As the end of the year approaches, investors have a unique window of opportunity to enhance their financial plans before the year is done. This includes leveraging strategies that minimize tax obligations, meet regulatory requirements, and maximize investment potential in key areas including tax & regulatory, gifting, retirement contributions, and benefits.
Optimizing Tax & Regulatory Strategies
For high-net-worth individuals, tax strategy is often the most critical area, with timing and management of taxable gains playing a central role.
Income Timing and Deferrals
The end of the year provides a window for adjusting the timing of income and deductions to optimize tax brackets. Income deferral, such as having a year-end bonus paid in the new year, is one way to defer income, particularly if a lower tax rate is expected in the upcoming period.1
Tax-Loss Harvesting
Tax-loss harvesting is fundamental to investing and can help offset capital gains and reduce taxable income by selling investments that have unrealized losses. However, the wash-sale rule mandates waiting at least 30 days before repurchasing the same or a “substantially identical” security.2 There are ways around this rule. For example, investors might sell a traditional S&P 500 fund and temporarily purchase a fund weighting S&P 500 components substantially differently to maintain similar exposure or even swap between separately managed funds in a similar asset class.
Required Minimum Distributions (RMDs)
For individuals aged 73 and older, RMDs are annual taxable distributions from their Individual Retirement Accounts (IRAs) as required by Internal Revenue Service (IRS) regulations. Calculated based on life expectancy and overall value, RMDs result in a growing percentage distribution each year, making it critical to address them annually to avoid penalties. If you fail to take the full RMD by the deadline (typically December 31 of each year), the IRS imposes a penalty of 50% of the amount not withdrawn.3 Meaning if your IRA account balance is $1 million, and your RMD for the year is calculated at $40,000, you will owe a $20,000 penalty to the IRS.
Inherited IRA RMDs
For inherited IRAs, the 10-year rule, introduced by the SECURE Act, applies to most non-spouse beneficiaries. Under this rule, the entire account balance must be withdrawn by the end of the 10th year following the original owner’s death, with no annual RMDs required during the interim unless the decedent had already begun RMDs.4 However, spousal beneficiaries have more flexibility. They can treat the IRA as their own, allowing RMDs to be delayed until they reach age 73.5 Alternatively, they can transfer the funds into an inherited IRA and follow RMD rules based on their own life expectancy or continue the decedent’s RMD schedule if distributions had already begun.6 These options give spousal beneficiaries greater control over the timing and tax impact of withdrawals compared to non-spouse beneficiaries.
Qualified Charitable Distributions (QCDs)
If investors do not need income from their RMDs, they could consider a Qualified Charitable Distribution. By donating the distribution directly to a qualified charity, one avoids the taxable income associated with RMDs.7 QCDs are especially beneficial for any investors not utilizing itemized deductions as other direct charitable gifts may not be tax-deductible to them.
Financial Best Practices
Beyond specific tax strategies, having a year-end tax projection performed by a CPA and having a streamlined tax reporting checklist for tax compliance can set the foundation for a smoother tax season.
Year-End Tax Projection
A tax projection from an individual’s accountant provides clarity on their tax-liability standing for the current tax year to enable adjustments, as necessary. This process can help fine-tune tax withholding and final estimated payments to confirm the taxpayer is on track to fund their tax liability. Further, it often opens the door to proactive planning such as converting IRAs to Roth IRAs if the individual has low-enough income (which may be up to as high as the 22% tax bracket [$201,050 for in 2024 for married couples filing jointly]).8,9
Gathering Financial Documents
An annual tax checklist (which should be prepared by the financial advisor) details the necessary forms and documents to be expected such as 1099s and K1s. This ensures an efficient filing process which saves time and money by avoiding back-and-forth document requests.10
Beneficial Ownership Information Requirements (BOI)
Starting this year, entities must report their beneficial owners by December 31st. This requirement, introduced under the Corporate Transparency Act (CTA), primarily affects Limited Liability Companies and other entities, and aims to increase transparency in business ownership. Failure to comply with these regulations can result in severe penalties, including civil fines of up to $500 per day for each day the violation continues and criminal penalties of up to $10,000 and/or two years imprisonment for willful noncompliance.11
Strategic Gifting
Year-end gifting is an effective way to manage your estate while supporting family or charitable causes. In addition to the previously discussed QCDs, one should consider:
Charitable Gifting
- Gifting Appreciated Stock: By donating appreciated assets, investors avoid unrealized capital gains taxes that would have been triggered if sold (and then gifted) while achieving a full charitable deduction for the asset’s fair market value.12
- Front-Load Charity: In years with high income, a charitably inclined investor may consider front-loading charitable contributions via a Donor-Advised Fund (DAF) or a Family Foundation. These can maximize charitable deductions in a year with a heavier tax burden while providing additional time to gift to specific charities.
- Advanced Charitable Strategies: For sophisticated gifting, options like Charitable Lead Trusts (CLTs) allow for front-loading deductions which provides flexibility around the timing of contributions. A CLT is a type of trust that provides income to a designated charity for a set term, after which the remaining trust assets are passed on to non-charitable beneficiaries, such as family members. This strategy can significantly reduce estate taxes while supporting charitable causes. The donor receives a tax deduction based on the present value of the income stream pledged to charity. This creates an effective tool for high-net-worth individuals seeking both philanthropic and financial planning goals.13
Family Gifting
- Annual Exclusion Gifts: Investors can gift up to $18,000 per recipient per year tax-free, or up to $36,000 with a spouse (2024). This annual exclusion gift provides a tax-efficient way to pass wealth to heirs incrementally without affecting the lifetime tax exemption.14
- Lifetime Exemption Gifting: For larger gifts, investors may consider using the lifetime exemption which can transfer substantial wealth to heirs ($13.61 million per gifting individual or $27.22 million jointly for 2024) free of gift tax.15
- 529 Plan Contributions: Funding a 529 plan for educational expenses is another strategic way to gift with the added option of front-loading five years’ worth of contributions up to $90,000 per beneficiary (2024).16 Additionally, recent changes to the law allow unused 529 funds to roll over into a Roth IRA for the beneficiary in the future which enhances this tool’s long-term flexibility.17
Maximizing Retirement Contributions
Investors should ensure they are taking full advantage of retirement contributions before the year-end. While some deadlines extend into the following year, maximizing contributions now allows you to benefit from potential tax deferrals sooner.
Contribution Deadlines
- 401k Contributions: These must be completed by year-end to count for the current tax year. Investors should ensure they maximize contributions, especially as it relates to employer matching contributions (the 2024 maximum contribution is $23,000).18
- IRA and Roth IRA Contributions: Although investors have until April 15th of the next calendar year to contribute, making contributions now could provide immediate benefits. Additionally, IRA-to-Roth conversions might be advantageous for investors in a lower tax bracket this year. Typically, an investor needs to have losses in a year or be in the lower-tax brackets, which may happen in retirement or even for high-net-worth investors without significant salaries or other ordinary income.19
- Backdoor Roth Conversions are a technique if an investor is ineligible for direct Roth IRA contributions based on income ($161,000 for those filing as single and $240,000 for those married filing jointly in 2024). The backdoor Roth strategy allows for non-deductible IRA contributions to be later converted to a Roth IRA without tax repercussion. However, a tax-free conversion is complicated if an individual has an existing pre-tax IRA. In this case, it may still make sense to do it, but an advisor should analyze the fact pattern.20
- Consider Roth Contributions for Kids: Setting up a Roth IRA for a child with earned income can provide a powerful foundation for long-term, tax-free growth. By helping them establish a Roth IRA early, it sets the stage for decades of tax-free compound growth.21
Evaluate Other Benefits
To ensure a comprehensive end-of-year review, one should also assess current benefits, insurance policies, and personal financial goals. These areas, although often overlooked, play a vital role in a holistic financial strategy.
Healthcare Accounts
- Health Savings Account (HSA): Maximize contributions if you have a high-deductible health plan. Remember that HSA contributions offer a triple tax benefit: contributions are deductible, the account grows tax-free, and qualified withdrawals are tax-free.22
- Flexible Spending Account (FSA): Review any available unused funds which may not roll over, so make sure to use these accounts fully by year end.23
Insurance Policies
Review insurance coverage and confirm that beneficiaries are up to date on policies like life insurance. An annual review ensures that your coverage reflects any life changes and still aligns with your family’s needs, including kids’ future needs, debt, business valuation changes, etc.24,25
Budget and Financial Goals
The year end is an ideal time to reflect on a budget and assess whether it has met the desired savings goals. Consider any potential events such as home purchases, education expenses, or retirement planning, and adjust the budget or savings plan accordingly. Tracking progress highlights areas for improvement in the coming year.26
Estate Plan Considerations
If an investor’s estate plan has not been recently updated, make sure it aligns with current wishes and family situation. Also, it is crucial to stay aware of potential changes to estate tax laws that may impact estate planning needs. Current estate law expires after December 31, 2025, due to its sunset provision.27 The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the federal estate and gift tax exemption amounts, allowing individuals to transfer up to $11.18 million tax-free, with adjustments for inflation in subsequent years. For 2024, this exemption is $13.61 million per individual.28 However, when these exemptions expire, they will revert to pre-TCJA levels as adjusted for inflation which is currently estimated to be only around $7.0 million per individual in 2026.29 This significant reduction could increase estate tax liabilities for many individuals. Therefore, it is advisable to consult with an estate attorney to review and potentially adjust your estate plan before the sunset date to ensure your assets are optimally protected.30
Conclusion
Financial advisors should empower high-net-worth individuals to make informed decisions, strengthen their financial positions, and set a strong foundation for the coming year. By prioritizing these steps, investors can capture tax savings, streamline reporting, and align investments and contributions with broader financial goals.
Endnotes
“Publication 505 (2021), Tax Withholding and Estimated Tax | Internal Revenue Service.”www.irs.gov, www.irs.gov/publications/p505.
2.“Publication 550 (2018), Investment Income and Expenses | Internal Revenue Service.”Irs.gov, 2018, www.irs.gov/publications/p550.
3.“Retirement Topics Required Minimum Distributions RMDs | Internal Revenue Service.”Irs.gov, 2017, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds.
4.“Retirement Topics Beneficiary | Internal Revenue Service.”Irs.gov, 2019, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary.
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6.“Text – H.R.1994 – 116th Congress (2019-2020): Setting Every Community up for Retirement Enhancement Act of 2019.”Congress.gov, 2019, www.congress.gov/bill/116th-congress/house-bill/1994/text.
7.“Topic No. 506 Charitable Contributions | Internal Revenue Service.”www.irs.gov, www.irs.gov/taxtopics/tc506.
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9.IRS. “Retirement Topics – IRA Contribution Limits | Internal Revenue Service.”Irs.gov, 2019, www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
10.“AICPA.”AICPA, 2019, www.aicpa.org.
11.“Beneficial Ownership Information Reporting | FinCEN.gov.”www.fincen.gov, www.fincen.gov/boi.
12.“Charitable Contributions | Internal Revenue Service.”www.irs.gov, www.irs.gov/charities-non-profits/charitable-contributions.
13.“Charities and Nonprofits | Internal Revenue Service.”www.irs.gov, www.irs.gov/charities-non-profits.
14.IRS. “Frequently Asked Questions on Gift Taxes | Internal Revenue Service.”Irs.gov, 2009, www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.
15.“Estate and Gift Taxes | Internal Revenue Service.”Irs.gov, 2019, www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes.
16.https://www.irs.gov/newsroom/529-plans-questions-and-answers
17.“Retirement Plans | Internal Revenue Service.” Irs.gov, 2019, www.irs.gov/retirement-plans.
18.“401(K) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 | Internal Revenue Service.” www.irs.gov, 1 Nov. 2023, www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000.
19.“Retirement Plans | Internal Revenue Service.” Irs.gov, 2019, www.irs.gov/retirement-plans.
20.IRS. “Roth IRAs | Internal Revenue Service.” Irs.gov, 2019, www.irs.gov/retirement-plans/roth-iras.
21.“Credits & Deductions for Individuals | Internal Revenue Service.” irs.gov, 2020, www.irs.gov/credits-deductions.
22.IRS. “Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenue Service.” Irs.gov, 2018, www.irs.gov/publications/p969.
23.“Retirement Plans | Internal Revenue Service.” Irs.gov, 2019, www.irs.gov/retirement-plans.
24.“Insurance: The Basics | III.” Iii.org, 2024, www.iii.org/insurance-basics/life-insurance/shopping-for-insurance-1.
25.“Internal Revenue Service | an Official Website of the United States Government.” www.irs.gov, www.irs.gov.
26.“Investing Basics | FINRA.org.” www.finra.org, www.finra.org/investors/investing/investing-basics.
27.“Estate and Gift Taxes | Internal Revenue Service.” Irs.gov, 2019, www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes.
28.“H.R.976 – 118th Congress (2023-2024): TCJA Permanency Act.” Congress.gov, 2023, www.congress.gov/bill/118th-congress/house-bill/976.
29.Schubel, Kate. “New 2025 Estate Tax Exemption Announced.” Kiplinger.com, Kiplinger, 23 Oct. 2024, www.kiplinger.com/taxes/whats-the-new-estate-tax-exemption.
30.“Estate and Gift Tax Exemption Sunset 2025: How to Prepare.” Cbh.com, 2024, www.cbh.com/insights/articles/estate-and-gift-tax-exemption-sunset-2025-how-to-prepare/.
