Year-end is an opportune time to review existing retirement and income plans to determine if changes are needed. There are several strategies that may help avoid costly mistakes, improve tax efficiency, and boost retirement savings, if acted on before the end of the year.
Here are some considerations for retirement planning before the end of the year.
1. Review retirement savings
Is there an opportunity to increase savings in a retirement plan or IRA? In 2024, the maximum amount for salary deferrals into a 401(k) plan increases from $22,500 to $23,000 (an additional $7,500 if age 50 or older). For 2024, the maximum IRA contribution increases from $6,500 to $7,000 (an additional $1,000 if age 50 or older).
In addition to the amount being saved, individuals may want to consider “how” contributions are being saved from a tax perspective. Individuals may consider whether to save in a traditional, pretax retirement account or in a Roth account. For example, participants in most retirement plans have the option of directing salary deferrals into a designated Roth account within the plan (i.e., Roth 401(k)). Also, the SECURE 2.0 law now allows participants to request employer-matching contributions into designated Roth accounts. Those concerned about higher taxes in the future may want to allocate a percentage of their contributions to a Roth 401(k).
2. Consider a “backdoor” Roth contribution
If your income is too high to contribute to a Roth IRA, consider executing a backdoor Roth IRA contribution before the end of the year. This involves two steps. First, make a non-deductible contribution to a traditional IRA. Second, convert those funds to a Roth IRA (all taxpayers can convert funds to a Roth IRA regardless of income).
This strategy does not generally work if you own other IRAs consisting of pretax funds that you do not wish to convert to a Roth IRA, but it can be an effective strategy if you hold your retirement savings in non-IRA accounts like a 401(k). The tax rules on this type of strategy can be complicated, so consult with a qualified tax professional.
3. Review beneficiaries
A beneficiary review is a good way to ensure accounts are up to date and to avoid costly mistakes. Life situations, such as divorce, can lead to complications later if documents are not updated. For example, a forgotten account may be inherited by an ex-spouse. If no beneficiaries are designated, retirement accounts may have to go through the probate process. Most families try to avoid probate because it is a costly and public process, and generally lengthens the time it takes to settle an estate. Investors need to be mindful that some IRA agreements or plan documents may identify “default beneficiaries” in cases where there is no named beneficiary.
4. Be sure to take required minimum distributions (RMDs)
Though recent retirement legislation (SECURE 2.0) reduced the penalty for failing to take a required distribution from a retirement account, the penalty is still 25% of the required amount. The fee may be reduced to 10% if the action is corrected in a timely manner, which generally means within a year. You must typically take your first required minimum distribution for the year in which you turn age 72, although you can delay your first distribution until April 1 of the following year. However, your second RMD would have to be taken by the end of that calendar year, resulting in two RMDs for the year.
There is also a “still working” exception (only for retirement plans in which a worker is currently a participant). This exception applies to individuals at age 73, who are participating in their employer plan and meet other requirements (for example, the individual must not own 5% or more of the company). These individuals can delay the first RMD until April 1 of the year they separate from service. For those with several IRAs, only one RMD is needed. There is no need to take separate distributions from each account as long as the RMD is based on the aggregate value of all IRAs as of December 31 of the prior year. However, separate RMDs are required for employer-sponsored plans including 401(k)s.
5. Know the rules about inherited retirement accounts
Beginning with deaths occurring after 2019, most non-spouse heirs are required to fully distribute inherited retirement accounts within a 10-year time period. Spousal beneficiaries still have the option to stretch required distributions based on their remaining life expectancy. Heirs subject to this new 10-year rule may want to determine when it makes the most sense to draw down the inherited retirement account based on their personal tax circumstances. For more information, see “Unraveling the 10-year rule.”
6. Consider a qualified charitable distribution (QCD)
If you are not relying on your RMD to meet current income needs, and if you are planning to claim the standard deduction, consider donating IRA assets to a qualified charity. A special provision of IRAs allows account owners to donate up to $100,000 tax free each year directly to a qualified charity. While the RMD age has increased recently due to retirement law changes, the age for those eligible to request a QCD remains at age 70½ or older. Those with inherited IRAs can utilize a QCD as well, provided they meet the age requirement. See "Donating IRA assets to charity."
7. If retired, review your annual withdrawal rate from savings
As year-end approaches, retirees may want to review income and spending for the year to get a sense of how much is being withdrawn from retirement savings and other portfolios. Given longevity risk and rising inflation, retirees need to make sure their withdrawal rate on savings is sustainable to mitigate the risk of running out of money in the future. Historical studies have found that a withdrawal rate of approximately 4% annually (adjusted for inflation) is generally sustainable over a person’s lifetime. However, individual circumstances will vary, making it important to work with a financial professional on a personalized retirement income plan.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.