As the year winds down and holiday celebrations take center stage, it’s easy to overlook the financial opportunities that can help set the stage for long-term success. At Aldrich Wealth, we encourage our clients to take a proactive approach to year-end financial planning, leveraging strategic actions now to yield significant tax savings, bolster your financial position, and ensure alignment with your broader goals.
Key year-end strategies and how Aldrich Wealth helps clients optimize their financial outcomes include:
Manage Tax Bracket Variability
An effective tax strategy requires understanding how your current-year income compares to prior years and identifying opportunities to strategically time deductions or income recognition. At Aldrich Wealth, we assist clients in managing their tax brackets and collaborate with tax professionals to evaluate and implement tailored strategies. Our advisors work closely with clients to identify timing opportunities for deductions and income recognition while considering broader financial goals.
- Accelerate Deductions: In high-income years, it can be beneficial to accelerate itemized deductions such as charitable contributions.
- Defer Income: For those expecting a lower tax bracket in the future, deferring income items like bonuses, the sale of investments, or stock option exercises can mitigate tax liability.
- Income Recognition Opportunities: While deferring income can be a valuable strategy in high-income years, there are situations where recognizing income now can lead to long-term tax savings. Consider these opportunities:
- Roth Conversions: If you anticipate being in a higher tax bracket in retirement, converting a portion of your traditional IRA to a Roth IRA can be advantageous. While you’ll pay taxes on the converted amount now, future growth and withdrawals from the Roth IRA are tax-free, potentially reducing your lifetime tax burden.
- Exercising Stock Options: For those with non-qualified stock options (NSOs) or incentive stock options (ISOs), it might make sense to exercise options in a lower-income year to minimize taxes. Timing the exercise to align with years of reduced income can reduce the tax impact and potentially avoid Alternative Minimum Tax (AMT) issues with ISOs.
- IRA Withdrawals: If you’re retired and in a lower tax bracket, withdrawing funds from a traditional IRA earlier than required can minimize future Required Minimum Distributions (RMDs). By strategically recognizing income during low-tax years, you can avoid being pushed into a higher bracket later when RMDs are mandatory.
By thoughtfully managing income recognition, you can balance your tax liabilities over time and take advantage of periods when you’re in a lower tax bracket to optimize your financial strategy.
Optimize Charitable Giving with Appreciated Securities
Year-end is a prime time for charitable giving, and gifting appreciated securities instead of cash can significantly enhance your tax benefits. When you donate long-term appreciated securities held in a taxable account, you avoid paying capital gains tax on the asset’s appreciation while receiving a tax deduction for the full fair market value of the securities (up to the annual IRS charitable deduction limit). Any donation amount exceeding the annual limit can be carried forward for up to five years.
This approach offers a dual benefit:
- Avoiding Capital Gains Tax: By donating the appreciated stock directly, you sidestep the capital gains tax you would owe if you sold the stock first and donated the cash proceeds.
- Preserving Cash for Other Needs: Instead of writing a check, you can retain high-basis cash or other assets for liquidity or future investments while still meeting your charitable goals.
Example: Imagine you want to make a $10,000 donation. You have a stock currently worth $10,000 that you originally purchased for $4,000.
If you sell the stock and donate the cash, you’ll owe capital gains tax on the $6,000 gain (assuming a 20% tax rate, that’s $1,200 in taxes). This leaves only $8,800 available for the donation.
However, if you donate the stock directly, you avoid the $1,200 capital gains tax and can still deduct the full $10,000 market value of the stock as a charitable contribution (subject to IRS limits).
In this scenario, donating appreciated securities directly allows you to maximize your deduction, avoid capital gains tax, and preserve your cash for other priorities.
Another tool many of our charitably inclined clients use is a donor-advised fund (DAF). This vehicle allows you to make a significant current-year contribution to receive an immediate tax deduction while distributing funds to charities over time.
We can help analyze your portfolio to identify the most tax-efficient assets for donation, ensuring you meet your philanthropic and financial objectives with confidence.
Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, qualified charitable distributions (QCDs) offer another tax-efficient way to give. A QCD allows you to donate up to $100,000 annually directly from your IRA to a qualified charity.
Key benefits of QCDs include:
- Exclusion from Taxable Income: Unlike a regular IRA withdrawal, a QCD is not included in your taxable income. This can help reduce your adjusted gross income (AGI), potentially lowering the impact on Social Security taxation and Medicare premiums.
- RMD Satisfaction: For individuals subject to RMDs, a QCD can count toward your RMD obligation for the year, effectively reducing your tax liability while supporting a cause you care about.
Example: Let’s say your RMD for the year is $20,000, and you don’t need the full amount for living expenses. By directing $10,000 of your RMD to a qualified charity as a QCD, you fulfill half of your RMD requirement and exclude that $10,000 from your taxable income, resulting in significant tax savings.
Combining strategies like QCDs and gifting appreciated securities can further enhance your year-end giving plan. We can guide you in selecting the most effective approach to align your philanthropic intentions with your financial goals.
Maximize Retirement Contributions
Contributing to retirement accounts is one of the simplest yet most impactful ways to build wealth and reduce taxes. Year-end is an excellent time to review your contributions and ensure you’ve maximized the tax benefits. We guide clients in determining the optimal contribution strategy, factoring in current income, future tax expectations, and overall retirement goals.
- 401(k)/403(b) Plans: For 2024, individuals under age 50 can contribute up to $22,500, while those age 50 and older can make an additional $7,500 catch-up contribution. Starting in 2025, the catch-up contribution is increased to $11,250 for individuals ages 60 to 63 as part of the legislation of the Secure Act 2.0 and $7,500 for all others over age 50.
- Pre-Tax vs. Roth Contributions: Deciding whether to make pre-tax or Roth contributions—or a combination of both—depends on your current and projected future tax bracket.
Ongoing Portfolio Tax Management
Throughout the year, Aldrich Wealth is selling positions with losses and reinvesting in similar investments to maintain market exposure while realizing tax benefits. At year end, mutual funds capital gain distributions are analyzed and if distributions outweigh unrealized gains positions the funds are sold to reduce overall taxes. These are steps in the process of monitoring portfolio tax efficiently and improving after-tax returns.
These proactive steps are part of our commitment to monitoring portfolio tax efficiency and improving after-tax returns for our clients.
Additional Year-End Planning Considerations
At Aldrich Wealth, our comprehensive approach to financial planning goes beyond taxes and retirement contributions. We help clients address broader opportunities, including:
- Required Minimum Distributions (RMDs): Ensure compliance to avoid penalties.
- Flexible Spending Accounts (FSAs): Use up remaining funds before year-end deadlines.
- Tax-Efficient Wealth Transfers: Assess strategies for passing assets to heirs in a tax-efficient manner during your lifetime.
Estate Planning Considerations
Year-end is an ideal time to review your estate plan to ensure it reflects your current wishes and financial circumstances. Estate planning isn’t just about wealth transfer; it’s also about providing clarity around your wishes and providing financial security for your loved ones. Key steps to consider include:
- Review Beneficiary Designations: Ensure that the beneficiary designations on retirement accounts, life insurance policies, and other assets are up to date. These designations override what’s stated in your will or revocable trust, so it’s crucial they align with your intentions.
- Update Estate Planning Documents: Life changes such as marriage, divorce, the birth of a child, or significant financial events may necessitate updates to your will, trust, or powers of attorney. If any of these life changes have occurred for you or if it has been 5 to 7 years since you last reviewed your estate planning documents, schedule time with your estate planning attorney to confirm these documents reflect your current goals.
- Plan for Health and Legacy Needs: Verify that healthcare directives and durable powers of attorney are current and appoint trusted individuals to make decisions on your behalf if necessary.
Proactively reviewing and updating your estate plan not only helps ensure your wishes are met but also helps to offer peace of mind that your legacy will be managed as intended. We can collaborate with your estate planning attorney to align your financial plan with your broader estate planning objectives.
How Aldrich Wealth Can Help
At Aldrich Wealth, we partner with individuals, families, and business owners to develop customized financial strategies that integrate tax planning, retirement savings, and investment management. Our advisors are here to help you make informed decisions that align with your goals and navigate the complexities of financial planning with confidence.
Key Takeaways for Year-End Planning:
- Review your tax situation to identify opportunities for deductions or income deferral.
- Leverage tax-efficient charitable giving strategies, such as donating appreciated securities or using a donor-advised fund.
- Maximize retirement contributions and plan for next year’s savings.
- Take advantage of tax-loss harvesting and other year-end financial tools.
Let us help you close out the year strong and start the next one with a clear financial roadmap. Contact our team to schedule a discussion today.
