Annual Year-End Tax Planning Tips
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It’s time to start thinking about year-end tax planning. This year is coming to a close, and there is no better time to start getting your finances organized for when tax filing season comes around. Here are some essential tips and strategies for individuals to be better prepared in the new year.
Review Your Personal and Retirement Portfolio
The end of the year means it’s time to “take stock” of your stock – or any investments you might have. Review your current assets and determine what might need selling to offset any gains and potentially reduce your tax bill. You can also take a look at investing in new ones.
Have you considered diversifying your portfolio with a self-directed IRA? Self-directed IRAs are a great way to add new investments to your portfolio. A self-directed IRA is not a particular type of IRA. Any Traditional, Roth, SEP, or SIMPLE IRA can be self-directed. The term refers to the unlimited types of investments you choose or “self-direct” within the IRA.
Midland Trust allows you to invest in alternative investments, unlike traditional IRA custodians. These alternatives can include real estate, private stock, cryptocurrency, hedge funds, and more. Investing in alternatives allows you to maximize your returns and potential gains by investing in assets in which you might have more knowledge. Visit our Self Directed IRA page to learn more about all investments you can make in your IRA at Midland.
Max Out Your Contributions
Retirement accounts are a fantastic way to lower your current year’s taxable income and grow your money for retirement over time.
Pre-tax dollars fund Traditional IRAs and 401(k) plans. This means you don’t pay any taxes on your money until you take it out. Employer-sponsored plans often match a certain percentage or dollar for dollar of what you contribute to your plan. Take advantage of those benefits for the rest of the year.
Post-tax dollars fund Roth IRA and Roth 401(k) plans. This means these accounts don’t provide the same taxable income benefits. But, these accounts offer many different benefits, some of which you can read about here.
You can make prior year contributions until the tax-filing deadline date typically April 15th of the next year. For current year contribution limits, go to our Contribution Limits Page.
Check Your RMD
Starting in 2023 - On the other end of the spectrum from contributions are RMDs or Required Minimum Distributions from a Traditional IRA. A person must start taking RMDs from their traditional IRA by April 1st of the year after they turn 73. After the year they turn 73 and every year going forward, withdrawals must be taken annually by December 31st.
RMDs are taxable income, and when making the withdrawal, you can request that your custodian withhold tax. However, you have to specify the amount or percentage you want withheld. If you don’t take your required RMD, you can be taxed 50% of the amount you should have withdrawn. This amount is based upon age, life expectancy, and the amount in the account at the beginning of the year.
If you have a Roth IRA, you are not required to take any RMDs. Roths have the flexibility of allowing the account holder to withdraw contributions and earnings in whatever quantity they prefer without penalty once they reach the age of 59½.
Defer Payments Through Charitable Giving
The holidays are the season of giving, and making donations are a great way to earn potential tax deductions.
For 2023, it’s possible to deduct up to $600 cash for joint filers and $300 for single filers. You can also donate IRA assets, especially alternative investments from your self-directed IRA, and take the same $300 or $600 deduction. In addition, if you contribute large percentages relative to your income this year, you can deduct cash gifts up to 100% of your adjusted gross income. Finally, for property, if you’ve owned it for more than one year, you can deduct the market value on the date of donation and avoid paying any capital gains tax from appreciation.
What Is a Roth Conversion?
Another potential strategy is looking at whether a Roth conversion is suitable for you. A Roth conversion occurs when you convert your traditional IRA to a Roth. This means you pay taxes now on the funds in the account instead of later at withdrawal. Some potential reasons for a Roth conversion are anticipating a higher tax bracket in the future, lower than normal taxable income this year, or potentially high RMDs due to gains in the account. Congress is talking about removing Roth Conversions, so now is the time to speak with your tax advisor to see if this is something that might be right for you.
Year-end is coming fast, so don’t wait on some of these critical tax and retirement planning ideas. For more information on IRA accounts and the opportunities available at Midland Trust, be sure to visit our website or call us at (239) 333-1032.