Year-end planning ideas for individuals

2024 brought economic resilience, cooling inflation, a pause in the Federal Reserve’s interest-rate hikes, and a shift toward lowering interest rates, including a second rate cut by the Fed in November.

Given all that, here are some wealth planning ideas to consider:

Tax Bracket Management

Consider accelerating income and accelerating or deferring deductions. If you expect to be in a higher tax bracket in the next few years, you could accelerate income so it is taxed at the lower rate. You can also defer deductible expenses until later years, when they can be claimed to offset higher-taxed income.

A few strategies to consider include:

• Roth conversions.
• Harvesting gains and deferring loss harvesting.
• Exercising stock options.
• Accelerating bonuses.
• Accelerating an installment sale gain or moving up the closing date of a sale.

Since more taxpayers are using the standard deduction, consider bunching expenses to maximize itemized deductions in certain years. This tactic can help circumvent deduction restrictions imposed by the Tax Cuts and Jobs Act (TCJA). This applies to deductions such as charitable, state and local taxes (up to $10,000), mortgage interest and miscellaneous itemized deductions. If your tax rate is expected to be higher in the future, consider deferring itemized deductions, as previously mentioned.

Gain/Loss Harvesting

Make the most of the reduced capital gain tax rates. Capital gain planning is still important. Long-term capital gains are taxed at a rate of 0%, 15%, or 20%. The 3.8% surtax on net investment income may also apply.

For those capital assets with gains, consider capital gain harvesting. Those assets can be sold now and repurchased with a higher basis so future sales will have less capital gain that could be taxed at higher rates. Always work with your tax advisor and portfolio strategist near year-end for strategies to match capital gains and capital losses. Remember that for individuals, capital losses can’t be carried back but can be carried forward indefinitely.

Taxpayers wanting to realize paper losses on stocks while still retaining the same investment position can sell shares and buy shares in the same company or another company. However, you need to avoid the wash-sale rules, which disallow the loss if substantially the same shares are acquired within the 61-day period beginning 30 days before and ending 30 days after the sale.

Roth Conversions

Converting a traditional IRA to a Roth IRA can offer several advantages:

• No more required minimum distributions (RMDs)
  With a Roth IRA, you won’t be required to take withdrawals during your lifetime, giving you more control over your retirement funds.
• Tax-free growth and withdrawals
  Your money in a Roth IRA grows tax free, and you won’t owe taxes on qualified withdrawals in retirement.
• Potential tax-free inheritance for your children

Unlike with traditional IRAs, your heirs generally won’t owe income tax on inherited Roth IRA assets.

It is important to note, however, that while there are no lifetime RMDs for the original Roth IRA owner, beneficiaries generally must withdraw the funds within 10 years of the owner’s death. This 10-year rule provides flexibility in how the inherited Roth IRA withdrawals are taken, and the funds can continue to grow tax-free during that period.
If your beneficiaries are in a lower tax bracket than you are, then conversion may not be the right strategy. Higher-earning taxpayers who cannot contribute directly to a Roth IRA may be able to contribute to a non-deductible IRA that might later be converted to a Roth IRA. Those unable to contribute to a Roth IRA have other alternatives. If your company retirement plan allows after-tax contributions and in-service distributions, you can convert the after-tax amount to a Roth IRA or do an in-plan Roth conversion to a Roth 401(k) account. Just be mindful that the TCJA eliminated the option to recharacterize Roth conversions.

Review Your Portfolio

Make sure your asset allocation aligns with your targets, risk tolerance and return requirements. Having a financial plan helps determine what the required return is to meet your goals. Taking on more risk may seem unnecessary if your goals are sufficiently met. Staying disciplined with a long-term investment horizon is key. For some investors, new tools such as alternatives and real assets should be incorporated where appropriate.

Review RMDs

With IRA planning, the SECURE Act of 2019 basically eliminated the stretch IRA, which previously allowed IRA or defined contribution plan beneficiaries to draw down the remaining plan benefits over the beneficiary’s life expectancy. Inherited IRAs and inherited defined contribution plans must now be distributed within 10 years of the original owner’s death.
The final SECURE Act regulations were issued in July, five years after proposed regulations were introduced. As a result, beginning in 2025, if an IRA owner dies on or after their required beginning date, the account is also subject to annual RMDs for years one to nine of the 10-year period. Beneficiaries who inherited retirement account assets should review how the post-death minimum distribution rules apply to their particular situation.

There are ways to simulate a stretch an IRA using lifetime income strategies such as a charitable gift annuity as beneficiary of the account or using the RMD to purchase life insurance that will provide a tax-free benefit to heirs. Discuss any possible risk with these strategies with your advisors.

Be Mindful of Cybersecurity

The end of the year is a good time to reassess your cybersecurity hygiene. Consider a digital password management system. Protect your home network with a network firewall and antivirus software. Freeze your credit. Back up your information regularly.

If any of your personal information was compromised by any of the recent data breaches, even if you don’t believe that the breach may affect you, now is a good time to follow those recommended procedures given in any post-breach communication from the affected companies to further protect your personal information. Some causes of leaked data are the result of poor security practices on the part of the consumer. Now is a good time to change passwords and/or review credit reports or sign up for any free identity-theft monitoring.

Eric Lindquist is SVP Colorado market director for Key Private Bank. He can be reached at [email protected]. Tina A. Myers, CFP, CPA, AEP, is director of planning & advice for Key Private Bank. She can be reached at [email protected].