Year-End Retirement Tax Planning Actions if You Have $1 Million or More

There are two big deadlines every year when it comes to tax planning. The most important deadline is December 31, and the other is April 15 (the deadline to file your taxes). Most of the strategies we’re talking about here will need to be done before December 31 because they involve tax planning, not tax prep.

What’s the difference? Tax planning is what you do throughout the year, while tax prep is how you collect and present your tax information to the IRS for the previous tax year. Both are important, but there are actions you can take before the end of the year to complete tax prep efficiently and make sure you’re taking advantage of opportunities to potentially reduce your tax bill.

Action No. 1: Consider a Roth conversion

One of the most important strategies we’re seeing right now is a Roth conversion, mostly because tax rates right now are among historical lows. Many analysts suggest these historical lows will continue with the extension of the Tax Cuts and Jobs Act (TCJA), which is scheduled to expire at the end of 2025 but could be extended by Congress. However, an extension is not guaranteed.

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With a Roth conversion, you move money from your tax-deferred investments (e.g., 401(k) or traditional IRA) to a tax-free type of investment like a Roth. The converted amount is counted as ordinary income and taxed at your regular income rates for the year in which you take the conversion, but you will not pay taxes on future distributions from a Roth.

Joe F. Schmitz Jr., CFP®, ChFC®

Joe has built a comprehensive retirement planning company focused on helping clients grow and preserve their wealth. Under his leadership, a team of experienced financial advisers use tax-efficient strategies, investment management, income planning and proactive health care planning to help their clients feel confident in their financial future — and the legacy they leave behind.

This strategy doesn’t make sense for everyone, but we often see this work well for people age 55 or older who have $1 million or more saved in tax-deferred investments. This is because of required minimum distributions (RMDs), which the IRS says you must take beginning at age 73 or 75 (depending on the year you’re born).

With RMDs, the government says you must take a certain amount from your 401(k) or IRA each year, and this distribution is counted toward your taxable income. The more money you have saved in a tax-deferred account, the more you will be required to take out each year — and the more you could end up owing in taxes.

Converting a tax-deferred account to a Roth allows you to get ahead of this requirement. But the conversion must be completed by December 31, because custodians (the firms that hold your money) may require longer processing times due to a higher volume of requests.

If you’re working with an adviser, they can run in-depth calculations to determine whether a Roth conversion works for your situation. They can also help you decide how much of your tax-deferred accounts to convert for that tax year. Since a Roth conversion can also impact capital gains and Medicare IRMAA premiums, it’s best to work with a knowledgeable and experienced tax planning team.

Action No. 2: Donate to charity

Another tax planning strategy to complete before the end of the year is to donate to charitable organizations. If you’re age 70½ or older and own an IRA, a qualified charitable distribution (QCD) might be a good option for reducing your taxes while doing good for your community.

A QCD allows you to move money from your IRA directly to a charity of your choosing. This donation is a win-win: Not only does it reduce your taxable income for the year, but the charity is not taxed for the donation.

People who are younger than 70½ may want to look into a donor-advised fund (DAF). Through a DAF, you can bunch charitable donations for one year or multiple years, then donate the assets to your chosen charity. The primary reason for this strategy is to take advantage of itemized deductions vs the standard deduction, which can lead to more tax savings. The other advantage is the ability to move highly appreciated non-qualified assets directly into the DAF; when you sell the asset in the DAF, you will avoid paying capital gains tax on that asset.

Action No. 3: Fund your retirement plan

If you’re still working, then it’s a good idea to continue saving money into your Roth or employer-sponsored plan (e.g., 401(k), 403(b) or Thrift Savings Plan). Be aware that these funds are coming straight from your paycheck, so it’s a good idea to check your contributions to make sure you’re taking full advantage of an employer match.

We’re seeing many people with $1M or more saved opt into the Roth 401(k) if their employer plan offers it. Under this option, your funds grow tax-free, balancing out funds saved in traditional tax-deferred plans. People who are age 50 or older can defer $23,000 to their employer-sponsored plan plus make an additional catch-up contribution of $7,500 for a total deferral of $30,500 for the 2024 tax year.

Action No. 4: Contribute to an IRA

The final tax planning strategy I’ll mention actually doesn’t have to happen until April 15, and you must have earned income to take advantage of it. If your income comes in higher than expected or more of your Social Security benefits were taxable, you can contribute to a traditional IRA to lower your taxable income for the tax year in which the contribution is made. If you want to be in a lower tax bracket in the future, you might consider contributing to a Roth IRA instead and take advantage of tax-free growth.

All of these strategies can be effective, but they’re useless unless you act. Take these steps now for the most impact on your retirement planning. It’s also a good idea to make sure your financial planner and accountant are working together to ensure you’re getting the most out of your plan. It can be useful to work with a financial planning team that offers these services under one roof to ensure nothing is missed and communication is on point.

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