Year-end retirement planning can be just as important as tax preparation. While tax preparation looks backward at what already happened, year-end planning gives you an opportunity to make decisions while there is still time to potentially affect your taxes, retirement income and overall financial plan.
For retirees and those approaching retirement, here are seven areas worth reviewing before December 31.
1. Have You Taken Your Required Minimum Distribution (RMD)?
If you're subject to a required minimum distribution, make sure you've taken the correct amount before the deadline.
Most retirement account owners who are subject to RMDs must begin taking them at age 73. RMD rules generally apply to traditional IRAs and many employer-sponsored retirement plans. Roth IRAs generally do not require distributions during the original owner's lifetime.
After your first RMD year, the annual deadline is generally December 31.
In addition to confirming that you've taken the required amount, consider whether enough federal and state income tax has been withheld from your distributions.
2. Should You Consider a Roth Conversion?
A Roth conversion moves money from a traditional tax-deferred retirement account into a Roth IRA. The taxable portion of the conversion generally becomes taxable income in the year of the conversion.
Why voluntarily pay taxes sooner?
Because good retirement tax planning isn't necessarily about paying the least tax this year. Sometimes it's about managing taxes over your entire retirement.
A Roth conversion may be worth discussing if you've recently retired, your taxable income has declined, you're not yet subject to RMDs or you have substantial savings in tax-deferred retirement accounts.
Instead of simply asking, “Should I convert to a Roth?” consider asking: “How much, if any, would make sense to convert this year?”
3. Are You Giving to Charity in the Most Tax-Efficient Way?
If charitable giving is already part of your plans, how you give may matter.
IRA owners age 70½ or older may be able to make a Qualified Charitable Distribution (QCD) directly from an eligible IRA to a qualifying charity. A qualifying QCD is generally excluded from taxable income and may also count toward an RMD.
For some retirees, this can be more tax-efficient than withdrawing money first and then making a charitable donation.
The important lesson: It's not only how much you give. How you give can matter, too.
4. Have You Reviewed Investment Gains and Losses?
If you own investments in taxable accounts, year-end is a good time to review realized and unrealized gains and losses.
An investment that has declined in value, for example, may potentially be sold to realize a loss that offsets certain capital gains. This is commonly called tax-loss harvesting.
However, taxes shouldn't drive investment decisions by themselves. Any change should still make sense within your overall investment strategy, and tax rules such as the wash-sale rule need to be considered.
Your investment strategy and tax strategy shouldn't operate independently of one another.
5. Have You Paid Enough in Taxes This Year?
Taxes can become more complicated in retirement.
Instead of receiving one paycheck with taxes automatically withheld, retirees may receive income from several sources, including Social Security, pensions, IRAs, annuities and investment accounts.
Before December 31, review your year-to-date income, estimated tax payments and withholding.
Finding a potential shortfall before year-end gives you more options than discovering it when your tax return is prepared the following spring.
6. Are Your Beneficiary Designations Current?
Not every important year-end financial decision involves taxes.
Beneficiary designations determine who receives assets from accounts such as IRAs, 401(k)s, annuities and life insurance policies. Yet these designations can sit unchanged for years.
Marriage, divorce, a death in the family, new grandchildren or changes in relationships are all reasons to review them.
And don't assume updating your will automatically updates the beneficiaries on your retirement accounts, annuities or insurance policies. These should be reviewed as part of your overall estate plan.
7. Do You Know Where Next Year's Retirement Income Will Come From?
Before the year ends, look ahead to the next 12 months.
How much money will you need beyond Social Security, pensions and other income sources? Where will it come from?
Will you use cash reserves, IRA distributions, annuity income, taxable investments—or a combination?
A retirement income plan shouldn't simply answer how much you can withdraw. It should also consider which accounts you draw from and when.
Those decisions can affect taxes, investment risk, future RMDs and how long your retirement assets may last.
Don't Wait Until Tax Season to Do Tax Planning
One of the biggest misconceptions about taxes is that tax planning happens when your tax return is prepared.
By then, many opportunities are already gone.
The final months of the year provide an opportunity to look at your retirement income, investments and taxes together while there may still be time to make adjustments.
Your Year-End Retirement Checklist
Before December 31, ask yourself:
- Have I completed my RMD?
- Should I evaluate a Roth conversion?
- Is there a more tax-efficient way to make planned charitable gifts?
- Should my taxable investment gains or losses be reviewed?
- Have I paid enough in taxes?
- Are my beneficiaries current?
- Do I know where next year's retirement income will come from?
You may not need to make a change in every area. The value is in reviewing them before the calendar makes the decision for you.
The Bottom Line
Retirement planning doesn't stop once you retire. Each year can bring new decisions involving income, taxes, investments, charitable giving and required distributions.
As the year winds down, one question can help focus the conversation:
Is there anything we should do before December 31 that we won't be able to do after December 31?
Sometimes the answer is no. Sometimes a relatively small adjustment can make a meaningful difference.
Either way, it's better to ask while there's still time to act.
Skemp Financial Services helps individuals and families in Warren, Erie and surrounding communities navigate retirement income planning, investment decisions and the financial choices that come with preparing for and living in retirement. Contact us if you'd like to review your year-end retirement strategy and the bigger financial picture.
Disclosures: This material is provided for general informational and educational purposes only and should not be construed as individualized investment, tax or legal advice or as a recommendation regarding any investment, debt-management or financial strategy.
Investing involves risk, including the possible loss of principal. Tax laws and individual circumstances vary and are subject to change. Consult appropriate financial, tax and legal professionals regarding your individual circumstances.