With the holiday season in full swing, it can be easy to forget about the finer points of financial planning. While your tax return isn’t due until April, several key deadlines are approaching by year-end, experts say.
“You can control your tax reporting destiny,” said certified financial planner Jim Guarino, a CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts.
However, the clock is ticking, he said. Here are four tax strategies to complete by Dec. 31 or sooner.
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1. Boost your 401(k) contributions
If you haven’t maxed out your workplace 401(k), there may still be time to boost your contributions for 2022, said Guarino.
The move may lower your adjusted gross income while padding your retirement savings, but “time is of the essence,” he said. With only one or two pay periods left for 2022, you’ll need to make contribution changes immediately.
2. Take your required minimum distributions
Unless it’s your first year for required minimum distributions, or RMDs, you must withdraw a specific amount of money from your workplace retirement accounts, such as your 401(k), and most individual retirement accounts, by Dec. 31. (RMDs currently kick in when you turn 72, and you have until April 1 of the following year to take your first distribution.)
If you miss the deadline, “the penalty is massive” — 50% of the amount you should have withdrawn, warned John Loyd, a CFP and owner at The Wealth Planner in Fort Worth, Texas.
While the deadline isn’t until the end of the month, Loyd calls his clients with an RMD by mid-December to ensure there’s “enough wiggle room” to meet the due date.
3. Plan ahead for qualified charitable distributions
If you are age 70½ or older and plan to give to charity, you may consider qualified charitable distributions, or QCDs, which are direct gifts from an individual retirement account to an eligible nonprofit.
Another perk is once you’re 72, you can use a QCD to satisfy yearly RMDs.
The QCD doesn’t count as taxable income, unlike regular IRA withdrawals, so it’s “really, really beneficial for people that do not itemize [tax deductions],” Loyd explained.
Since few Americans itemize deductions, it’s harder to claim a tax break for charitable gifts. But retirees taking the standard deduction may benefit from a QCD because it’s not part of their adjusted gross income, he said.
However, you’ll need enough time to send the money from your IRA to the charity, and confirm the check has been cashed before year-end, Loyd said.
4. Time Roth IRA conversions with transfers to a donor-advised fund
Another charitable giving strategy, donor-advised funds, may pair well with a Roth IRA conversion, Guarino said.
Donor-advised funds act like a charitable checkbook, allowing investors to “bunch” multiple years of gifts into a single transfer, providing an upfront tax deduction.
The Roth conversion, which transfers pretax IRA funds to a Roth IRA for future tax-free growth, is attractive when the stock market drops because you can buy more shares for the same dollar amount, he said.
Although you’ll trigger taxes on the converted amount, it’s possible to offset your liability with the deduction from your donor-advised fund contribution,” Guarino said.
“It’s a great one-two punch to be able to time both of those events in the same year,” he added.