By Michael Lynch CFP®
As we begin the end of 2024, I want to point out a few simple year-end strategies that may have a big financial impact on you. Given that taxes are the largest expenses of most of my clients, it’s no surprise that most strategies focus on tax-related moves.
Do the Bracket Bump
Move number one: bump your bracket. My dad fed our family as a general contractor specializing in underground construction. He won or lost jobs at blind bids, where he put in a price he was committed to for completing a job. On bid day, I’d have two questions for him when he returned from the office. (These would usually be asked as I racked for a game of eight ball after putting Merle Haggard on the stereo.)
First, “Did you get the job?”
If he said yes, I’d follow up, “How much did you leave on the table?”
This refers to the gap between his winning bid and the next lowest, that is, the amount of additional money he could have earned and still secured the contract.
Leaving too much green on the table turns a win into a psychological loss.
I bring this concept to my financial planning practice, in which I encourage clients not to leave anything on the table if they find themselves in low tax brackets. The U.S. tax code is extremely progressive, which means if you can keep your “taxable” income modest, you will pay very little income tax. For retirees, this may mean they are in the 12 percent bracket in early years only to jump to the 22 percent when RMDS kick in in later years. Don’t waste the low 12 percent bracket. Given that the current brackets are set to increase in 2026, some may want to fill up higher brackets as well.
The simple strategy is to “bump” your income to take full advantage of it. Options include taking a withdrawal and investing it in a non-qualified account or converting it to a Roth IRA and never paying tax again. Each of these strategies will pay off big in future years for you or your heirs.
IRMAA is Not Just a Hurricane
How do you feel about paying extra for Medicare? You most certainly will, without any extra services, if your Modified Adjusted Gross Income (MAGI) exceeds $103,000 per person in 2024. Earn
$103,100 and you’ll pay $994 a year more for Medicare Parts B and D. That’s a tax rate of nearly 1,000 percent! There are other income thresholds as well.
The Income-Related Monthly Adjustment Amount (IRMAA) is often triggered by unwanted RMDs once you reach age 72. The simple solution is to plan, in advance, to lower RMDs. If the threshold is $103,000, consider withdrawing or converting pre-tax retirement assets to Roth IRA assets to approach but not exceed this threshold. If you find yourself paying IRMAA, make sure you use the entire allotted bracket. Call it IRMAA optimization.
IRMAA is not driven by taxable income so traditional charitable contributions will not lower it. However, people who are 70.5 years old can send non-profits money directly from an IRA, a Qualified Charitable Contribution (QCC), which will reduce their income. (You cannot do this strategy from an employer plan like a 403(b) or 401(k).)
Do the Roth Conversion
Roth conversions are both a tool and a strategy. They are a tool for IRMAA optimization and bracket bumping. They can be a strategy to take advantage of stock market dips, converting and therefore paying taxes at temporarily depressed prices. The simple strategy is to optimize tax brackets or Medicare limits and keep a keen eye for distress in financial markets. That’s the time to strike for big results. Thankfully, this is not likely to apply in 2024.
It’s Harvest Season
Look for year-end tax-loss or gain harvesting. Under the current tax code, you always pay lower taxes on capital gains than on your earned and ordinary income. Better yet, if you fall into the 12 percent bracket you will pay nothing, zero percent, my favorite tax rate. One strategy involves selling losing investments to offset other gains or even $3,000 of ordinary income. This should be an ongoing--not just a year-end--strategy, but year-end provides the last chance to deploy it. Another less intuitive strategy is to take only gains. If you are in the 12 percent tax bracket, this simple move will free up funds or just reset your tax basis higher at no cost. That may pay off big later.
There’s No Button for This
Each of these strategies and tactics is situational and highly fact-dependent. Your numbers must be crunched to know if a strategy is a personal winner or loser. Our team devotes substantial effort and resources to doing just this. Don’t hesitate to reach out if you want to review your personal situation.
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and Fort Myers FL, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and, most recently, Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.
Securities, investment advisory, and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
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