IRA and 401K Changes Coming, Year-end Tax Strategies
Last minute tax planning moves for this year
Introduction
As I’ve noted in the past, I am a huge proponent of ROTH IRA and 401K accounts. You can read my newsletter about the benefits of ROTH IRAs here, and how to invest in them even if your income is too high. Also, you can check out my newsletter on 401Ks at this link. In this issue, I discuss some changes coming to retirement accounts in 2025.
There are also still a few weeks to make last-minute moves to save money on taxes, and in this newsletter, I go over some of the things I make sure to do as the year comes to a close.
A quick reminder that this is not financial advice, just myself sharing my strategies, investments, stocks, index fund strategies, what I'm buying, and where I plan to take those investments. Everyone’s financial goals are different. No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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Retirement Plan Changes And Notes For 2025
The contribution limit for traditional and ROTH IRAs in 2025 is $7,000, the same as in 2024. Individuals aged 50 or older can make a catch-up contribution of $1,000, bringing the total contribution to $8,000.
However, the contribution limit has changed for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan. Before, the limit was $23,000 if you’re under 50. Starting in 2024, that increases to $23,500, a whopping $500 increase—don’t spend it all in one place!
For employees 50 and over, the catch-up contribution limit remains $7,500. So with the new limit of of $23,500, you add that $7,500, and the contribution limit is $31,000 for employees 50 and up.
You can read more about changes for 2025 on the IRS’ official website at this link.
Year-End Tax Strategies
As the year winds down, it’s the perfect time to review your finances and make strategic moves to lower your 2024 tax bill. Here’s a roundup of some essential year-end tax strategies that I consider:
Maximizing 401Ks. The goal here is to pay your future self. If you have a 401K or other employer-sponsored account, you generally have until the end of the year to make your final contributions. Usually, you have to contact your employer if you want to change your contribution amount to reach your limit. For 2024, you can contribute up to $23,000 (or $30,000 if you're 50+ with catch-up contributions).
Contribute to an HSA to save on medical expenses and reduce taxable income. The maximum H.S.A. contribution for the 2024 tax year is $4,150 for single coverage and $8,300 for family coverage with an additional $1,000 catch-up contribution if age 55 or older. Procrastinators, rejoice! You have until April 15th to make those contributions for 2023.
If eligible, consider a traditional or Roth IRA contribution. For 2024, you can contribute up to $7,000 (or $8,000 if you're 50+). Like with HSA contributions, you have until April 15th to make those contributions for 2023.
Tax-loss harvesting is a strategy to sell investments that have lost money to reduce the amount of money you'll owe for income taxes. It’s a strategy to turn lemons into lemonade that many investors utilize at the end of each year. There have been studies showing that tax loss harvesting yielded almost an additional 1% annual return each year from 1928 to 2018. I personally am not selling any investments this year, but I did last year, and I detailed how I utilized tax-loss harvesting in this issue.
With tax loss harvesting, if you have losses in your investment portfolio, you might consider selling them to offset capital gains. While the 30-day wash sale rule prevents you from repurchasing the same or substantially similar securities, it doesn’t apply to gains. So, you could sell a profitable security, immediately reinvesting the proceeds in the same security. This maneuver allows you to realize your gain tax-free, maintain your original investment position, and potentially lower your future tax liability by increasing your cost basis.
If you’re 73 or older, ensure you’ve taken your RMDs from retirement accounts. Missing the deadline could result in hefty penalties.
Donations to qualified charities can provide a tax deduction. Consider gifting appreciated assets directly to charity can provide significant tax benefits. Don’t forget to get receipts for contributions over $250.
Update your W-4 or quarterly payments. If you’ve had significant life changes in 2024—like a new job, marriage, or major purchase—ensure your tax withholding or estimated payments reflect your current situation to avoid surprises.
Consult a tax professional. These are just some of the major items I look at every year, there are many, many others. Tax laws are complex, and 2024 has seen some updates, including the IRS’s adjusted tax brackets for inflation. A professional can help tailor strategies to your unique financial situation.
Conclusion
While taxes may not be the most exciting topic, every dollar saved is another step toward your financial goals. Remember, these are just a few strategies to consider. It’s essential to consult with a tax professional to tailor a plan that meets your specific financial needs and goals. But act as soon as you can to ensure you’re making the most of available tax breaks before the December 31 deadline.
That's it for this week! As always, no financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert. If you haven’t already, please subscribe to this newsletter below and never miss an update: