As the calendar year winds down, it’s common to fill our agendas with celebrations. However, this period is also a vital opportunity to assess and modify your financial strategies. For federal employees, the landscape of benefits presents unique prospects and obstacles that demand thoughtful consideration.
From distributions from retirement accounts to thoughtful philanthropic donations, making informed decisions now can assist you in minimizing tax obligations, enhancing your wealth, and preparing for a prosperous new year. Here’s a comprehensive overview of the financial actions to address prior to December 31. The internal revenue regulation compels individuals to withdraw a specified minimum amount from their retirement accounts annually once they reach a particular age.
Neglecting this requirement could lead to significant penalties. While TSP and numerous 401(k) plans manage RMDs automatically, traditional IRAs necessitate individual initiative. Moreover, inherited retirement accounts—including inherited Roth IRAs—are subject to RMD regulations, which often take individuals by surprise.
If you’re considering charitable donations, think about utilizing a Qualified Charitable Distribution (QCD). QCDs enable individuals aged 70½ and above to give directly from their IRAs, fulfilling RMD obligations while bypassing income taxes. It’s a beneficial scenario: you lessen your tax load, and the charity benefits fully from your contribution without incurring taxes.
A Roth conversion can be an astute method to reduce your long-term tax exposure by moving funds from a pre-tax retirement vehicle into a Roth IRA. The transferred funds appreciate tax-free and are excluded from future RMD requirements. Once you reach the age for RMDs, any added income from these distributions could elevate you into a higher tax bracket, especially if you’ve been diligent in saving.
Conducting a conversion now may enable you to settle taxes at present rates rather than facing potentially larger ones in the future. Additionally, lower taxable income could lead to reduced Medicare costs for individuals enrolled in FEHB or TriCare for Life, as Medicare premiums correlate with income levels. Effective planning can help mitigate unexpected increases in costs.
If you possess mutual funds in taxable accounts, year-end distributions of capital gains can lead to unanticipated tax responsibilities next April. These distributions take place even if you haven’t sold any of your shares. Identify the taxable gains for each of your investments and comprehend which gains will be distributed to estimate the taxes you might owe.
Year-end financial planning suggestions
Setting aside cash at this time can alleviate financial pressure come April. You have until April 15 of the subsequent year to contribute to your IRA for the current tax year, but making contributions before December 31 comes with its benefits.
If you are certain that you qualify for a Roth IRA, earlier contributions enable your wealth to start compounding tax-free sooner. For individuals whose income exceeds the limits for direct Roth IRA contributions, the backdoor Roth IRA provides a pathway to move funds into a Roth account. It’s crucial to seek guidance from knowledgeable financial professionals to navigate the regulations accurately.
If charitable contributions are integral to your plan, think about a method called “bunching,” which means consolidating multiple years of donations into a single tax year. The Tax Cuts and Jobs Act increased the standard deduction, leading many federal employees to avoid itemizing their deductions. By making larger, one-off donations, you might surpass the standard deduction threshold and gain the advantage of itemization.
Some families also elect to establish a donor-advised fund (DAF). By setting up a DAF, you can claim the tax deduction now while phasing in your charitable donations over time. The most effective financial strategies don’t just stop at the year’s end—they strive to forecast needs and reduce risks.
Begin contemplating your cash flow requirements for the upcoming year. If you foresee significant expenses in 2025, such as a home remodel or vehicle acquisition, ensure that you have adequate cash available. Selling investments during an unfavorable market decline could cement losses and disrupt your plans.
If retirement is nearing, it’s imperative to formulate your cash flow strategy for the subsequent years. Adjust your plans to ensure you have a solid income strategy in place. You still have time during open season to make changes to your healthcare coverage for the next year.
HSAs can be valuable resources, but assess your age and whether a High-Deductible Health Plan (HDHP) suits your needs. Year-end financial planning need not be overwhelming, but it does require attention to fine details and timely intervention. Take the necessary time to review your accounts, familiarize yourself with the regulations, and apply these strategies.
With a bit of foresight now, you can wrap up 2024 with assurance and embark on the next year with a solid financial foundation. After all, it’s not solely your finances; it’s your future.
