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 31st will be here before we know it.
The end of the year marks an important time for retirees: 401(k) contributions must be made, required minimum distributions (RMDs) must be taken, and tax strategies such as charitable donations or Roth conversions must be filed.
Unfortunately, many retirees wait until the last minute to get their finances under control, which can lead to costly mistakes as the year-end approaches. Proactively thinking about your tax strategy and other financial measures at the end of the year gives you enough time to make the right decisions instead of hasty decisions.
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Why plan ahead?
Everyone’s financial goals and needs are unique, which means that the strategies that may work for one person may not be the best fit for another. Thinking about year-end cash movements now, rather than in late November or December, gives you time to research strategies and review different scenarios. For example, a financial planner can run models to confirm whether a Roth conversion this year will save you money in the long run, or whether it makes more sense to wait until you’re in a lower tax bracket.
Thinking proactively about year-end financial planning will also help you meet deadlines. Processing times for RMD requests and Roth conversions have increased following the pandemic. Even if you receive your request by December 1st, some companies will make a “best effort” to complete the request by the end of the year, but this is not guaranteed. Why wait and subject yourself to 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 cuts. When will the Fed cut interest rates? Many predict as early as September, which could have a big impact on investors and savers who have benefited from higher than normal interest rates.
Elections also bring the opportunity for policy changes, from taxes and trade regulations to tax spending. For example, taxes are expected to increase in 2026 unless Congress extends the current tax cuts. If taxes go up, you may benefit from taking advantage of certain tax-saving strategies in 2024 and 2025, and you’ll want to give yourself enough time to determine the right steps for your unique situation.
Cash movements at the end of the year 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 to a Roth IRA. You pay tax on the converted funds at your current tax rate, but those dollars can then grow tax-free and be withdrawn tax-free when you retire. Run the numbers now to see if paying taxes today will save you money in the long run. A CPA may be able to help you with this, but they are generally 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 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 giving 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 setting up a DAF can take several weeks, 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 advisors may want you to wait until later in the year to claim your RMDs to give your account as much time as possible to grow. But waiting until the last minute can lead to delays and mistakes. Millions of retirees will be filing their RMD requests in November and December, and you don’t want to compete with them for attention.
Claiming your RMDs earlier in the fall can help you plan for your tax situation. If you withdraw a large sum of money at the end of the year, it may inadvertently put you in a higher tax bracket, but you can plan for the extra income if you work proactively. It is also important to avoid taking withdrawals when your accounts are down, and the choice can 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 cut interest rates this fall, many investors face the risk of renewal rates. If you’ve benefited from the current high interest rate environment, the same returns may not be available to you towards the end of the year, but there are ways to reduce your renewal rate risk. It could be, for example, that you have bought a one- or two-year CD that has performed well, but it matures in the autumn. If you work proactively, a financial planner may be able to help you lock in your current returns for another 18-36 months.
You may also consider rebalancing your portfolio if you are taking on more risk than necessary. Although Wall Street tends to do well in the long term after election years, investors may experience some near-term volatility leading up to November. Now is a good time to look at your portfolio and make sure you have a long-term strategy designed to withstand market fluctuations.
Good financial planning is about being proactive rather than reactive. Rather than taking 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 a 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.
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This article was written by and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check the advisors’ records with SEC or with FINRA.