Navigate these tax and retirement milestones to optimize savings and avoid penalties.
Staying on top of year-end tasks helps you avoid penalties and take full advantage of tax benefits.
Key Takeaways
The end of the year brings several deadlines that could be costly for investors to overlook. Chief among them are tax-related deadlines for retirement account contributions and capital gains harvesting.
Staying vigilant about these year-end tasks saves you money in penalties for missed deadlines and helps you utilize the benefits of the tax code. These year-end retirement deadlines include:
If you plan to contribute to your employer-sponsored 401(k) plan, the deadline is Dec. 31.
However, if you intend to contribute to an individual retirement account, you have until the tax filing deadline in April 2025.
If you are a business owner and would like to set up a simplified employee pension, or SEP IRA, that deadline is also April 2025, said Stefan Greenberg, managing partner at Lenox Advisors in Stamford, Connecticut, in an email.
“If you plan to contribute to a solo 401(k), your employee contributions need to be made by Dec. 31, but the employer contributions can be made before the business files their taxes,” Greenberg said.
One of the most important year-end withdrawal deadlines concerns required minimum distributions from IRAs. Those withdrawals must be made before Dec. 31 or the account owner faces a penalty.
Signed into law in December 2022, the SECURE 2.0 Act reduced the penalty for a missed RMD or incomplete withdrawal to 25% from 50%, and the penalty may be reduced to 10% if the mistake is corrected within two years.
A U.S. House of Representatives Ways and Means Committee report from March 2022 found that many failures to take an RMD are inadvertent rather than attempts to avoid taxation. The committee said it wanted to take steps to reduce the penalty on retirement savers who attempt to correct an honest mistake.
“If this is your first time taking an RMD, you get a little extra time,” Greenberg said. “You can take your distribution by April of the following year. Your RMDs thereafter would adhere to the Dec. 31 deadline.”
The deadline for converting a traditional IRA to a Roth IRA is Dec. 31.
A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth account, with the converted amount subject to income tax. Investors use this strategy to benefit from tax-free withdrawals in retirement.
According to brokerage Fidelity, a Roth recharacterization typically occurs for one of three reasons:
The timetable for recharacterizing a Roth IRA contribution back to a traditional IRA contribution differs from some of the other retirement account cutoff dates.
“The deadline for recharacterizing a Roth IRA contribution back to a traditional IRA contribution is Oct. 15 of the year following the year in which you need to make the adjustment,” said Aaron Cirksena, founder and CEO of MDRN Capital in Annapolis, Maryland, in an email.
According to the Internal Revenue Service, retirement savers who are age 50 or older at the end of the calendar year can make annual catch-up contributions.
The catch-up contribution limit for 401(k) and similar employer-sponsored plans is $7,500 in 2024.
The IRS allows catch-up contributions of up to $1,000 to your traditional or Roth IRA. Catch-up contributions to an IRA are due by the due date of your tax return in April or in October for those who extend their tax filing.
These days, fewer Americans itemize their taxes, but it’s still possible to deduct up to 60% of adjusted gross income when you make a cash donation to a qualified charity. If you donate appreciated securities, you may be able to deduct 30%.
However, you must make contributions by Dec. 31 to get those deductions.
If you don’t itemize your taxes, you could still get the deduction using a strategy called bunching. That involves clustering charitable deductions in a single year, then skipping the following year or even a few subsequent years.
According to Fidelity, “This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions.”
The enrollment period for Medicare begins three months before you turn 65 and ends three months after your 65th birthday.
The open enrollment period runs from Oct. 15 through Dec. 7. “You can apply during this time if you missed the initial enrollment period, but keep in mind you may have to pay a late enrollment penalty,” said Kendall Meade, a certified financial planner at San Francisco-based SoFi, in an email.
Social Security has no particular deadlines pegged to the year’s end. New recipients can apply for their Social Security retirement benefits up to four months in advance and begin receiving benefits as early as age 62, said Meade.
“The Social Security Administration will reduce your benefit if you do not wait until full retirement age, which is 67 for most,” she added. “Some people may choose to delay until age 70 to receive the maximum benefit. There is no benefit to waiting past age 70.”
Related:
Reasons to Take Social Security Late at Age 70
Adhering to end-of-year investing and tax deadlines is crucial if you want to maximize the benefits of saving and minimize penalties.
By taking action in a timely fashion as required by tax law, you can capitalize on investment opportunities. You’ll also avoid missed contributions that could impact your financial health in the long term.
https://money.usnews.com/money/retirement/401ks/articles/year-end-retirement-planning-deadlines
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