As we approach the end of 2024, now is the time to review year-end tax planning opportunities. Examining your 2024 tax situation before year-end could lead to tax savings when you file your tax return in 2025.

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IRA and Retirement Planning

Make sure you contribute the maximum to your IRA or 401K.  If you are not an active participant in your employer’s retirement plan during 2024 and are married, even if your spouse has no earnings, you can generally deduct in the aggregate up to $14,000 ($16,000 if you are both at least age 50 by the end of the year) for contributions to your and your spouse’s traditional IRAs. You and your spouse must have combined earned income at least equal to the total contributions. However, no more than $7,000 ($8,000 if at least age 50) may be contributed to either your IRA account or your spouse’s IRA account for 2024. Even active participants where only one spouse has an employer plan and joint income is below $230,000 may qualify for an IRA deduction for the nonactive spouse. Also, if joint income is below $123,000, both spouses can still qualify for an IRA.  IRA deposits must be made by April 15, 2025.

For those taxpayers that participate in their 401(k) at work, you have until December 31 to make the maximum contribution of $23,000 ($30,500 if at least 50 years old).  Self employed individuals can contribute up to 20% of their net income (maximum of $69,000) to a SEP IRA.  SEP deposits should also be made by April 15, 2025, but can be made later if the individual’s tax return is extended past the original due date.

New Exceptions from Early Withdrawal Penalties

On December 29, 2022, President Biden signed the “Consolidated Appropriations Act, 2023.” Known as the Secure 2.0 Act, some of the highlights from that Act that affect your 2024 year end plan are listed below.

Exceptions from the 10% Penalty Tax for certain “Early Distributions” from Retirement Accounts were expanded. With the recent hurricane disasters, etc. it’s important to note that individuals living in a Federally Declared Disaster area may be able to withdraw up to $22,000 from their retirement plan (including an IRA), penalty-free, as a Qualified Disaster Recovery Distribution (QDRD). There is a 180-day window within which the amounts may be withdrawn penalty free. Even though there is no penalty on the amount withdrawn, the amount withdrawn will generally be included in your income.

Also, there is a new exception for distributions to Domestic Abuse Victims. Distributions from an eligible retirement plan (generally qualified plans, other than defined benefit plans) to a domestic abuse victim will not be subject to the 10% penalty tax if such distribution is made to an individual during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. This includes qualifying distributions from an IRA.

Also, there the law allows employers to make an “Emergency Personal Expense Distribution.” Such distributions from a retirement plan, other than a defined benefit plan, to an individual to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses will not be hit with the 10% penalty tax. Only one distribution for emergency expenses is allowed per calendar year. An employer is not required to include an “Emergency Personal Expense Distribution” provision in the employer’s retirement plan.

Changes to RMDs

Increase In Age For Required Minimum Distributions (RMDs). Required Minimum Distributions (RMDs) are now required after 73, for individuals who attain age 72 after 2022.  For an individual born after 1959, RMDs are required no later than April 1 following age 75.

Consider a Qualified Charitable Distribution (QCD)

If you are 70 ½ or older by December 31,  a Qualified Charitable Distribution (QCD) allows a donation to a charitable organization of up to $105,000 from a traditional IRA. These contributions are excluded from income and count toward your RMD for 2024. These contributions are not deductible as itemized deductions. However, if you normally take the standard deduction, a QCD could be even more beneficial since the distribution will be excluded from your income.

Rollover an unused 529 to a Roth Account

A trustee-to-trustee tax-free transfer is now allowed after 2023 from a 529 plan to a beneficiary’s Roth IRA without tax or penalty if the following requirements are met: 1) The 529 plan has been maintained for at least a 15-year period ending on the date of the transfer, 2) The amount of transfer to the Roth IRA does not exceed the aggregate amount of contributions and earnings prior to the 5-year period ending on the date of transfer, 3) Transfers for any one taxable year cannot exceed the IRA contribution limitation for the year reduced by the amount of all contributions made to all IRAs maintained for the beneficiary’s benefit during the year, 4) The aggregate of all qualified transfers for the current and all prior years does not exceed $35,000.