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End of the Year Checklist

End of the Year Checklist

November 09, 2021

As the end of the year draws near with all its festivities and gatherings, it becomes more important than ever to pause and step away from it all to make sure address some key things.  The most important, of course, is to focus on the people you love and the time that you spend with them.  Somewhere on that list, probably somewhere between hugging your children and being sure to send a gift to your in-laws, needs to be the things that you can do to help reduce some of your tax burden for this year.  After all, if you wait until the year ends, it will be too late.

Charitable Contributions and Donations

Most people know that giving to charities or non-profits is a tax-deductible event if they are filing with itemized deductions.  What most people are unaware of is the ability to take what is called a qualified chartable distribution (QCD) from their IRA.  This strategy is especially useful for individual who are over age 72 and are required to withdraw money from their IRA each year (Required Minimum Distribution).  In order to avoid the taxes on that withdrawal, they can donate that distribution to a charity and neither side will have to pay taxes on that gift.  This can allow for more giving without the tax hit that would normally occur with a withdrawal from an IRA.

Maximize Your Contribution

Each year individuals can contribute a limited amount to their different retirement accounts.  For an individual retirement arrangement (IRA) the amount this year is $6,000 for anyone under 50 and $7,000 for those 50 or older.  Contributing to these accounts can be deductible if you qualify, which can help reduce your tax-burden.  Be sure to contribute to the limit if you are able.  If you qualify, you could consider contributing to a Roth IRA. The contribution is not tax-deductible, but any earnings are tax-deferred and qualified withdrawals are tax-free so you should still strive to max that out whenever possible.  Also included in this consideration could be the retirement account at your employer.  If you have excess income and can contribute more to your 401(k) or 403(b) then that will also help reduce your tax burden.  Talk to your HR department to see how you can maximize that contribution.

Roth Conversion

Lastly, if you have some additional room in your tax bracket and have the cash to pay a little more tax this year you, could convert some of your money in your Traditional IRA into a Roth IRA.  You would pay tax now, but any future growth or qualified withdrawals will be tax free. This could benefit you if you believe you will be in higher tax bracket in the future.  If this sounds like something that might interest you, or you are curious about the above tips, please feel free to give us a call and we’d be happy to discuss the options with you.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.