Year End Money Moves 2024
Taking a cue from the nation’s retailers, let’s start the holiday season before Thanksgiving, though unlike them, I am trying to help you save or make money, not spend it! Delaying until the waning days of the year, might also put me in competition with the vortex of holiday energy, which can suck down even the most steadfast Grinch. Here are action items to consider:
Get a Jump on Taxes: Use the IRS's Withholding Estimator to make sure that you have set aside enough money to pay your tax bill next April. If not, notify your payroll department to increase your withholding through the end of the year. If you are not working, or are self-employed, you may want to make an estimated tax payment to reduce or eliminate potential tax penalties.
Contribute More to a Pre-tax Retirement Plan: If you can afford it, boost your contributions before the end of the year, doing so will allow you to reduce your tax bill and save for the future. As a bonus, if your adjusted gross income is $38,250 or less (or $76,500 if married), your retirement contribution might qualify for the Saver's Credit, which is worth up to $2,000 for individuals and $4,000 for couples, depending on your income.
Take Your Required Minimum Distributions: If you have contributed to a pre-tax retirement account, like a 401 (k) or an IRA, the government requires that you take a certain amount of money from the account after age 73. These are called Required Minimum Distributions or RMDs. Failure to take an RMD results in a 50 percent penalty on the amount you should have taken, though that hefty amount drops to 25 percent (or possibly 10 percent), if the RMD is timely corrected within two years). If you have multiple IRAs, you only need to take one RMD based on your age and the total value of the accounts. Roth IRAs are not subject to RMDs and do not require withdrawals until after the death of the owner.
Sidestep an RMD With a QCD: Anyone 70½ or older who has an IRA, can make a direct transfer of up to $105,000 ($210,000 for married couples filing jointly) from the IRA to eligible charities. This is called a Qualified Charitable Distribution (QCD) and any amount transferred is not included in your taxable income. For those who are at least 73 years old, QCDs can satisfy your RMD for the year. Of course, this strategy only works if you do not need the money from the account and are charitably inclined.
Consider Health Care Savings and Spending: If you are using a high deductible health plan with a Health Savings Account (HSA), you can increase your payroll contribution to the HSA. The dollars that go in are not taxed and the limit this year is $4,150 per individual and $8,300 per family. Remember that you do not have to spend money that is contributed into an HSA within any time period, you can use it decades in the future to pay for future health care costs.
Unlike the HSA, if you have a Flexible Spending Account (FSA), many plans require you to spend the money before the end of December, or else you lose the money. Check your account and see if there is a balance and if so, go buy some glasses or contacts, or book your therapy appointment!
Rebalance Your Investment Accounts: Many people wrote to me after stock market indexes soared to new all-time highs, asking whether they should sell now, “before the next drop occurs.” I do not believe in timing the market, but I do think that this is a great time of year to make sure your money is invested in accordance with your time horizon and risk tolerance.
This is called re-balancing and here is how it works: Let's say that you started the year with 60 percent of your 401(k) in stocks and 40 percent in bonds. With the rise in stocks, that balance might be out of whack, maybe it's 70-30 now. Use this opportunity to sell 10 percent of the stock position and redirect it into bonds to return to your target allocation. If you rebalance a retirement account, there is no tax event. But, if you rebalance a taxable brokerage account, you may have to pay a tax on the gain.
Take Advantage of Winners and Losers: If you have a taxable investment account, sell losing positions and use those losses against sales of winning positions. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. If you have more than $3,000, you can carry over that amount to future years. Taking losses is a great way to rebalance your account with Uncle Sam’s help.
Consider Donor Advised Funds (DAFs): Given the massive gains in the stock market this year, you may have a unique opportunity to be charitable for years to come. Using a DAF, which is offered through all of the big investment firms, you can contribute appreciated assets into the fund and then grant to a charity over the next several years. Here’s the extra cool feature: you can write off the current market value (not just what you paid) to escape taxes on the accumulated gains. So, if you invested $5,000 in Nvidia and it is now worth $25,000, you could move the entire position into a DAF, get a charitable deduction for the full $25,000 and never pay capital gains tax on all of those gains. (If you want to preserve your original investment of $5,000, then just move $20,000.)