Year-End Tax Strategies for Retirees

Authored by Kendall Benner, CFP^®

As the year draws to a close, retirees have a valuable opportunity to review their financial and tax strategies. In this guide, we’ll outline practical year-end strategies tailored for retirees to finish the year strong and start the next with confidence.

I. Charitable Giving Strategies Before Year-End

Giving to charity isn’t just a way to support causes you care about. It can also help reduce your taxable income. If you itemize deductions, completing donations before December 31 ensures they count for this tax year.

For retirees, one powerful option is a Qualified Charitable Distribution (QCD). If you’re 70½ or older, you can transfer up to $108,000 directly from your IRA to a qualified charity. This can satisfy part or all of your Required Minimum Distribution (RMD) and keeps that amount out of your taxable income.

Another strategy is using a donor-advised fund, which allows you to consolidate multiple years of charitable contributions into a single tax year. This approach can help you maximize deductions while supporting charities over time. These strategies can be especially valuable if you’re looking to manage your tax bracket or reduce future RMDs.

II. Review Required Minimum Distributions (RMDs)

If you’re age 73 or older, the IRS requires you to take Required Minimum Distributions (RMDs) from most retirement accounts, including traditional IRAs and 401(k)s. Missing an RMD can be costly. The penalty is currently 25% of the amount you should have withdrawn.

Year-end is the perfect time to confirm you’ve met your RMD obligations.

If you turned 73 this year, you have until April 1 of next year for your first withdrawal, but delaying could mean taking two distributions in one calendar year, which may increase your taxable income.

Consider strategies like using a Qualified Charitable Distribution (QCD) to satisfy part of your RMD while supporting a cause you care about. This approach can help reduce taxable income and fulfill your charitable goals at the same time.

III. Consider Roth IRA Conversions

A Roth IRA conversion can be a powerful tool for retirees who want to reduce future tax burdens and gain flexibility in retirement income planning. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the amount converted now, but future withdrawals, including earnings, are tax-free. This also eliminates Required Minimum Distributions (RMDs) from the converted funds, which can help with long-term tax planning.

When might a Roth conversion make sense?

• Lower Income Year: If your taxable income is unusually low, perhaps due to reduced withdrawals or higher deductions, converting now may allow you to pay taxes at a lower rate.
• Before RMDs Begin: Converting before age 73 can help reduce future RMDs and keep more control over your distributions.
• Estate Planning Goals: Roth accounts can be advantageous for heirs because withdrawals are tax-free, which may reduce the overall tax impact on your estate.
• Managing Tax Brackets: If you have room in your current tax bracket, converting a portion of your IRA can help avoid pushing future income into higher brackets.

Keep in mind that conversions increase taxable income for the year, so it’s important to understand the impact on your overall tax situation. Roth IRAs also have a five-year rule for withdrawals, which should factor into your planning.

IV. Tax-Loss Harvesting Opportunities

Year-end is an excellent time to review your investment portfolio for potential tax savings. Tax-loss harvesting involves selling investments that have declined in value to offset gains from other investments. This strategy can help reduce your taxable income and potentially lower your overall tax bill.

If your realized losses exceed your gains, you can use up to $3,000 of those losses to offset ordinary income, and any remaining losses can be carried forward to future years. However, it’s important to avoid the wash-sale rule, which disallows the deduction if you repurchase the same or a substantially identical security within 30 days before or after the sale.

Tax-loss harvesting can be particularly useful for retirees who have taxable investment accounts and want to manage capital gains efficiently. It’s a proactive way to keep your portfolio aligned with your goals while optimizing your tax position.

V. Review Healthcare Coverage and Withholding

As the year comes to a close, it’s a good time for retirees to review their healthcare coverage and tax withholding. Medicare’s open enrollment period typically ends in early December, so make sure your plan still meets your needs and budget. Changes in prescriptions, providers, or overall health can make a different plan more cost-effective.

It’s also wise to check your tax withholding. If you’ve had significant changes in income, such as large withdrawals, Roth conversions, or investment gains, your current withholding may not be enough to cover your tax liability. Adjusting now can help you avoid surprises and potential penalties when you file your return.

VI. Virginia 529 Plan Contributions for Individuals Over 70

If you’re a Virginia resident age 70 or older, contributing to a Virginia 529 college savings plan can provide a unique state income tax benefit. Unlike younger contributors who are subject to annual deduction limits, individuals over 70 can deduct the full amount of their contributions from Virginia taxable income, regardless of size.

This provision offers retirees an opportunity to support education for children, grandchildren, or other loved ones while reducing state income taxes. Contributions to a Virginia 529 plan have the potential to grow tax-free, and withdrawals for qualified education expenses are also tax-free. This strategy can be an effective way to leave a lasting legacy while managing your state tax liability.

VII. Final Thoughts

The end of the year is an ideal time for retirees to review their tax strategy and make adjustments that can reduce taxes, optimize income, and support long-term goals. Tax laws and personal circumstances vary, so a tailored approach is essential. Acting now ensures you take advantage of available strategies before December 31 and start the new year with confidence.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement available through your financial advisor and should be read carefully before investing.