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Essential Tax & Financial Planning Actions to Consider Before Year End Thumbnail

Essential Tax & Financial Planning Actions to Consider Before Year End

Investor Insights

As we approach the end of the year, it's an excellent time to take a close look at your financial strategies and make the most of opportunities to optimize your financial well-being. In this article, we'll delve into three essential financial actions to consider before December 31st: Roth conversions, maximizing your retirement plan contributions, and charitable contributions (plus, the advantages of Donor Advised Funds). 

Roth Conversions: A Smart Tax Strategy with Unique Benefits

Roth conversions can be a powerful tax strategy, especially if you anticipate lower income in the current year than in future years. One unique advantage of Roth IRAs is that they are not subject to required minimum distributions (RMDs) during your lifetime. This means you have more flexibility in managing your retirement income and legacy planning. 

By converting a portion of your traditional IRA or 401(k) into a Roth IRA, you can potentially reduce your future tax burden. Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, making them an attractive option for those looking to minimize taxes and maximize their retirement income. 

Keep in mind that the amount you convert will be added to your taxable income for the current year, so it's essential to analyze your tax situation carefully to determine the appropriate timing of a Roth conversion. The truth is, you will pay taxes on your IRA distributions now or in the future. With a Roth conversion, you are choosing to pay the tax now to try and lower your overall lifetime tax bill! Our team can help you determine the optimal amount to convert to minimize taxes while taking advantage of this valuable strategy. 

Maximize Your Retirement Plan Contributions

Contributing to your retirement accounts is not only a wise financial move but also an excellent way to reduce your taxable income. If possible, try to max out your contributions to retirement plans such as your 401(k), IRA, or SEP IRA if you're self-employed. For 2023, the contribution limits for 401(k) plans are $22,500 for individuals under 50 and $30,000 for those 50 and older. 

If you haven't reached these limits yet, consider increasing your contributions before year-end. These additional contributions can grow tax-deferred, helping you build a more substantial retirement nest egg while lowering your taxable income by each dollar you contribute to a pre-tax IRA or 401(k). This deal expires at the end of each year, and you only have so many years to utilize, so consider taking advantage of it! 

Charitable Contributions and Donor Advised Funds: Give While Reducing Taxes and Maximizing Impact 

Contributing to charitable organizations supports your community and can significantly reduce your tax liabilities. To claim a federal income tax deduction, ensure your charitable donations are completed by December 31. However, to maximize the benefits of your charitable contributions, it's crucial to surpass the standard deduction threshold. In some cases, it may be more advantageous to "bunch" contributions in alternate years to achieve this goal.

One effective strategy for charitable giving is utilizing Donor Advised Funds (DAFs). DAFs allow you to make tax-deductible contributions to the fund and then recommend grants to your favorite charities over time. This approach allows you to take an immediate tax deduction while maintaining flexibility in distributing funds to support causes you care about. It's a powerful way to optimize your giving and your tax strategy simultaneously. 

Additionally, gifting appreciated assets can be a particularly effective strategy to help keep your estate below the federal estate tax threshold, especially considering the scheduled reduction in the federal estate tax exemption in 2026. By donating appreciated assets, you not only support charitable causes but also strategically manage your estate's tax implications. 

You may also consider a Qualified Charitable Distribution (QCD). If you are at the age of Required Minimum Distributions (RMD), a QCD can both satisfy your RMD and lower your tax bill because the distributions to a charity are not subject to income tax like an RMD is. You don’t have to pick one or the other, either. You may choose to distribute an RMD and QCD in the same year! 

Take Action Now for a Stronger Financial Future 

As we near the end of the year, we encourage you to take action on any essential financial planning strategies that may apply to you. Whether it's a Roth conversion to minimize future taxes, maximizing retirement contributions for a more comfortable retirement, or exploring the benefits of Donor Advised Funds to make a lasting impact through charitable giving, now is the time to act. 

Effective tax and financial planning require thoughtful consideration and expert guidance. Our dedicated team is here to assist you in making informed decisions that align with your financial objectives. 

Don't hesitate to Contact Us today to discuss how these strategies can benefit your unique financial situation. Your financial well-being is our priority, and we're committed to helping you navigate these important decisions.


Securities offered through American Portfolios Financial Services, Inc., Member: FINRA, SIPC. Advisory services offered through American Portfolios Advisors, Inc. and Novem Group, Inc., SEC-Registered Investment Adviser firms. American Portfolios Denver, Inc. and Novem Group, Inc. are independent of each other and independent of American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc.