As the year comes to a close, it’s easy to pack our schedules with festivities. Yet, this is also a crucial time to review and adjust your financial plans. For federal employees, the benefits landscape offers specific opportunities and challenges that require careful attention.
From retirement account distributions to strategic charitable giving, making the right moves now can help you save on taxes, grow your wealth, and set yourself up for financial success in the new year. Here’s a detailed look at the financial tasks to tackle before December 31. The internal revenue code requires you to withdraw a minimum amount from your retirement accounts each year once you reach a certain age.
Failing to do so can result in a hefty penalty. While TSP and many 401(k) plans handle RMDs automatically, traditional IRAs require manual action. Additionally, inherited retirement accounts—including inherited Roth IRAs—are subject to RMD rules, which often catch people by surprise.
If you plan to donate to charities, consider using a Qualified Charitable Distribution (QCD). QCDs allow individuals aged 70½ and older to donate directly from their IRAs, satisfying RMD requirements while avoiding income taxes. It’s a win-win: you reduce your tax burden, and the charity receives the full benefit of your gift with no tax either.
A Roth conversion can be a smart way to lower your long-term tax liability by transferring funds from a pre-tax retirement account into a Roth IRA. The converted funds grow tax-free and are not subject to RMDs in the future. Once you reach RMD age, the additional income from required distributions could push you into a higher tax bracket, especially if you’ve been a good saver.
Converting funds now may allow you to pay taxes at today’s rates rather than tomorrow’s potentially higher ones. Lower taxable income can also reduce Medicare premiums for those on FEHB or TriCare for Life, as Medicare premiums are tied to your income level. Proper planning can help to avoid unexpected cost increases.
If you own mutual funds in taxable accounts, year-end capital gains distributions can create unexpected tax liabilities come next April. These distributions occur even if you haven’t sold any of your shares. Identify what the taxable gain for each of your investment holdings will be, and understand what gains will be distributed to estimate the taxes you’ll owe.
Year-end financial planning tips
Setting aside cash now can avoid financial stress in April. You have until April 15 of the following year to make IRA contributions for the current tax year, but contributing before December 31 has its advantages.
If you know you’ll qualify for a Roth IRA, contributing earlier allows your money to start compounding tax-free sooner. For earners who exceed the income limits for direct Roth contributions, the backdoor Roth IRA offers a way to funnel funds into a Roth account. Be sure to consult the right financial professionals to navigate the rules and perform it correctly.
If charitable giving is part of your plan, consider a strategy called “bunching,” which involves consolidating several years of donations into one tax year. The Tax Cuts and Jobs Act increased the standard deduction, meaning very few federal employees will itemize their deductions. By making larger one-time donations, you may exceed the standard deduction threshold and gain the ability to itemize.
Some families also choose to set up a donor-advised fund (DAF). Setting up a DAF allows you to take the tax deduction now while spreading out your charitable contributions over time. The best financial plans don’t stop at year-end—they look ahead to anticipate needs and mitigate risks.
Start thinking about your cash flow needs for next year. If you anticipate major expenses in 2025, such as a home renovation or vehicle purchase, make sure you have enough cash on hand. Selling investments during an untimely market downturn could lock in losses and derail your plans.
If retirement is on the horizon, you must plan your cash flow needs for the next several years. Adjust your plan to ensure you have developed your income strategy accordingly. You still have time in open season to make adjustments to your healthcare coverage for next year.
HSAs can be great tools, but consider your age and whether a HDHP is right for you. Year-end financial planning doesn’t have to be overwhelming, but it does require attention to detail and timely action. Take the time to review your accounts, understand the rules, and implement these strategies.
With a little preparation now, you can close out 2024 with confidence and start next year on the right financial foot. After all, it’s not just your money, it’s your future.
