Year-End Tax Planning for a Financially Healthier Retirement

A woman looks at her laptop while using a calculator at her desk.

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By Ryan Marston, Investment Adviser Representative

published 1 December 2023

When you hear the words “tax planning,” you might envision the process of preparing and filing your income tax return. But what you may not realize is that there’s a whole different side of taxes that has nothing to do with going to TurboTax, H&R Block or your trusted tax preparer.

The goal of tax planning is to decrease your tax liability and maximize your income. It’s a strategy that can have a huge impact on your financial well-being throughout your working life and especially in retirement.

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The end of the year is a great time to focus on your tax strategy because now that we’re in the fourth quarter of the year, you should have a good gauge of how the first three quarters of the year panned out for you. You can do an analysis of your financial situation to identify capital gains, which are simply any profit you make by selling an asset. Perhaps you sold a house or a car. Other common gains are profits earned from selling stocks and bonds. Those are assets that you need to account for.

The most common assumption people make is that they’ll pay less in taxes in retirement. Many of the people I work with are surprised to find out that the company-sponsored retirement savings plans they've spent their lifetime contributing to are actually ticking time bombs when it comes to taxes. Everything ends up getting lumped into a tax-deferred 401(k) or 403(b), and then when they’re set to retire, they don’t realize all the taxes they’re about to pay on their withdrawals over the next 20 or more years. Despite the significant impact of taxes on their income, many people are unfamiliar with their tax situation and end up with a major surprise.

There are also misconceptions about the tax code because the rules that dictate how income is taxed in our country are extremely complicated. Many people don’t know what they’re required to pay and what they’re not. They might not be able to come up with a solid tax planning strategy on their own to reduce their tax burden. And because the tax code is confusing, many aren’t able to keep up with all the changes.

The end of the year is an important time to make sure you’re supplying as much money as you can to your retirement accounts, keeping in mind contribution limits for IRA and 401(k) accounts. For 2023, you can contribute up to $22,500 in a 401(k) and as much as $6,500 in a traditional IRA or Roth IRA. If you're over the age of 50, you can contribute an additional $7,500 to your 401(k) for a total of $30,000 and up to $6,500 for a traditional or Roth IRA, plus $1,000 in catch-up contributions. Adequately contributing to your retirement accounts allows you to lower your gross income and your tax liability.

You can convert your tax-deferred accounts, like traditional IRAs and 401(k)s, to tax-free accounts such as a Roth IRA. Roth IRA conversions can be especially good when the stock market is experiencing a downturn. In some cases, this could save you thousands of dollars. Markets typically bounce back after a major dip, so when that happens, you can re-invest those dollars and avoid tax liability. If you want to get a better idea of how you should go about all of this, you can find Roth conversion calculators online or reach out to your financial adviser.

Tax-loss harvesting is a non-charity-related strategy that takes place in taxable accounts. It’s when you sell an asset or security at a loss to offset the amount of capital gains tax you owe from selling profitable assets. This can help keep the value of your investment portfolio intact while alleviating tax burden, which is why it tends to be more beneficial for those in higher tax brackets. So if that’s you, then you may want to include tax-loss harvesting in your tax strategy.

If you enjoy donating to charities, you should look at ways to make the most of those donations. A donor-advised fund (DAF) is a relatively simple and flexible way of giving that allows you to support causes that are important to you. A DAF is an investment account you create that is dedicated solely to supporting your favorite charities. When you donate cash or other assets to a DAF at a public charity, you’re usually eligible to receive an immediate tax deduction. Another major benefit is that the money you place in your charitable investment account has the potential to grow, which makes more money available for giving without actually having to put more dollars into that account.

If you’re planning on retiring, it’s important to keep in mind that you are required to make withdrawals from your retirement accounts each year. These are called your required minimum distributions (RMDs), and it’s what allows you to avoid tax penalties in retirement. Setting up a qualified charitable distribution (QCD) is one way you can fulfill your yearly required RMD. A QCD is a direct transfer of funds from your IRA account to a 501(c)(3) organization. This strategy works best if you’re required to take a minimum distribution from an IRA but don’t need the money. Instead of taking the distribution as income and dealing with increased tax liability, you can give it to charity to reduce that burden.

The most important thing to remember when it comes to tax planning is that every situation is unique. Keep in mind that general advice is meant to serve as a guiding post and not a rulebook you have to follow to a T. No two people have the same financial situation, so it’s crucial to speak with a financial adviser and consult with your CPA to make sure you’re creating a tax strategy that will reduce your tax liability, maximize your income and ensure you are financially stable in retirement.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Ryan Marston joined Rubino & Liang in 2009 so he could assist pre-retirees and retirees with strategies that move them closer to maintaining a happy, stress-free lifestyle. Ryan is Series 65 licensed, provides financial and investment advice and personally manages his clients’ investment portfolios as a fiduciary adviser. After graduating from the University of Connecticut with a major in economics, Ryan entered the financial industry at Bank of America Investment Services.