As we near mid-December, it’s natural to reflect on the past year. While there were many major headlines in 2024, such as wars, lower interest rates, the election of a new president and the U.S. market hitting all-time highs, it’s easy to get caught up in the latest news. However, fixating on the short term is not constructive. Instead, it’s worth focusing on practical strategies to consider before the end of the year.
Some of the following items may be applicable to you, while others may not be. The key is recognizing the opportunities that exist in this environment so you can make informed financial decisions and stay focused on what is important as you enter 2025.
Investing considerations
1. Overall allocation. Does your investment mix of stocks, bonds, alternative investments and cash still make sense based on your goals? If your situation has changed, it may impact your portfolio.
2. Rebalancing. Though the S&P 500 is up meaningfully this year, that return has been driven primarily by several large technology stocks. Meaning there are areas of the market, such as REITs, international stocks and investment-grade bonds, that have meaningfully underperformed the S&P 500. Many investors’ asset allocation is probably out of whack, and it may make sense to rebalance your portfolio to ensure your allocation is brought back to its appropriate risk tolerance.
3. Investment policy statement (IPS). One way to stick to a disciplined plan is by developing an IPS. An IPS helps define an investors’ goals, risk tolerance and other considerations to ensure they are on track to achieve their objectives. Most important, it will help investors ignore the noise and the slick salespeople trying to sell them something imprudent. Speaking to your financial adviser today to set up an IPS before the New Year is a great way to start 2025 on the right financial foot.
4. Review your cash position. In today’s world, cash doesn’t need to earn nothing. Money market yields are now paying around 4%-plus. Proactively moving cash from accounts paying 1& to 2% to those paying about 4% is prudent. On the other hand, yields are much lower than they were last year. This may impact how much cash you should have on hand.
Considerations for required minimum distributions (RMDs)
5. Don’t forget to take your RMDs from your retirement account. RMDs apply to folks who are 73 and older. If you are subject to RMDs and don’t take them before the end of the year, there will be a penalty.
Considerations for charitable giving
6. Qualified charitable distributions (QCDs). Individuals who are 70½ or older can donate all, or a portion, of their RMD directly to charity via a QCD. Regardless of the amount of your RMD for the year, you can give up to $105,000 to charities from your IRA as QCDs.
7. Deduction for cash contributions. Under the Tax Cuts and Jobs Act, the deduction for cash contributions directly to charity, including gifts to a donor-advised fund, increased from 50% of AGI to 60%. The limit will revert to 50% after the sunset of the TCJA at the end of 2025, so donors should consider maximizing their cash gifts today.
8. Donate appreciated stocks. Many investors may have long-held or concentrated stock positions with large imbedded unrealized capital gains. These folks should consider donating these highly appreciated securities directly to charity, which helps avoid capital gains tax that would otherwise need to be paid when selling the security. It also facilitates minimizing a large position, which helps derisk a portfolio.
9. Utilize a donor-advised fund (DAF). A DAF is an account where you can deposit assets for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and still has the ability to control how the funds are invested and distributed to charity. A DAF can be extremely useful if you hold a security with no cost basis, a highly appreciated stock or a concentrated position. In all these scenarios, the tax liability can be circumvented by moving that position to a DAF. A DAF may be particularly useful when “bunching” your charitable contributions, which involves donating several years’ worth of charitable contributions all at once, which is done for tax planning purposes.
Considerations for Roth IRA conversions
10. Roth IRA conversions. A Roth IRA conversion is the process of transferring retirement funds from a traditional IRA, SEP or 401(k) into a Roth account. There is no early withdrawal penalty on this conversion amount. Since a traditional IRA is tax-deferred, while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the converted funds at the time of conversion. This is typically done to avoid a potentially more onerous tax liability later or for estate planning reasons.
Considerations for beneficiary designations
11. Beneficiary updates. Retirement accounts and insurance policies have beneficiary designations that pass outside of one’s will. Therefore, even if you did estate planning, it’s important to review your various beneficiary designations to ensure that your money is passing according to your wishes. It is not unheard of for assets to pass to the wrong party, such as an ex-spouse, because beneficiary designations were not updated.
Considerations for estate planning
12. Changing family dynamics. If a family member passed away this year, you may want to reach out to your estate planning attorney to review and update your planning/documents such as a will, power of attorney, health care proxy, etc.
13. Aligning your financial plan with your investments. If you update your estate plans or have a trust, make sure that your investment accounts reflect your estate plan (i.e., the trusts should be funded and accounts titled correctly).
14. Take advantage of the high federal unified estate and gift tax exemption. The federal unified estate and gift tax exemption for 2024 is at an all-time high of $13.61 million for individuals and $27.22 million for married couples. It’s going up next year (to $13.99 million for individuals and $27.98 million for married couples). However, while the incoming Trump administration may extend this high exemption amount, they are still scheduled to expire after December 31, 2025. At that point, the amounts are scheduled to revert to the pre-2017 level, which is about half of what they are today. Depending on a family’s assets, it may be a great opportunity for large lifetime gifts to capitalize on the historically high exclusion amount today to remove assets from their estate.
Considerations for 529 plan contributions
15. 529 plan contributions. A 529 plan is a tax-advantaged college savings account. It may provide an opportunity for immediate tax savings if you live in one of the 30 or more states offering a full or partial deduction for your contributions to the home-state 529 plan. This is a nice option for using the annual gift tax exclusion, if you haven’t already used it. You can gift up to $18,000 a year tax-free per person in 2024 (in 2025, it’s $19,000). The annual exclusion recycles on January 1, so make sure to use your 2024 gift allowance by then so you don’t lose it.
16. “Superfunding” 529 accounts. In this strategy, you can spread a tax-free gift to a 529 account over five years for gift tax purposes. So, a married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $180,000 in 2024 to a 529 plan for each child and, with the election, not run into gift tax problems.
Considerations for tax loss harvesting
17. Tax-loss harvesting is the process of selling securities at a loss to offset a capital gains tax liability. In addition to offsetting any capital gains for the year, the loss can also be used to offset up to $3,000 of your ordinary income.
Considerations for company retirement accounts
18. Assess contributions to employer retirement plans. Review how much money you contributed to your 401(k) or 403(b) this year. If you are financially able, it’s worthwhile to max out those accounts every year. In 2024, maximum contribution limits are $23,000 before any company match or $30,500 if you are 50 or older.
19. Plan for next year’s 401(k)/403(b) contribution limits. For 2025, the contribution limit increased to $23,500. Catch-up contributions will remain the same at $7,500 for those 50 and over. Interestingly, in 2025 the IRS will now permit an additional catch-up for employees ages 60 to 63 of $11,250, instead of just $7,500. Don’t forget to make the required tweaks within your plan to ensure you are making the maximum contribution for the upcoming year.
20. Roth IRA vs traditional IRA. It’s important to decide whether to make Roth IRA or traditional IRA contributions. As a rule of thumb, if you think you may have a high-income year, then a traditional IRA makes more sense since you’ll get an immediate tax deduction. However, if you anticipate a low-income year, then a Roth IRA makes sense. In that scenario, you’ll pay a more modest amount in taxes now and not have to pay tax on the withdrawals years later.
21. Review your 401(k)/403(b) investment lineup and current portfolio. Determine if it is sensible to make any investment changes in your plan. This is especially applicable if your firm switched 401(k) providers recently, if you rolled over an old 401(k) or if you are approaching retirement. In any of these scenarios, tweaking your investments may make sense.
Considerations for other tax-advantaged accounts
22. Health savings account (HSA). Consider maxing out your HSA, which allows you to save and pay for qualified medical expenses with tax-free dollars. In order to contribute to an HSA, you have to be enrolled in an HSA-eligible health plan. You can only contribute a certain amount to your HSA each year, but all contributions roll over from year to year. In 2024, you can contribute up to $4,150 for yourself, or $8,300 if you have coverage for your family. In 2025, you will be able to contribute up to $4,300 for yourself or $8,550 if you have coverage for your family.
23. Flexible spending account (FSA). FSAs allow you to contribute pre-tax money, up to a certain amount, to an account that can be used to pay for eligible out-of-pocket health care expenses or eligible dependent care services, such as childcare. However, FSA funds typically are “use it or lose it,” meaning you generally can’t roll the full amount into the next calendar year. To avoid losing any unspent funds, make a plan to use the money before December 31.
Considerations for your budget
24. Sufficient emergency fund. Make sure you have adequate funds in your checking account. Three to six months’ worth of expense money is a good rule of thumb for those who are working. For retirees, this number should be sufficient to mitigate sequence of returns risk, which may require having a year’s worth of cash readily available.
25. Reflect on your expenses and plan ahead for next year. This is especially important for retirees who must evaluate how much cash they will need in the year ahead to ensure they are able to meet their cash flow needs. Since prices on many items skyrocketed this year, it’s imperative to ensure you have adequate cash on hand to meet these expenses.
Reviewing the aforementioned strategies with your loved ones and financial adviser can help ensure that your financial house is in order. It will also help lay the groundwork for a financially successful year ahead.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures.
