With the holidays in full swing, we are loving this season of opening joyous things. Cookie tins. Festive drink bottles. Beautifully wrapped packages. And … the MarketMinder mailbag! It isn’t quite time for our monthly Q&A, but feedback on last week’s personal finance rundown suggests to us a sequel focusing on the nitty gritty of yearend financial housekeeping is in order. So, what are the Is to dot and the Ts to cross as we wind toward New Year’s Eve? Read on.
Check Your Contributions
For all those who love compound growth and hate paying more taxes than you need to, tax-deferred retirement accounts are a major blessing. If you have the means to do so, maxing them out yearly is a wonderful way to reduce your taxable income and put more of your money to work toward your long-term goals. And with contribution limits a moving target, we think it is always wise to take a look before yearend to ensure you are socking away as much as you can.
On the IRA front, contribution limits rose from $6,500 to $7,000 in 2024, with the catch-up amount remaining at $1,000 for the 50+ crowd. Eligibility for tax deferral is a smidge complicated, depending on your income, marital status and whether you have access to a workplace plan—the IRS has all the details here, along with the rules on Roth IRA eligibility for 2024. While the year is winding down, you still do have time to make those contributions if you are eligible: While it may be beneficial to plow it in as soon as possible, you technically have until April 15 to make a prior-year contribution.
Now, for workers with 401(k)s, your ability to top up contributions to the $23,000 2024 limit may be harder, since contributions are made chiefly through salary deferral. But there is news to be aware of here, too, and action you can take: While next year’s IRA contribution limits will match 2024’s, there are some bigger changes coming in the 401(k) world.
The main contribution limit will inch up from $23,000 to $23,500, while the catch-up contribution amount for folks age 50 and older will stay at $7,500. But if you are age 60, 61, 62 or 63 at any point next year, you get a special, higher catch-up contribution limit of $11,250—a handy present from the SECURE 2.0 Act. As always, plan participation varies, but it is worth investigating and, if relevant, having a wee chat with your plan administrator to ensure you are getting everything Uncle Sam offers. Regardless, yearend is a time to review your contribution rate and ensure you are plugging away as much as your budget or the law allows.
Make Sure You Took Your RMD
Of course, while Uncle Sam giveth, Uncle Sam also taketh away, which brings us to annual required minimum distributions (RMDs). Traditional IRAs and 401(k)s are funded with pre-tax money and grow tax-free, which is lovely, but the tradeoff is that withdrawals are taxed as ordinary income. And to ensure the government gets its cut, minimum distributions are required annually once you hit age 73. If you fail to take your RMD on time, you get slapped with a penalty of 10% of the undistributed amount … which rises to 25% if you don’t fix the error within two years.
If you turned 73 this year, you have a bit of wiggle room. Your first RMD is due by April 1, 2025. But keep in mind you will still have to take your 2025 RMD by 12/31/2025, and taking both in the same calendar year will increase your tax bill. What is right for you will depend on your needs and overall financial situation, but that is a consideration worth weighing carefully.