As the year draws to a close, it’s an opportune time to assess your tax situation and identify strategies that could reduce your tax burden. The Krilogy Tax team has compiled a list of key planning strategies for clients to consider as 2024 winds down.
Roth IRA Conversions
Pre-tax retirement accounts can be a ticking time bomb, as their future tax liabilities grow over time. Roth IRA conversions offer a way to mitigate this future tax burden by converting pre-tax retirement assets to a Roth IRA, where earnings grow tax-free, and withdrawals in retirement are tax-free as well. Additionally, Roth IRAs are exempt from required minimum distributions (RMDs), providing more flexibility in retirement.
Given potential tax changes in the future, 2024 could be an ideal time to initiate a Roth conversion. It’s important to consult with both your wealth manager and tax advisor to determine whether a Roth conversion is right for your specific situation.
529 Plan Contributions
A 529 plan is a tax-advantaged savings account designed to fund education expenses. Many states, including Missouri, offer tax deductions for contributions to 529 plans. For 2024, Missouri allows a deduction of up to $8,000 per individual or $16,000 for married couples filing jointly. In Missouri, contributing $16,000 can result in state tax savings of up to $768.
529 plans are also more versatile than ever, as they’re not just restricted to college tuition; 529 funds can also be used for books, supplies, room and board, or even trade school, apprenticeship programs, and student loan repayments. Some states even allow for 529 funds to be used for K-12 expenses; however, it’s important to verify whether your state permits this, as Missouri does, while Illinois does not. And for those worried about saving too much in a 529 plan, the SECURE Act 2.0 includes a provision that took effect in 2024 that allows unused 529 funds to be rolled over into a Roth IRA.
The deadline for 2024 contributions is December 31st, so there’s still time to take advantage of this tax-saving opportunity.
Itemized Deduction Bunching Strategy
The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction and eliminated personal exemptions, which has led many taxpayers to utilize standard deductions instead of itemizing. However, a tax-saving strategy known as “bunching” can help those who would otherwise take the standard deduction by consolidating multiple years of deductible expenses, such as medical costs or charitable donations, into a single year to exceed the standard deduction.
This strategy is particularly effective for charitable contributions through a Donor Advised Fund (DAF), which allows taxpayers to front-load donations for multiple years. The DAF’s growth is tax-free, and you receive an immediate tax deduction in the year the donation is made.
Tax-Efficient Charitable Giving
With changes to the tax laws in recent years, charitable giving has become more flexible. Donor Advised Funds (DAFs) have grown in popularity as an efficient vehicle for ongoing charitable contributions. By transferring several years’ worth of donations into a DAF, taxpayers can exceed the standard deduction, thus increasing the value of their charitable contributions.
Additionally, for taxpayers over 70½, a Qualified Charitable Distribution (QCD) allows for the direct transfer of funds from an IRA to a qualified charity. This distribution counts toward the taxpayer’s RMD but is not included in taxable income.
Timing the Sale of Investments
For taxpayers whose income fluctuates year-to-year, it’s important to assess the tax impact of selling investments before year-end. If your income is higher in 2024 compared to future years, you might want to delay selling investments until 2025 to avoid moving into a higher capital gains bracket.
Additionally, consider the impact of the Net Investment Income Tax (NIIT), a 3.8% surtax on investment income for high earners. Assessing the timing of sales, and potentially realizing gains in years with lower income, could save significant tax dollars in the future.
Required Minimum Distributions (RMDs)
The SECURE Act 2.0 raised the age at which you must begin taking Required Minimum Distributions (RMDs) from 72 to 73, starting in 2023. For individuals who don’t need their RMD, a Qualified Charitable Distribution (QCD) offers a powerful tax strategy; with a QCD, you can make direct transfers from your IRA to a charity. These transfers count toward your RMD but are not subject to taxes, providing a tax-efficient way to give back.
If you’re unsure whether you’re on track to meet the RMD requirements for 2024, it’s wise to reach out to your financial advisor for assistance in meeting the distribution requirement and exploring other tax-efficient strategies.
Health Savings Account (HSA) Contributions
Taxpayers who are enrolled in a high-deductible health plan (HDHP) can contribute to a Health Savings Account (HSA). For 2024, the contribution limits are $4,150 for individual coverage and $8,300 for family coverage. If you’re 55 or older, you can contribute an additional $1,000.
HSA contributions lower taxable income, and the funds grow tax-free. Qualified medical expenses can be paid from the account tax-free, and unused funds roll over year after year. In fact, once you reach age 65, you can withdraw funds for non-medical expenses without penalty (though they will be taxed as ordinary income).
HSAs offer a unique opportunity for tax-free growth and can be a valuable part of your retirement strategy, often referred to as a “secret IRA.”
Final Thoughts
As 2024 comes to a close, there’s still time to consider strategic tax-saving opportunities. Whether through Roth IRA conversions, 529 plan contributions, or charitable giving strategies, there are multiple ways to reduce your tax liability. Always consult with a wealth and tax advisor to tailor these strategies to your unique financial situation and ensure you’re making the most of your year-end planning.
Important Disclosures:
This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement. Krilogy® does not provide tax and legal advice. Krilogy® is affiliated with Krilogy Tax Services, LLC. Krilogy® Tax Services provides tax planning and preparation services for an additional cost to Krilogy® clients. You should consult your attorney or qualified tax advisor regarding your situation.
Investment Advisory Services offered through Krilogy Financial® (“Krilogy”), an SEC Registered Investment Advisor. Please review Krilogy’s Client Relationship Summary (“CRS”) and Form ADV 2A (“Firm Brochure”) carefully prior to investing. All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services, nor is it to be construed as individualized advice or recommendations suitable for the reader.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Krilogy, its employees and financial advisors do not provide tax and legal advice. Krilogy provides investment management and financial planning advice. This advice may indirectly impact certain tax and legal advice received from your tax and legal professionals. You should consult your attorney or qualified tax advisor regarding your situation. Krilogy Tax Services, LLC is an affiliated company to Krilogy and provides tax services under separate engagement for a fee. KEP Law, LLC d/b/a Krilogy Law is an independent law firm that provides estate and business planning under separate engagement for a fee. Krilogy and KEP Law, LLC have common owners. All information contained herein should be independently verified and confirmed.
