Planning for the End of the Year

Connor Cox, CFP®

November 11, 2024

Quick Take

• As we approach the final weeks of 2024, there's still time to make impactful financial moves to optimize your tax situation, boost savings, and set yourself up for a stronger start to 2025.

It’s hard to believe we are just six short weeks from 2025. While the year is coming to a close, there is still plenty of time to ensure your finances end the year on a positive note. Consider several end-of-year planning opportunities if you want to minimize your tax bill, maximize your savings, and boost your financial health as we head into the new year. Here’s a checklist of financial planning opportunities to consider to make the most of 2024. 

Tax Loss Harvesting – We’re on it!

As part of our investment management process, we review your after-tax investment accounts for opportunities to reduce your tax exposure. Tax loss harvesting involves selling an investment at a loss, which can offset gains realized earlier in the year. If you have not realized capital gains over the course of the year, the losses can offset your ordinary income (up to $3,000), and the remaining losses can be used to offset capital gains in future years.

Example: Imagine you sold a stock earlier this year for a $5,000 gain. By selling another stock at a $10,000 loss, you would:

• Reduce your realized gains to $0

• Reduce your ordinary income by $3,000

• Carry forward the remaining $2,000 for use in future years!

Expecting Higher Future Income?

If you anticipate an increase in your future income, perhaps due to career growth, social security income, required minimum distributions, or other investment income, preparing now can help mitigate your tax liability in future years.

Roth IRA or Roth 401(k): Contributions made to a Roth IRA or Roth 401(k) are not deductible in the year they are made; however, the contributions can grow and are accessible in the future on a tax-free basis.

Roth Conversions: If you are retired and in a lower income tax bracket than you expect in the future, consider Roth conversions to “fill up” the lower tax brackets.

Example: Mike, a single taxpayer, recently retired at 65 with approximately $2.5 million saved in his traditional IRA. Mike believes his IRA could grow to $3.5 million by age 73, which is when he will begin taking a Required Minimum Distribution (RMD). Based on this assumption, Mike’s first RMD would be approximately $127,000, placing him in what is now the 24% marginal tax bracket. Based on his current after-tax savings, Mike believes he can maintain his taxable income at $25,000 – placing him in the 12% marginal tax bracket. Mike recognizes that he will likely have more income (and taxes!) in the future, so instead: 

• Mike took advantage of his lower-income years by utilizing Roth conversions 

• He converted enough of his IRA to fill up the 12% marginal tax bracket, essentially pre-paying his tax liability at a lower rate than he expects to pay in the future

Expecting Lower Future Income?

Conversely, if you are in a higher income tax situation than you expect to be in the future, now may be a great time to take advantage of tax-deferred savings options.

Pre-tax 401(k) and IRA: Contributions made on a pre-tax basis to an employer-sponsored retirement plan or individual retirement account are a great way to reduce your taxable income if you are in a relatively high marginal tax bracket in comparison to where you expect to be in the future. For 2024, the deferral limits are as follows:

• Employee 401(k): $23,000 ( $30,500 if age 50+ )

• Individual Retirement Account (IRA): $7,000 ( $8,000 if age 50+ )
  
  

Health Savings Accounts (HSA): If enrolled in an HSA-eligible high-deductible health plan, contributing to an HSA is a great way to reduce your taxable income while saving for future healthcare costs. A recent Fidelity study found that, on average, a 65-year-old couple retiring today will spend $330,000 on health care in retirement. This is a 5% increase from the prior year’s estimate, highlighting the importance of factoring healthcare costs into your retirement saving plan. For tax year 2024, you can contribute the following:

• Individual: $4,150 ( $5,150 if age 55+ )

• Family: $8,300  ( $9,300 if age 55+ )

Charitable Giving Plans

Charitable giving is often top of mind during this time of year. If you consider making a meaningful contribution, several strategies may benefit you and the organizations you care about. Here are some key options to consider:

Qualified Charitable Distributions (QCDs): If you are 70 ½ or older, you can use your IRA to give to eligible charitable organizations. For 2024, the IRS permits QCDs up to $105,000. For those who qualify, QCDs offer unique advantages in managing taxable income while supporting charitable causes:

• Counts towards RMD: For those over the age of 73, QCDs can be used to satisfy your required minimum distribution. This allows you to reduce your taxable income while supporting your cause of choice. 

• Not RMD Age? For individuals eligible to make QCDs but not yet required to take a required minimum distribution, using QCDs can be an excellent strategy to reduce your IRA balance over time. A lower IRA balance means a smaller required minimum distribution, which can give you greater control of your taxable income in retirement.

Donor Advised Funds: For taxpayers planning to itemize their tax deductions, a Donor Advised Fund can be an excellent, tax-efficient tool for maximizing your charitable impact. Through a Donor Advised Fund, you can make contributions that not only support the causes you care about but also provide several financial benefits:

• Immediate tax deduction: Donors receive an immediate tax deduction for contributions to a donor-advised fund, even if the grants to charities are made later.

• Tax-free growth of donations: Contributions to a donor-advised fund can be invested, allowing you to leverage the market to extend your giving over time.

• Efficient management of appreciated assets: Contributions are not limited to cash. Donors can contribute appreciated securities, which allows them to complete their charitable gift while avoiding capital gains taxes. 

• Family involvement: Donor-advised funds offer a way for families to engage in charitable giving together, creating a legacy of philanthropy across generations.

Other Planning Opportunities & Reminders

• Have a balance in your flexible spending account (FSA)? Most FSA programs are “use it or lose it” and do not allow you to roll a balance into the next year. If you have a balance, consider reviewing qualified expenses to use up the funds and zero out the account before December 31st. You can find a complete list of medical FSA-qualified expenditures here.

• Itemize deductions and have a mortgage? Consider making your January mortgage payment in December so that the interest is deductible on your 2024 tax return. 

• Were you subject to an estimated tax penalty in 2023? Review your federal tax withholding to confirm it is appropriate as we move into the new year.

Contact us at 865-584-1850 or info@proffittgoodson.com

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income, or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results.