As we approach the last few months of the year, a discussion that continues to come up is year-end tax planning and getting ahead of it.
Here's a list of 9 tax planning considerations everyone should be thinking about before year-end:
1) Proper asset location:
- Placing your assets in the right accounts could potentially add up to .6% to your annual returns on a net return basis.
- As a rule of thumb, place tax-efficient investments in taxable accounts (brokerage account) and tax-inefficient investments in tax-deferred accounts such as 401(k)s and IRAs.
- Tax-efficient investments may include exchange-traded funds that do not throw out gains each year, and municipal bonds that pay tax-free interest.
- Tax-inefficient investments include dividend paying stocks, real estate, taxable bonds.
2) Contributing more to your 401(k) on a pre-tax basis:
- This seems obvious but your 401(k) allows you to stash away a lot of money for retirement in a tax advantaged manner.
- In 2024, you can contribute $23,000 as an employee and $7,500 on top of that if you’re over 50.
3) Backdoor Roth IRA contributions:
- If you are over the income limit to contribute directly to Roth IRA, there is a way around this by using the backdoor Roth IRA strategy.
4) Mega-backdoor Roth 401(k) contributions:
- This is a great tool for high income earners if your 401(k) plan allows for it.
- In order to utilize this strategy, you need to the ability to max after-tax contributions to your 401(k).
- See this article for more details: Roth 401(k) Conversion Strategy - Ryan Johnson | Ameriprise Financial (ameripriseadvisors.com)
5) Roth conversions:
- Roth conversions allow you to pay the tax on IRA distributions now. Once converted, you enjoy tax-free growth and are never subject to RMDs.
- See this article for more details: Roth Conversions - Ryan Johnson | Ameriprise Financial (ameripriseadvisors.com)
6) Health savings account (if you’re in a high deductible health plan):
- Contributions go in pre-income and pre-FICA tax (extra 7.65%). Distributions used for medical expenses are tax free as well.
- You can re-imburse yourself for medical expenses paid out of pocket at any time while continuing to let the HSA grow tax free if it’s invested.
7) Owning real estate:
- Real estate is a highly tax advantaged asset class.
- You could potentially have the following benefits available to you: bonus depreciation, cost segregation studies, 1031 exchanges, etc.
8) Equity compensation planning:
- Many employees are compensated by being awarded stock. Developing a strategy around this can be very beneficial.
- See this article for more details: Basics of Equity Compensation - Ryan Johnson | Ameriprise Financial (ameripriseadvisors.com)
9) Bunching charitable contributions, medical expenses, etc:
- With the increased standard deduction, you only benefit from larger charitable contributions and large medical expenses.
- The tax impact of smaller charitable contributions and medical expenses (in excess of 7.5% of Adjusted gross income) is pretty much non-existent.
- As a result, deferring itemized deductions into a single tax year has become a common tax mitigation strategy.
Utilizing the strategies that apply to you can lead to significant tax savings annually and over your lifetime. You want to get ahead of these things and start planning before it's too late.
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