‘Tis the Season for Tax Savings: Year-End Moves to Deck Your Wallet

As the year winds down, it's natural to start looking ahead—and your finances deserve just as much attention as your holiday plans. With tax season around the corner, making a few smart moves now can mean valuable savings and smoother planning in the year to come.

In this episode of Capital Conversations, Accredited Investment Fiduciary® John Biedenstein and CERTIFIED FINANCIAL PLANNER® professional Colin Day cover three practical strategies that could help set you up for financial success before the year closes out: optimizing required minimum distributions, making the most of health savings accounts, and understanding Roth conversions.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts.

Below is a transcript of our most recent podcast episode, "‘Tis the Season for Tax Savings: Year-End Moves to Deck Your Wallet.

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John Biedenstein: Welcome. We have another Capital Conversations for you today. John Biedenstein here and I have with me, Colin Day.

Colin Day: Hello, John. How are you? This is weird. It's weird.

John Biedenstein: I'm great.

Colin Day: This is weird.

John Biedenstein: It's the first time I've done the intro. We've done these so many times. And I said, “Colin. I'm taking it today, Betty. It's mine.”

Colin Day: Yeah. This is like a Freaky Friday moment.

John Biedenstein: We got to change things up every once in a while. The election's over, we're coming up on a new year, and it's time to take some action.

Colin Day: If you want to take the reins, John, what are we even going to talk about today? Why did you drag me in here?

John Biedenstein: We are going to talk about tax planning. I know everyone thinks, “Okay, Thanksgiving is upon us. The holidays are upon us.” But, at the end of the holidays, you have that end of year. And there are certain things you want to take advantage of from a tax planning standpoint that set you up for this year that maybe saves you some money.

Colin Day: Absolutely. So I think what we'll do today is talk about three things. [There are] many different things that we can talk about when it comes to tax planning at year end. I think we'll just slim it down to three so we're within the time allotted for you all to commute to your place of work, or if you work from home for you to pour your coffee and walk upstairs.

Fair enough?

John Biedenstein: Perfect.

Colin Day: So let's start with required minimum distributions. Required minimum distributions, also known as RNDs, are an annual calculation on amounts that need to be withdrawn from retirement accounts.

So this only applies to those of you that either have inherited a retirement account from a loved one or are of a certain age. For most people at this point, it's age 73 and above.

There is an annual amount that is calculated with the help of your tax preparer that needs to be withdrawn between January 1st and December 31st each year. So, being that it is in November now of 2024, we have basically two months to make sure that our clients have withdrawn the funds out of the account.

Now, the IRS doesn't necessarily care how much you take in a year, provided you meet the minimum. So what you do with those funds are completely up to you. If you want to use them and spend the money for the holidays to buy that big turkey this year, be the hero or, to buy Christmas presents or whatever it might be for you and your holiday. Perfectly fine.

There are some creative strategies, however, that we might be able to consider, John, if we think about maybe using those required minimums in a different way.

John Biedenstein: Yeah. You gotta pay taxes on the required minimum distribution. And one way to lessen the tax amount is to take the RMD amount and make a charitable contribution. So [you can] use the fund to give it to your favorite charity, so you're getting in the hands of the right people.

What happens then is the RMD, which would typically be added to your adjusted gross income, it's going to be taken off. Now, if you do use your RMD for a charitable contribution, you don't also get to deduct it as a charitable contribution.

You basically lessened your income. So that's where you get the tax benefit from it.

Colin Day: Yeah. For an example, to make it maybe a little bit easier to understand for our listeners or viewers, let's say the required minimum distribution for you this year is calculated to be $10,000. And you decide, I have not made my contribution to my synagogue, to my church, again to my favorite charity, my favorite nonprofit, and I would like to put some of that money that I must withdraw to the charitable organization.

The biggest rule is that this money must come directly from your IRA or retirement account to the charitable organization. You can't receive those funds and then try to through the back pocket to the organization. It must come directly from your IRA. So you need to give your IRA provider or your financial advisor instructions where to send the funds.

That $10,000 that needs to come out that year, let's say you want to take $1,000 and give that over to your charity. Well, great. Your contribution to that charity means that that $1,000 doesn't get recorded on your tax return. But the other $9,000 that you have to withdraw, well, that amount still applies. It still needs to be included on your income for the year.

But you get credit for all $10,000 that you're required to take, because underneath the rules from the IRS, you satisfied the complete withdrawal, and you got a little bit of a tax break by taking amounts from your IRA directly.

Make sense?

John Biedenstein: That's correct.

Colin Day: Yeah. That's certainly one of the best ways to lower your tax liabilities while also doing the things that mandatorily the IRA says you need to do.

Something else to think about here. For those of us that are still working and still funding different kinds of accounts, many of our accounts are on a calendar year basis. Some accounts are not on a calendar year basis, things like IRAs. So by funding an IRA, like a traditional or a Roth IRA, you actually have until the tax filing deadline to get that money in there.

One type of account that often gets forgotten about our health savings accounts, which need to be funded by December 31st. You care to wax poetic on HSAs for a moment, John?

(Correction Note: While it’s mentioned here that HSA contributions need to be made by December 31, contributions can actually be made up until the tax filing deadline (usually April 15) for the previous tax year. If contributing through payroll, check with your HSA provider to apply contributions to a prior year.)

John Biedenstein: So HSAs, you basically get a tax deduction for setting aside the money that would be specifically held for future health expenditures. While you're working, you want to put that money away because at some point in time the amount you can contribute is going to change. Much like a retirement plan or an IRA, there's catch-up contributions that you can make. A health savings account allows you to [make] a catch-up contribution after age 55.

Colin Day: Fifty-five and above.

John Biedenstein: Fifty-five and above. Fifty-five and older is when you can make that additional contribution.

But there's an age limit where you need to stop making health savings account contributions, right?

Colin Day: Yeah, and that's related to Medicare age. So they'll allow you to get that tax break by putting money into your HSA every single year. But, once you get up to Medicare age, essentially they're gonna say, “Okay, you can no longer contribute to an HSA account.” Then you really want to involve your tax preparer to make the determination, “How much are you allowed to contribute in the year that you are eligible for Medicare?”

But to John's point, when you fund an HSA account, many of us enjoy a match on an HSA. For example, your employer might match the first $500 or whatever it is to your HSA. So you might be putting in $500 and your employer puts in $500. Well, that's a good start. That's $1,000 that you could put towards your HSA.

But if you're eligible for an HSA contribution, those limits are not $1,000. They're much higher than that. So if you have, for example, some forecasted health expenditures in the next couple months or even years, you can put that money into an HSA temporarily and just route that money right back out into your pocket to pay off your bills that you just had for the health event.

So if you have a procedure that you're trying to get done by the end of the year because you want to put your out-of-pocket maximum in one calendar year – I've done it before – you're in a situation where you can put the money into the HSA just temporarily before the end of the year, and then you'd be able to withdraw those same funds.Then you don't owe the taxes on it because you use them for a qualified health expense.

So again, HSA's [are] great long term tools. There's some short term strategies as well. Again, as we approach the end of the year, December 31st is going to be that cutoff.

So lastly, I want to talk about Roth conversions. I don't know if you've had many of these conversations, John, but I personally have had quite a few conversations with folks.

John Biedenstein: It seems to be a very hot topic now.

Colin Day: Yeah. And part of that might be the fact that, with the Tax Cuts and Jobs Act set to sunset in 2026, I think some people are feeling the time is now. That if we're going to do something, we should probably get off the pot, so to speak.

So when it comes to Roth conversions, if you're not familiar, this is taking your pre-tax retirement money and making it after tax. So it's the process of literally moving it, for example, from a traditional IRA and rounding that money into a Roth IRA. The reason we do that is to pre-pay the taxes so we don't owe taxes on that money in the future.

The drawback is that we have to pre-pay the taxes. We have to pay the taxes in the year that we do that. So, John, can you think of a scenario where it would make sense for someone to consider doing a Roth conversion maybe within the next two months before the end of the year?

John Biedenstein: Well, it's going to be beneficial for individuals. You got to coordinate with your tax preparer. Let's just say you're in a tax bracket, but you've got $30,000 or $40,000 before you hit the max. So you know that you're going to pay 22%, 24%, whatever that bracket number is of taxes for that current year or for that amount of income. That would be a great strategy.

Say, in my example, you take the $30,000 or $40,000 and you do the Roth conversion. You know you're going to pay that rate that you're paying today versus – Anything that's converted, you're not going to pay taxes on it when you actually use it.

So it is a huge benefit to be withdrawing money in retirement and not having to pay taxes on those funds. You get more bang out of your buck in retirement.

Colin Day: And I just had this conversation with clients. We were looking at their portfolio, which is very pre-tax heavy. Now that they're retired and they're not earning the same kind of amounts that they used to when they were W-2 employees, we've now opened a window to offer the opportunity to do Roth conversions.

Again, the whole reason that we do a Roth conversion is to prepay the taxes because we don't know what taxes are going to be in the future. So, if you're the type of person that believes taxes are only going up, well, why wouldn't you want to pay the taxes now? Seems to make a little bit of sense. Now, working with your tax preparer can help figure out exactly where the benefits lie.

We as financial advisors in our office, we use a tool that helps forecast a lot of conversions. So using the same client example, there might be a reason to do conversions in these first couple of years of retirement, especially if you're in what I call the Goldilocks zone, which is “I'm retired, but I'm not taking Social Security yet.” For some people, it's maybe only one or two years. For other people, it might be ten years for all I know.

Regardless of your situation, performing conversions in those years smooths out the taxes over the long term, and likely, on a tax adjusted basis, increases your overall wealth because you're paying taxes.

Your absolute worst case scenario is, let's say you do these conversions and five years later, unfortunately, you pass away. Well, your loved ones are going to inherit this money. You've already paid the taxes for them, so kudos to you. Beyond the grave, you're doing something wonderful for your beneficiaries. They don't have to pay the taxes on those same dollars.

So, in your situation, if you think Roth conversions make sense, your tax preparer obviously can help. Also, your financial advisor probably has the ability to model something like a conversion to determine if it even makes sense for you and your plan.

So again, we talked about three things today. We started off with required minimum distributions; the fact that we need to start to make withdraws once we're in our 70s. Again, if you are inheriting assets, we need to make sure that that money comes out. If you don't take that money out, there is an excise penalty and that penalty is 25% now. It used to be 50%. Now it's only 25%.

If you rectify it and make sure that you take that money out within two years, if you've corrected it, it reduces the penalty down to 10%. It's still a penalty. So, please just go ahead and take care of it by the end of the year.

For HSAs, those health savings accounts are great tools, and they can be short term vehicles as well as long term. I prefer the long term, but short term could mean I'm going to fund this thing before the end of the year and be able to afford an expense. Before the end of the year or early next year, be able to withdraw those funds, not included on your tax return.

Third thing we talked about was the merits of doing a Roth conversion. When it comes to a Roth conversion, your situation is going to be different from someone else's. Always involve a tax preparer, your advisor, on conversations like that.

John, phew, we only talked about three things. We got a lot more than we could have talked about today, but that took quite a lot of work and brain power for me to get through those three.

I don't know how you do it as the leader of our podcast.

John Biedenstein: It’s my first time.

This is a tool for you. I know there's other things you might be interested in, or that might come up top of mind. Call us. We thought these were good items to talk about that might cover more people than others.

So, okay?

Colin Day: Yeah. Well, thanks again, everyone for joining us for another capital conversation for John Biedenstein, I’m Colin Day. We'll talk soon. Thank you.

John Biedenstein: Thank you.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered.

Capital Conversations | Correct Capital Wealth Management

While the holidays are busy enough on their own, a little preparation now can help protect what you’ve worked hard to build. Planning ahead for taxes, healthcare, and retirement income keeps your financial peace of mind as you step into the new year. Talking through these options with a trusted advisor makes it easier to see what might work best for you. You can schedule a meeting with a member of our advisor team, contact us online, or give us a call at 877-930-401(k), or give us a call at 877-930-401(k) to review your end-of-year financial options.