As the year draws to a close, retirees have an excellent opportunity to review their finances and ensure they’re maximizing their resources. Year-end financial planning can have a significant impact on your retirement security, helping you minimize taxes, boost your savings, and streamline your income strategies. Below are some practical and proven end-of-year personal finance tips that retirees can use to make the most of their retirement years.
Review and Adjust Your Retirement Income Strategy
Retirement income planning is essential for maintaining financial security throughout your retirement years. Now is the time to review your income sources and make any necessary adjustments to align with your financial goals for the coming year.
Take Required Minimum Distributions (RMDs)
If you have retirement accounts like traditional IRAs, 401(k)s, or other tax-deferred retirement plans, the IRS requires you to begin taking minimum distributions (RMDs) by the age of 73. Failing to withdraw the required amount can result in hefty penalties—up to 50% of the amount you were supposed to withdraw.
By December 31st, ensure you have taken your RMD for the year. Consider spreading withdrawals across multiple accounts to minimize the impact on your taxes and avoid taking out large sums in a single year, which could push you into a higher tax bracket.
Consider Roth Conversions
A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth IRA. The primary benefit is that Roth IRAs allow for tax-free growth and tax-free withdrawals in retirement. While the conversion itself is taxable, it may make sense to convert funds in years when your taxable income is lower.
If you have the flexibility to pay taxes on the conversion, consider converting some of your traditional retirement funds into a Roth IRA before the year ends. This could help reduce your tax liability in future years, especially if you expect your income to increase or tax rates to rise.
Evaluate Your Pension Plan or Annuity Payments
If you’re receiving income from a pension plan or annuity, consider how your withdrawals or distributions are structured. Are you withdrawing too much, too little, or at an inefficient time? Review your payment schedule to ensure it aligns with your current financial needs and long-term retirement goals.
Some pension plans offer the option to adjust the timing or amount of distributions. This is a good opportunity to make adjustments if you want to lower your taxable income for the year or take advantage of a more favorable tax situation.
Maximize Health Savings and Medicare Benefits
Healthcare can be one of the largest expenses in retirement, so taking full advantage of healthcare-related tax benefits and savings plans is essential.
Contribute to Health Savings Accounts (HSAs)
If you are enrolled in a high-deductible health plan (HDHP), contributing to an HSA can be a great way to lower your taxable income while preparing for future medical expenses. For 2024, the contribution limit for individuals is $3,850, and for families, it’s $7,750. If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. If you haven’t maxed out your HSA contributions yet, consider doing so before the end of the year to reduce your taxable income and build up your savings for healthcare needs.
Review Your Medicare Plan
Medicare open enrollment typically runs from October 15th to December 7th each year. This is the time to evaluate whether your current Medicare plan meets your healthcare needs or if a different plan might offer better coverage or savings.
Review all aspects of your Medicare plan, including prescription drug coverage (Part D) and supplemental Medicare (Medigap) policies. You can make changes to your plan during the open enrollment period, which can help you save money on premiums, deductibles, or out-of-pocket costs in the upcoming year.
Take Advantage of Charitable Contributions
As a retiree, you may have more time to focus on charitable giving, and this can provide both personal fulfillment and financial benefits.
Donate to Charity and Claim Deductions
Donations to qualified charitable organizations are deductible on your tax return. If you plan to donate to charity, consider doing so before the year’s end to maximize the deduction in the current tax year. You can donate cash, goods, or appreciated securities like stocks, which may allow you to avoid capital gains taxes on the appreciated value.
If you’re 70½ or older, you can also use a Qualified Charitable Distribution (QCD) to donate directly from your IRA to a charity. QCDs count toward your RMD but aren’t included in your taxable income, which could help lower your overall tax liability.
Donor-Advised Funds (DAFs)
For retirees who are looking to donate a larger sum, a donor-advised fund (DAF) can be an excellent option. With a DAF, you can donate appreciated assets or cash to the fund and take an immediate charitable deduction. You can then choose to distribute the funds to the charity of your choice over time, giving you the flexibility to plan your charitable giving.
Plan for Tax Efficiency in Investments
Even in retirement, investment income can contribute significantly to your overall tax liability. Therefore, it’s important to review your portfolio for tax efficiency.
Capital Gains and Losses
If you’ve realized gains or losses on your investments throughout the year, you can use tax-loss harvesting strategies to offset your gains and reduce your tax burden. Selling investments that have decreased in value can offset capital gains in other areas of your portfolio, and you can even use up to $3,000 in capital losses to offset ordinary income.
If you have capital gains, you might also consider holding off on selling appreciated assets until the new year, especially if you expect your taxable income to be lower. This could help reduce the tax rate you’ll pay on those gains.
Review Your Asset Allocation
Consider reviewing your asset allocation to ensure it’s tax-efficient. For example, placing tax-efficient assets like municipal bonds in taxable accounts and tax-inefficient assets like bonds that generate interest in tax-advantaged accounts (such as IRAs or Roth IRAs) can help minimize taxes on investment income.
Assess Your Estate Plan
End-of-year planning also offers an opportunity to review your estate plan and ensure your assets are properly structured for your heirs.
Update Beneficiaries and Wills
Ensure your beneficiary designations are up-to-date on all retirement accounts, insurance policies, and investment accounts. A mistake here could result in your assets going to unintended recipients, and correcting it is usually a simple process.
Review your will or trust to make sure it reflects your current wishes, especially if there have been any major life changes like the birth of grandchildren, a change in your marital status, or significant changes in your financial situation.
Consider Gifting Strategies
Retirees often want to share their wealth with family members while minimizing the tax burden on both themselves and their heirs. The IRS allows you to gift up to $17,000 per recipient per year without incurring any gift tax. If you plan to make larger gifts, you can take advantage of the lifetime gift tax exemption, which is $12.92 million in 2024. Making gifts now can reduce the size of your estate and lower future estate taxes.
Consult a Financial Advisor or Tax Professional
If you’re unsure about the best strategies to implement in your retirement planning, seeking professional advice is always a good idea. A financial advisor or tax professional can help you navigate complex decisions, optimize your tax strategies, and ensure that you are making the most of your retirement resources.
Year-End Tax Planning Review
Consulting with a professional before the end of the year can provide insights into tax-efficient withdrawal strategies, Roth conversions, and deductions you may have missed. They can also help you adjust your financial plan based on any changes in tax laws or retirement goals.
Conclusion
Retirement offers many opportunities for financial security, but it requires careful planning, especially at year-end. By following these proven tips—such as reviewing your RMDs, contributing to HSAs, making charitable donations, and strategically managing your investments—you can maximize your deductions, lower your taxes, and ensure that you continue to enjoy a comfortable and secure retirement. Taking the time to implement these strategies now can provide long-term benefits and peace of mind for the future.