As 2024 rides into the sunset, there’s still time to optimize tax strategies for your individual retirement account.
Year-end tax planning is not only about saving money today; it can also set you up for better financial outcomes later in life. By taking strategic steps now, you can make the most of tax benefits and avoid penalties.
While it may not sound fun to think about your taxes around the holidays, the good news is that many of these moves are simple to execute. Here are five year-end IRA strategies that can benefit taxpayers of any age.
[READ: Retirement Accounts You Should Consider.]
Take Your Required Minimum Distribution
If you’re 73 or older, taking your required minimum distribution by Dec. 31 is a must to avoid steep IRS penalties.
RMDs are the government’s way of ensuring investors pay taxes on qualified accounts like IRAs and 401(k)s. Missing this deadline can result in a 25% penalty on the amount you were supposed to withdraw.
“Even though the age to take RMDs has been extended to age 73, you should not miss taking them,” said Richard Craft, CEO of Wealth Advisory Group in Berwyn, Pennsylvania, in an email.
It’s not necessary to make a withdrawal from every qualified account you own. For example, if you have several IRAs, which is not uncommon, you can take all your RMDs from a single account.
“You do need to tally the entire RMD from all sources, based on the balances from Dec. 31 of the prior year, but can take the distribution from any single or combination of qualified buckets,” he said.
For example, he added, you may have some holdings that you would have difficulty liquidating or others that you’d rather keep than sell a portion.
“Also, know that if you are still working for an employer and have an active qualified retirement plan with that employer, even if you are RMD age, you do not have to take an RMD from that account,” Craft added.
[READ: What Is an Average Roth IRA Return?]
Make Your IRA Contribution
If you contribute to an IRA, the limit is $7,000 in 2024, with an additional $1,000 catch-up contribution allowed if you’re 50 or older.
Traditional IRA contributions may be tax-deductible, depending on your income and participation in workplace retirement plans. There’s still time to check with your tax preparer or financial advisor if you’re unsure of your status. Roth IRAs don’t offer an immediate tax deduction, but they allow your earnings to grow tax-free, making them a valuable tool for future tax diversification.
Pairing IRA contributions with a 401(k) can help maximize your retirement savings while leveraging immediate and long-term tax advantages.
There’s no year-end deadline for IRA contributions. You have until April 15, 2025, to fund an account for 2024.
[Read: How to Tell if You Have a Lousy 401(k) Plan.]
Contribute to a 401(k)
If you’re working and your company offers a 401(k) or similar plan such as a 401(b), funding that account is one of the most effective ways to lower your taxable income while bolstering your retirement savings.
After you leave your job, even before retirement age, you can roll your 401(k) into an IRA with no tax consequences or fees.
For 2024, you can contribute up to $22,500, or $30,000 if you’re 50 or older. If your employer matches your contributions, that’s free money you shouldn’t give up.
“For most taxpayers, maximizing your 401(k) contribution is an effective way to simultaneously build your nest egg for retirement and save on income taxes,” said Brian Tullio, wealth manager at Fairway Wealth Management in Independence, Ohio, in an email.
An added benefit, he said, is that 401(k) contributions defer recognition of income during your working years, potentially saving you thousands in taxes.
“Alternatively, Roth conversions or contributions to a Roth 401(k) could make sense for those taxpayers not yet in a high-income tax bracket or are experiencing a lower year of income,” Tullio added.
“Although there is no immediate tax break associated with Roth accounts, the earnings in a Roth account grow tax-free, potentially setting you up for immense tax savings in the future as you begin to draw from the account,” he said.
Don’t Forget to Follow Up
There’s an additional risk that your year-end contributions and account changes may not go through promptly. “You should make sure that your employer’s payroll department processes these contributions before the end of the year if you want them to count for the current year,” said Jeffrey Wood, a partner at Elysium Financial in South Jordan, Utah, in an email.
“If you are a self-employed individual, you should look into an individual or solo 401(k) plan, which can have a similar tax impact, contribution limit and end-of-year deadline,” Wood said.
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Year-End IRA Tax Moves for 2024 at Any Age originally appeared on usnews.com
Update 12/24/24: This story was published at an earlier date and has been updated with new information.
