By Michael Henley, CFP®, CPWA®, CRPC®, RMA®
As 2024 draws to a close, now is the perfect time to reflect on your financial health and position yourself for a strong start to the new year. Whether your focus is retirement savings, tax efficiency, or refining your investment strategy, there are many steps you can take before year-end to optimize your financial position.
1. Max Out 401(k) Contributions
Contributing the annual maximum to your employer-sponsored 401(k) plan is one of the most straightforward ways to minimize taxes and boost retirement savings before the end of the year. Contributions to traditional 401(k)s are made pre-tax, reducing your taxable income for the year. This can lead to significant savings, especially if you are in a high tax bracket in your peak earning years.
If you opt to contribute to a Roth 401(k), contributions are made after-tax, but withdrawals in retirement are tax-free. Maximizing these contributions helps lock in tax-free growth over time.
For 2024, the annual contribution limit for 401(k) plans is $23,000 or 100% of an employee’s taxable income, whichever is less. There is an additional $7,500 catch-up contribution for those age 50 or older. If you haven’t maxed out your 401(k) contributions yet this year, consider increasing your contributions in the final months of the year to meet the annual limit.
For those looking ahead to 2025, the contribution limit is $23,500 with an additional $7,500 catch-up contribution for those age 50 or older. For individuals age 60 to 63 years old, there is a new super catch-up contribution starting in 2025 that allows you to contribute even more. Consult with your advisor or CPA to learn more.
2. Consider Tax-Loss Harvesting
Tax-loss harvesting is a strategy that allows investors to reduce the amount of capital gains taxes owed by selling investments that have lost value to offset profits from other investments. This strategy does not apply to retirement accounts such as IRAs and Roth IRAs, etc.
For example:
• Let’s say you bought shares of Stock A for $10,000, but the shares are now only worth $7,000, meaning you have a $3,000 loss. At the same time, you sold Stock B this year and made a $4,000 profit.
• To reduce the taxes owed on your $4,000 profit, you can sell Stock A and “harvest” the $3,000 loss. This loss offsets your $4,000 gain, so now you will only have to pay taxes on $1,000 ($4,000 gain minus $3,000 loss).
Additionally, if your capital losses exceed your capital gains, you can carry them forward indefinitely and deduct up to $3,000 of extra losses against ordinary income each year, further reducing your tax bill.
3. Don’t Forget to Take Your Required Minimum Distribution (RMD)
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw annually from certain retirement accounts, such as Traditional IRAs, 401(k) plans, and other tax-deferred accounts, once you reach a specific age. As of 2024, RMDs generally begin the year you turn 73. The IRS requires these withdrawals to ensure that taxes are eventually paid on previously untaxed contributions and earnings.
To avoid significant penalties, it is important to take your RMDs before year-end and pay any applicable state and federal taxes on the distribution. Some retirees strategically use their distributions to cover the entirety of their tax bill, particularly if they have additional sources of income, like Social Security, pensions, or investment gains. This approach helps manage tax liabilities throughout the year and avoid underpayment penalties.
4. Utilize Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) offer a way to both satisfy your annual RMD and accomplish your charitable giving objectives. A QCD allows individuals age 70½ or older to transfer up to $100,000 per year (adjusted to $105,000 in 2024) directly to a qualified charity from their IRA without counting the distribution as taxable income.
For individuals age 73 and older, QCDs can also satisfy the annual RMD from your retirement account. This strategy effectively allows you to reduce your taxable income while fulfilling your charitable goals, since the amount donated is excluded from your adjusted gross income (AGI) for the year. A QCD also potentially helps lower your Medicare Part B and D monthly premiums. This is particularly helpful for those who do not itemize deductions, as it provides a direct tax benefit. It is important to ensure QCDs are completed by December 31st in order to satisfy the current year’s RMD.
5. Contribute to a Donor-Advised Fund (DAF)
A QCD is not the only tax-efficient way to accomplish your charitable giving initiatives. A Donor-Advised Fund (DAF) is a charitable giving account that allows individuals to make a charitable contribution, receive an immediate tax deduction in that year, and make grants from the fund to charities over time.
Donating to a DAF before year-end is particularly beneficial for those seeking to reduce their taxable income for the current year, especially for those facing a high-income year or planning to itemize deductions. You can “bundle” several years’ worth of charitable contributions into one large donation in a high-income year, receiving the full deduction while deciding how to distribute the funds over time. The deduction limits are typically up to 60% of AGI for cash contributions and 30% of AGI for appreciated assets.
6. Convert to a Roth IRA
A low-income tax year is a great opportunity to take advantage of Roth Conversions. A Roth Conversion is the transfer of funds from a Traditional (pre-tax) IRA to a Roth IRA. As a result, the amount transferred is treated as taxable income in the year of the conversion. Conceptually, it is advantageous to pay a nickel of tax today rather than pay a dime tomorrow.
Once funds are invested in a Roth IRA, they grow tax-free, and qualified withdrawals are tax-free. Converting in a low-tax year can be especially beneficial because taxes are paid on the conversion at a lower tax rate. This strategy allows individuals to lock in tax-free growth for the future while taking advantage of a temporary drop in income, whether due to a job change, gap years after retirement before RMDs or Social Security begin, or large deductions in a particular year.
7. Ideally Fully Fund Your Health Savings Account (HSA)
If you have access to a Health Savings Account (HSA) with your high-deductible health plan, you can enjoy triple tax-savings: your contributions are tax-deductible, the growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. Plus, there are no federal income tax, state or local taxes, or Federal Insurance Contribution Act (FICA) taxes if contributions are made through payroll. While prior-year HSA contributions can be made up until April 15th of the following year, fund your HSA by year-end to save on payroll taxes.
Your HSA balance rolls over from year to year, allowing you to invest the funds for the long term and use the account to pay for medical expenses in retirement. For 2024, the contribution limit is $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution allowed for those 55 and older.
Plan for a Financially Strong 2025
As 2025 approaches, the actions you take now can help position you for success, whether that is by reducing your tax burden, planning for retirement, or adjusting your investment strategy to better align with your financial goals.
At Brandywine Oak Private Wealth, we are committed to providing thoughtful, objective guidance tailored to your unique needs. We are here to help you navigate life’s financial decisions with confidence and clarity.
Interested in discussing your year-end tax strategy? Contact us at (484) 785-0050, email Contact@BrandywineOak.com, or get started online now. And if you’re curious about what our clients have to say about working with us, visit our client testimonials page to hear their stories.
About Michael
Michael Henley is the Founder and CEO of Brandywine Oak Private Wealth, a private wealth management and registered independent advisory firm headquartered in Kennett Square, PA. Over the course of his 20-year career, Michael has been dedicated to helping wealthy individuals and families plan and manage all aspects of their finances and investments. With a passion for helping others look behind the curtain and understand the complex world of finance, he develops close relationships with clients as he helps them progress toward their financial goals. Michael loves to provide clarity and alleviate financial anxiety, help prevent families from overpaying in taxes, and give wealthy families permission to enjoy their life savings. He says, “No work is more gratifying than giving families outcomes to what matters most to them.”
Michael holds the CERTIFIED FINANCIAL PLANNER®, Certified Private Wealth Advisor®, Chartered Retirement Planning Counselor℠, and Retirement Management Advisor® designations. Residing in Chadds Ford, PA, with his two children, he enjoys outdoor activities, particularly maintaining trails on his property, hiking with his dogs, and being an actively engaged dad, always taking his kids everywhere. Michael’s latest hobby is tennis, and he recently started ice skating to join his daughter Savannah. He can also be found moving logs to the firepit with his son Maverick on the tractor. Michael serves on the board of United Way of Southern Chester County and loves mentoring younger advisors. Great mentors helped him succeed, and he’s convinced that every leader needs to both have mentors and be a mentor. To learn more about Michael, connect with him on LinkedIn.
Brandywine Oak Private Wealth is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
