April 15th is four months away, but there are plenty of actions you can take before then to help manage your tax bill. From maximizing tax-advantaged savings accounts to donating to charity, here are nine strategic tax moves to consider before year-end.
1. Take required minimum distributions (RMDs) - If you're age 73 or older, you must take minimum distributions from your tax-deferred retirement accounts by the end of the year. Missing the deadline could subject you to a 25% penalty on the portion of the RMD you failed to withdraw. If you are unsure about the amount of your RMD, upload your December of 2022 retirement account statements to your portal and we will help calculate the amount needed to withdraw.
2. Maximize your 401(k) - Contributing the maximum amount to your tax-deferred employer-sponsored retirement plan can help reduce your taxable income for the current year. In 2023, the maximum contribution for 401(k)s and similar plans is $22,500 ($30,000 if age 50 or older).
3. Contribute to a Roth 401(k) - If your employer offers the option you can choose to make after-tax contributions to a Roth 401(k) up to the $22,500 limit ($30,000 if age 50 or
older) —minus whatever you might've contributed to your traditional 401(k)—before year-end.
4. Consider a Roth conversion - If your income exceeds Roth individual retirement account contribution limits ($228,000 for couples filing a joint return, $153,000 for single filers), you can convert the pretax savings in a traditional IRA to a Roth IRA. While this strategy will increase your tax liability this year, it will put you in a position to have tax-free withdrawals in retirement. Call the Monotelo office to determine if a Roth Conversion makes sense for your particular situation.
5. Consider a mega backdoor Roth - If your workplace retirement plan permits it, the mega-backdoor Roth allows high-income earners to save in a Roth account while avoiding the income limits of a Roth IRA and the tax consequences of a regular Roth conversion. To take advantage of this strategy, you first max out your normal, pretax 401(k) contributions for the year, then contribute after-tax dollars up to the overall account limit of $66,000 in 2023 ($73,500 if 50 or older), after which you can convert those funds to a Roth IRA. You should roll over those funds as quickly as possible to avoid being taxed on any additional investment returns after the conversion.
6. Optimize Your Charitable Giving - You can deduct donations to qualified charities up to 60% of your adjusted gross income (AGI).
Donating appreciated long-term investments can be especially tax-efficient because you don't have to recognize the capital gains and you can receive a tax deduction for the full fair-market value of the donation (up to 30% of your AGI).
Qualified charitable distribution (QCD): If you're 70½ or older, in 2023 you can donate up to $100,000 to a charity directly from your IRA using a QCD. You won't receive a tax deduction for the donation, but the gifted amount can be used to satisfy your RMD without adding to your taxable income. For charitably-inclined retirees, this is a great way to do your charitable giving.
7. Exercise nonqualified stock options (NQSO) - If your company issues NQSOs, you should wait until the end of the year to exercise them. Because they are taxed as ordinary income when exercised, you want to be careful how much income you create when exercising them. By waiting until the end of the year you can manage your taxable income by exercising just enough to stay within your targeted tax bracket.
8. Harvest losses - When rebalancing your portfolio at year-end , you may be able to reduce your tax liability by offsetting any realized capital gains with your losses. If you do employ tax-loss harvesting, you cannot buy the same or a similar security within 30 days to avoid the pitfalls of the wash-sale rule. Also remember that any losses beyond $3,000 will carry forward to future years.
9. Maximize Other Tax-Deferred Savings Accounts
Health savings accounts (HSAs): $3,850 for individuals ($4,850 if 55 or older) and $7,750 for families ($8,750 if 55 or older). HSAs provide many tax benefits, including tax-free earnings and withdrawals (when used for qualified medical expenses), and you can deduct after-tax contributions.
Traditional IRAs: Up to $6,500 ($7,500 if you're 50 or older). However, if you or your spouse are covered by an employer retirement plan, contributions to a traditional IRA may not be fully tax-deductible and deductions may be phased out.
Roth IRA contributions are made with after-tax dollars. While they will not reduce your taxable income this year, they may help you reduce your lifetime tax liability. That’s because all contributions and earnings can be withdrawn tax-free if you've held the account for five years and are age 59½ or older. Also, Roth IRAs are not subject to RMDs. Keep in mind you cannot contribute to a Roth IRA if your income exceeds $153,000 (or $228,000 if you file a joint return with your spouse).
Oh! And one more: Give It Away! You can give away up to $17,000 ($34,000 if you are married) to an unlimited number of people without eating into your lifetime estate- and gift-tax exemption. This won't reduce your taxable income for the year, but it will allow you to strategically transfer wealth to your heirs tax-free.
To see how any of these strategies apply to your financial situation, or to hear more year-end tax-saving moves, schedule a tax planning conversation with Monotelo Advisors.
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
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