January 30, 2023

4 key year-end steps to "control the fate of tax reporting"

4 key year-end steps to “control the fate of tax reporting”

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1. Boost your 401(k) contributions

If you don’t Your workplace has maxed out a 401(k)There may still be time to increase your contributions for 2022, Guarino said.

The move could lower your adjusted gross income while increasing your retirement savings, he said, but “time is of the essence.” With only one or two pay periods left for 2022, you’ll need to make contribution changes right away.

2. Take the required minimum distributions

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Unless this is your first year minimum distributions required, or RMDs, you must withdraw a specified amount of money from workplace retirement accounts, such as 401(k), and most individual retirement accounts, by December 31. (RMDs currently Start when you are 72 years oldYou have until April 1 of the following year to take your first distribution.)

If you miss the deadline, “the penalty is massive”—50% of the amount you should have withdrawn, warned John Lloyd, CFP and owner at The Wealth Planner in Fort Worth, Texas.

While the deadline isn’t until the end of the month, Loyd contacts his clients with RMD by mid-December to make sure there’s “wielding room” to meet the deadline.

3. Pre-planning for eligible charitable distributions

QCD doesn’t count as taxable income, unlike regular IRA withdrawals, so it’s really, really helpful for people who don’t itemize [tax deductions]Lloyd explained.

A few Americans ago Detailed discountsIt’s hard to claim a tax deduction for charitable gifts. But he said retirees who take the standard deduction may benefit from QCD because it’s not part of their adjusted gross income.

However, you’ll need enough time to send the money from your IRA to the charity, and confirm that the check is cashed before the end of the year, Loyd said.

4. Time Roth IRA Transfers With Transfers To Donor Advice Fund

Another strategy for charitable giving, Donor-advised fundsIt might pair well with a Roth IRA conversion, Guarino said.

Donor-advised funds act like a charitable checkbook, allowing investors to “pool” several years’ worth of gifts into a single transfer, providing an upfront tax deduction.

He said a Roth conversion, which converts pre-tax IRA money into a Roth IRA for tax-free future growth, is attractive when the stock market is down because you can buy more shares for the same dollar amount.

Although you will be taxed on the amount transferred, it is possible to offset your liability with a deduction from your donor-advised financial contribution.”

“It’s great to be able to time these two events in the same year,” he added.