timely fashion as required by tax law, you can capitalize on investment opportunities. You’ll also avoid missed contributions that could impact your financial health in the long term.
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6 End-of-Year Retirement Deadlines You Shouldn’t Miss for 2023 originally appeared on usnews.com
Update 12/14/23: This story was published at an earlier date and has been updated with new information.
