6 Year-End Money Moves You Need to Make Before December 31st to Save on Taxes

As the year draws to a close, it’s important to think ahead about how you can set yourself up financially for a successful new year. With only a few months remaining in 2024, there are several key year-end deadlines that can have a big impact on your taxes and savings. These deadlines mark the last opportunity to take full advantage of certain tax-smart accounts and strategies, which could help you reduce your tax liability and increase your savings.

Let’s take a look at six important year-end money moves you should consider before December 31st.

1. Don’t Lose Your Flexible Spending Account (FSA) Funds

A flexible spending account (FSA) can be a great way to save on medical expenses, but it comes with a catch: you must use the funds by the end of the year or risk losing them. FSAs are offered by employers and allow you to set aside pre-tax dollars to pay for eligible health care and dependent care expenses. However, the IRS requires that any unused funds be forfeited by the end of the year, unless your employer offers a rollover or grace period.

There are three types of FSAs:

• Health Care FSA: For medical expenses such as doctor visits, prescriptions, and over-the-counter medications.
• Limited Purpose FSA: For those with a Health Savings Account (HSA), typically used for dental and vision expenses.
• Dependent Care FSA: For daycare, eldercare, and other dependent care costs.

If your employer offers a grace period, you may have up to 2½ months into the new year to use your remaining funds. However, it’s always best to check your specific plan details and avoid waiting until the last minute. Don’t let your hard-earned savings go to waste—make sure to submit your claims before the deadline.

2. Complete Your Roth Conversion Before Year-End

Roth IRAs are powerful retirement accounts, offering tax-free withdrawals in retirement as long as certain conditions are met. If you have a traditional IRA or another tax-deferred retirement account, a Roth conversion can be a smart strategy to get your funds into a Roth IRA. However, to have the conversion count for the 2024 tax year, it must be completed by December 31.

A Roth conversion involves moving assets from a traditional IRA or 401(k) into a Roth IRA. While you’ll owe taxes on the converted amount, doing so can be beneficial if you expect your tax rate to rise in the future or if your retirement account balance has decreased. For example, if the value of your retirement holdings has gone down, you can convert a larger amount at a lower tax cost.

You can convert assets in kind (meaning you don’t have to sell the investments), but be aware that you will still owe taxes on the amount converted. Make sure to consult with a tax advisor to determine whether this strategy makes sense for your financial situation and whether you need to take action before the year ends.

3. Max Out Contributions to Tax-Advantaged Accounts

Certain retirement and health accounts allow you to contribute for the prior year up until the tax-filing deadline (typically April 15th), but some accounts have strict year-end deadlines. If you want to take full advantage of tax deductions for 2024, you must make contributions to accounts like your 401(k) before December 31.

In 2024, you can contribute up to $23,000 to a 401(k), or $30,500 if you’re age 50 or older. This is a valuable opportunity to lower your taxable income for the year and increase your retirement savings. If you receive a year-end bonus, consider directing some or all of it into your 401(k) to maximize your contributions before the deadline.

Additionally, Health Savings Accounts (HSAs) must be funded by the end of the year to take advantage of payroll tax benefits. While you can contribute to an IRA up until the April tax-filing deadline, making contributions through payroll deductions ensures you avoid the FICA taxes that would otherwise apply to HSA contributions made outside of payroll deductions.

If you’re also saving for education, don’t forget about 529 college savings plans. Some states offer tax deductions for contributions made to these plans before year-end, so be sure to contribute before the deadline to maximize your state tax savings.

4. Charitable Contributions Can Lower Your Tax Bill

Making charitable donations before December 31 can not only help those in need but also reduce your taxable income for the year. If you itemize your deductions, you can deduct up to 60% of your adjusted gross income (AGI) for cash donations. Donations of appreciated securities, such as stocks or bonds, may allow you to deduct up to 30% of your AGI.

To ensure your charitable contributions count for the 2024 tax year, they must be made by December 31. If you’re considering donating assets such as cryptocurrency or restricted stock, be sure to consult with a tax advisor to ensure you meet any specific rules or deadlines.

If you typically don’t itemize your deductions, you might consider a strategy known as bunching. This involves concentrating your charitable contributions into one year in order to exceed the standard deduction and make itemizing more advantageous. By front-loading multiple years’ worth of donations, you can maximize your tax benefits in the year of the contribution.

5. Don’t Forget Your Required Minimum Distributions (RMDs)

If you are 73 or older, the IRS requires you to take Required Minimum Distributions (RMDs) from your retirement accounts, such as traditional IRAs and 401(k)s. The deadline for taking your RMD is December 31 each year, and failure to do so can result in a steep penalty—up to 25% of the amount you should have withdrawn.

For your first RMD, you have until April 1 of the year following the year you turn 73, but keep in mind that if you delay your first RMD until April, you’ll have to take two distributions in the same year. This can increase your taxable income for the year, potentially pushing you into a higher tax bracket.

If you’ve already started taking RMDs, make sure you meet the December 31 deadline to avoid penalties. Consider taking your RMD earlier in the year to avoid the year-end rush and give yourself time to plan for the tax consequences.

6. Tax-Loss Harvesting Can Offset Gains

Tax-loss harvesting is a strategy where you sell investments that have decreased in value to offset capital gains in other parts of your portfolio. This strategy can help reduce your taxable income for the year, allowing you to keep more of your investment returns.

For instance, if you have realized capital gains from selling stocks or other assets, you can sell other investments at a loss to offset those gains, reducing your overall tax liability. If your losses exceed your gains, you can use up to $3,000 of the remaining losses to offset ordinary income (or $1,500 if you’re married and filing separately). Any unused losses can be carried forward to future tax years.

To take advantage of tax-loss harvesting for 2024, you must sell the investments before December 31. Keep in mind that the IRS has specific rules about “wash sales,” so make sure to replace the sold investments with similar but not identical assets to avoid triggering the wash sale rule.

Take Action Before the Year-End

As 2024 comes to a close, it’s important to make the most of these year-end financial opportunities. Whether you’re aiming to reduce your tax liability, boost your retirement savings, or give to charity, acting before December 31 can make a significant difference in your financial situation.

Take the time to review your accounts and consult with a financial or tax advisor if you’re unsure about the best steps to take before year-end. With careful planning, you can finish the year strong and start 2025 with a financial advantage.