More Nitty Gritty Personal Finance Reminders for Yearend Checkups

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.

For everyone else, review all your tax-deferred retirement accounts to see if you have taken your RMDs yet. And if you haven’t, take them. Determining your RMD should be easy, as it will be on your Form 5498, which you will typically receive early in the year, and it is on many IRA custodians’ account statements. If you can’t find it, you can also call your financial professional, who is likely able to help quite easily. If for some reason you can’t track this down, most brokerage firms have RMD calculators you can use. Or you can do it yourself with pen, paper and a calculator, using your 12/31/2023 account balance and the IRS’s life tables.

If you inherited an IRA from someone who isn’t your spouse, we strongly counsel talking to a tax adviser or financial professional about required distributions. The 2019 Secure Act included a provision that required many non-spousal beneficiaries to fully deplete the account within 10 years via annual withdrawals. Failure to do so could result in a penalty of 25% of withdrawal amount. Now, this penalty has been waived every year since—including 2024. But it still may behoove you to take funds now for tax planning reasons. Again, this is an area of tax law that has been evolving lately—so being aware of how this rule may affect you is key.

Mind Your HSA and FSA

Tax-advantaged accounts aren’t just for retirement saving anymore—it is also for healthcare. There are two main account types: the Health Savings Account (HSA) and Flexible Spending Account (FSA).

Starting with the simpler of the two, the HSA lets you put pre-tax money in an account dedicated to healthcare spending, and the money accumulates over time. To participate, your health insurance plan must be eligible (which generally means it must be high-deductible), and you can’t have an HSA and an FSA. And like a 401(k), an HSA has annual contribution limits. These are important to keep in mind not only to ensure you are participating to the fullest extent possible, but because over-contributing is a major no-no.

For 2024, contribution limits are $4,150 if your plan covers just yourself and $8,300 if it covers your family. Note, this limit includes any employer matching. The limit isn’t $4,150 plus whatever your employer chips in. It is $4,150, period. Oh, and folks age 55+ get an extra $1,000 catch-up contribution. So check in and see if a top-up makes sense.

Moving on to FSAs, these also let you use tax-free dollars to fund medical expenses, and you contribute through payroll deductions. But contributions don’t accumulate—they are basically use it or lose it. For 2024, the contribution limit is $3,200. If you and your spouse each have an FSA, the limit is $3,200 in each plan. But of this amount, you can only carry over $640 into 2025. So if you currently have more than this sitting in your FSA, you risk watching the excess vanish at yearend.

Which means … you may want to get busy. If you aren’t able to cram in a medical appointment you have been putting off, there is a long laundry list of over-the-counter items that are FSA-eligible, everything from basic medicine and medical supplies to sunscreen to hearing aids. Restocking your medicine cabinet, updating your first aid kit, replacing the thermometer whose accuracy you have been questioning … these and many other endeavors can help you put the funds to good use. The IRS has the full eligibility list here. 

Consider a Charitable Donation

While Congress debates whether to extend 2017’s Tax Cuts and Jobs Act, its provisions remain in force for this year and next—which means itemized deductions remain limited. The major exception is charitable contributions. So if you have the means and desire to donate to the organizations and causes that touch your heart, this is a good time to see if a donation might improve your tax situation for next year.

Which brings us back to RMDs. IRS rules allow for up to $105,000 in qualified charitable distributions from an IRA—distributions that go straight from your account to the charitable organization. These are tax-free (meaning, they don’t count as withdrawals), and crucially, they also count toward your RMD. So if you don’t need your RMD for living expenses, taking it as a qualified charitable contribution satisfies the requirement without adding to your income tax bill. And it benefits people and causes you care about. If ever there were a win-win-win, we think this qualifies.