Have you thought about your New Year’s plans yet? The holidays are probably far away from you, 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 is an important time for retirees: 401(k) contributions are due, required minimum distributions (RMDs) must be taken, and tax strategies such as charitable giving or Roth conversions must be filed.
Unfortunately, many retirees wait until the last minute to get their finances in order, which can lead to costly mistakes toward the end of the year. By being proactive about your tax strategy and other year-end financial moves, you’ll have plenty of time to make the right decisions rather than rushing into them.
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Why plan ahead?
Everyone has their own financial goals and needs, which means strategies that work for one person may not necessarily be the best solution for another. Thinking about your year-end money moves now, rather than in late November or December, gives you time to research strategies and work through 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.
Being proactive about year-end financial planning can also help you meet deadlines. Processing times for RMD requests and Roth conversions have increased following the pandemic. Even if you submit your request by December 1, some companies will make their best effort to complete the request before year-end, but it’s not guaranteed. Why wait and put yourself through the stress of potentially missing the year-end deadline?
With the upcoming election and the possibility of a Fed rate cut, it’s especially important to think proactively this year. When will the Fed cut rates? Many expect this to happen as soon as September, which could have a significant impact on investors and savers who have benefited from higher-than-average interest rates.
Elections also bring the possibility of policy changes, from taxes and trade regulations to government spending. For example, taxes are expected to rise in 2026 unless Congress extends the current tax cuts. If taxes rise, you may benefit from using certain tax-saving strategies in 2024 and 2025, and you should take plenty of time to determine the right steps for your individual situation.
Cash movements to be taken into account at the end of the year:
1. Tax strategies
Roth conversions are a common way to lower your long-term tax liability by rolling money from a 401(k) or traditional IRA plan into a Roth IRA. You’ll pay taxes on the converted funds at your current tax rate, but those funds can then grow tax-free and be withdrawn tax-free in retirement. Do the math 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’re typically interested in lowering your tax liability for the current year. Instead, consider meeting with a tax advisor who can think about a long-term strategy. Our firm employs a fee-only tax attorney to ensure we provide our clients with the highest level of expertise as they weigh the pros and cons of a Roth conversion.
Another common tax-saving strategy is giving to charity. This allows you to support causes you care about and lower your taxable income. If giving to charity is a priority for you, consider opening a donation-based fund (DAF). Most people don’t think about giving to charity until the holidays, but setting up a DAF can take several weeks, so it’s better to start the process sooner rather than later.
2. RMD
Retirees who are 72 or 73, depending on their birth year, have until Dec. 31 to take their RMDs. Some financial advisors may advise you to wait until later in the year to file your RMDs so your account has as much time to grow as possible. But waiting until the last minute can lead to delays and errors. Millions of retirees will file their RMDs in November and December, and you don’t want to be competing with them for attention.
Filing your RMDs earlier in the fall will allow you to plan your tax situation strategically. Withdrawing a large sum of money at the end of the year could inadvertently put you in a higher tax bracket, but you can plan for the extra income if you’re proactive. It’s also important to avoid withdrawals when your accounts are in the red, and the choice could create a wave of volatility at the end of the year. Thinking proactively about your RMDs can 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 are facing renewal risk. If you’ve benefited from the current high-yield environment, those returns may no longer be available to you toward the end of the year, but there are ways to reduce renewal risk. For example, you may have purchased a one- or two-year CD that’s done well but is maturing this fall. If you’re proactive, a financial planner may be able to help you lock in your current returns for another 18 to 36 months.
You should also consider rebalancing your portfolio if you find yourself taking on more risk than necessary. While Wall Street tends to do well in the long term after election years, investors can expect short-term volatility through November. Now is a good time to review your portfolio and make sure you have a long-term strategy that can withstand market fluctuations.
Good financial planning is about being proactive rather than reactive. Rather than taking a “set it and forget it” approach, review your plan now, at the end of the year, and again in at least six months. This will help you avoid year-end stress and create a comprehensive plan that will protect you from the inevitable ups and downs of the economy.
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This article was written by our contributing consultant and represents the views, not those of the Kiplinger editorial staff. You can check the consultants’ records using the SEC or with FINRA.
