Year end is a good time for tax and retirement planning since the last day of the calendar year is also the contribution/distribution deadline for many retirement accounts. You may get extra time with other plans, but planning now could help you avoid higher taxes with last-minute deposits or withdrawals through these year end tax planning strategies!
7 important moves for year end tax planning strategies
- Set a Retirement Savings Target: Before you can start successfully saving for retirement, you should know how much you will need. Without setting goals and calculating your retirement needs accordingly, you’re likely to end up with too little saved by the time you reach retirement. Use a retirement calculator to understand how much you should be saving every month, based on your annual income, age, current investments and goals.
- Contribute to Your IRA and 401k – Even if you make IRA contribution and 401(k) contributions every year, you may not be contributing enough to reach your retirement saving goals. Max out your annual contributions so you can enjoy the full tax savings and benefits. Remember that your biggest ally in terms of retirement planning is time; compound interest and tax-deferred gains can help your investments grow tremendously.
- Make Catch-Up Contributions – After you turn 50, you can make additional tax-deferred contributions to your 401(k) by the end of the calendar year. Use these catch-up contributions to maximize your savings and tax breaks while planning for retirement. Workers who are 50 years of age or older can contribute an additional $7,500 in 2023($6,500 for 2021-2020) to their 401(k) account, for a total of $20,500 annually.
- Track Required Minimum Distributions (RMDs) – You need to take RMDs from traditional IRAs and 401(k)s after the age of 70½. If you don’t take the entire amount by December 31 every year and pay income tax on the distribution, you incur a 50% penalty and tax on the amount that should have been withdrawn. You can delay your first RMD till the following April, but you pay tax twice and could end up in a higher tax bracket.
- Explore Conversion to Roth IRA – Investments in a traditional IRA account are not taxed until you make a withdrawal. However, income tax is due on contributions to Roth accounts at the time of the contribution. Roth IRA investments don’t have RMDs, which can be very helpful for tax and retirement planning. You can convert part or all of your IRA into a Roth account, but consult a tax professional or financial planner about whether and when to do this.
- Review Your Retirement Goals – You may have a general goal in mind when it comes to retirement, but you need a specific plan for effective savings. Reassess your retirement planning goals annually, and prioritize spending needs based on what will make you happy and comfortable. Create a budget for early, middle and late retirement, taking into consideration different expenses for each stage.
- Optimize Retirement Planning for Tax Breaks – Year-end is a good time to review your taxes, both for the current year and the next. If you’ve been holding retirement money in a savings account, move it into tax-advantaged retirement accounts to start maximizing your tax breaks. Sign up for your employer’s 401(k) plan, contribute as much as they will match, and check whether you qualify for saver’s credit.
Retirement planning is not a one-time activity, but something you need to review and update regularly. Year-end reassessments can help you stay on track, especially if you haven’t looked over your investment portfolio and personal finances in a while.
Need assistance organizing your finances?
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.