2024 Year-End Tax Planning Checklist: Tips for Tax-Advantaged Accounts

The end of 2024 is quickly approaching, and we think this is a good time to review all your tax-advantaged accounts and act on or before December 31 to maximize the benefits of these savings vehicles. Among the possibilities:

• Taking a saver’s credit on contributions made to retirement accounts
• Converting funds to a Roth IRA
• Making sure to fully fund your 401(k), 403(b), 457(b), or SIMPLE IRA
• Making a Qualified Charitable Distribution (QCD)
• Reviewing age requirements for lifetime RMDs

Use our convenient year-end checklist to see suggested actions and determine which situations apply to you.

RELATED WEBINAR - Thursday, December 12, 2024 1:00–2:00 PM EST

2024 Year in Review: Important Changes Affecting Retirement Accounts

1. Aim to take advantage of the saver’s credit.

The saver’s credit is a nonrefundable federal income-tax credit available to individuals with an adjusted gross income (AGI) of less than $76,500 in 2024. To qualify, a taxpayer must make a contribution to a 401(k), 403(b), governmental 457(b), SIMPLE IRA, traditional IRA, Roth IRA, SAR-SEP IRA, or Section 529 ABLE account.

The maximum annual contribution eligible for the credit is $2,000, and the maximum credit is 50%, making the maximum saver’s credit $1,000.

2. Fully fund your workplace retirement plan.

In 2024, you can defer a maximum of $23,000 into your 401(k), 403(b), governmental 457(b), or Thrift Savings Plan (TSP). This limit is an aggregate of all your pre-tax and/or Roth contributions. Individuals age 50+ (by the end of the year) can defer an additional $7,500 in catch-up contributions.

TIP: 457(b) plan salary deferrals are not coordinated with deferrals made to a 403(b) or 401(k) plan. Therefore, you can fully fund your 403(b) or 401(k) without reducing the contribution limits to a governmental 457(b). Participating in both plan types allows individuals to maximize contributions.

EXAMPLE: In 2024, an individual participating in both a governmental 457(b) and 403(b) or 401(k) can defer up to a total of $46,000 ($23,000 into a 457(b) plus an additional $23,000 into a 401(k) or 403(b)). Plus, those individuals age 50+ can defer an additional $7,500 per plan type for up to an additional $15,000 in catch-up contributions.

3. Fully fund your SIMPLE IRA.

In 2024, you can defer up to $16,000 into your SIMPLE IRA. Participants age 50+ may make an additional catch-up contribution of $3,500.

By participating, you’re eligible to receive a non-forfeitable, immediately vested, employer-funded contribution in the form of a 3% match or 2% non-elective contribution.

The employee salary deferral limit or employer contribution amount can be increased in certain situations. See this column from June 2024 for details.

4. Fully fund your traditional or Roth IRA.

Although the deadline to contribute to an IRA for the 2024 tax year is April 15, 2025, why not fund it now? Virtually anyone with taxable compensation (earned income) is eligible to fund a traditional IRA up to $7,000. Plus, a $1,000 catch-up contribution can be made by individuals age 50 and older.

Anyone, regardless of age, can contribute to a traditional or Roth IRA. Roth IRAs, however, also require an individual to have earned income but also to satisfy an annual income test. Eligibility to fund the maximum Roth IRA contribution depends on tax-filing status and modified adjusted gross income (MAGI).

TIP: A spousal IRA is an exception to the earned income eligibility requirement. It’s available to a married couple where one spouse has no compensation. Furthermore, a spousal IRA only applies to married couples that file a joint tax return.

5. Fund a Roth IRA for a minor.

Because there is no minimum age to establish a Roth IRA, a minor with reportable earned income (taxable compensation) can establish and fund such an account. Anyone can fund the Roth IRA up to the amount earned by the minor. Contributions cannot exceed $7,000 for 2024.

6. Consider a “Backdoor” Roth IRA.

A Backdoor Roth IRA is a retirement savings strategy for high earners. An individual contributes after-tax funds (nondeductible) to a traditional IRA and then converts such funds to a Roth IRA.

Roth IRA eligibility is means tested—an investor must satisfy an annual income threshold set by the IRS. Contributions directly to a Roth IRA require that your MAGI be below a certain threshold, dependent on tax-filing status. High-income earners, regardless of their MAGI, are eligible to convert funds to a Roth IRA.

7. Did you make an Excess Contribution to your IRA?

Many investors contribute more to their IRA than allowed without realizing it. “Excess IRA Contributions” include contributing more than the maximum annual contribution limit, not satisfying Roth income eligibility, and funding an IRA with an ineligible rollover such as a required minimum distribution (RMD) or hardship withdrawal.

Excess contributions can be withdrawn without tax penalty if corrected within the tax-filing deadline (including extension). If not corrected, the excess contribution plus earnings are subject to a 6% penalty for every year they remain in the account.

8. Did you make a nondeductible (after-tax) traditional IRA contribution?

File IRS Form 8606 if you made such a contribution.

Tax-filing status, MAGI, and whether you and or your spouse are an active participant in a workplace retirement plan determine whether a contribution to a traditional IRA is tax deductible.

Participation in an employer-sponsored retirement plan, such as a 401(k), 403(b), governmental 457(b), Thrift Savings Plan, SIMPLE, or SEP IRA, does not affect IRA eligibility or contribution amounts but may affect whether your traditional IRA contribution is tax deductible.

9. Did you take an IRA distribution that contains basis?

All an owner’s IRAs (except Roth and inherited IRAs) are considered a single IRA regardless of where the account is held (for example, different IRA custodians).

IRA distributions are taxed “pro-rata,” partly from pre-tax (tax-deductible contributions plus earnings) funds and partly from non-deductible (after-tax) funds. The amount of the distribution is subject to income tax, based on the ratio of after-tax dollars to total IRA assets (across all IRAs, excluding Roth and inherited IRAs) at the end of the year. When there are after-tax funds held in a traditional IRA (including rollover, SEP, and SIMPLE IRAs) and the total IRA balance across all accounts isn’t distributed, this tax is applied.

Reporting the tax liability of an IRA distribution that contains basis requires the filing of IRS Form 8606 “Nondeductible IRAs.”

10. Consider a Roth IRA conversion.

All account owners regardless of age and or income can convert funds to a Roth IRA. However, to qualify for 2024, the conversion must be completed on or before December 31. In other words, there is no such thing as a prior-year Roth conversion.

A taxpayer can convert as much or as little of a traditional IRA (including SEP and SIMPLE) to a Roth IRA as they choose. The value of converted funds (minus basis) is subject to income tax (federal and state, if applicable) in the year of conversion. The conversion amount is taxed at your marginal tax bracket. To report a Roth conversion, file IRS Form 8606.

Converting to a Roth IRA is irrevocable. The ability to recharacterize a Roth IRA conversion was previously repealed as part of the Tax Cuts and Jobs Act.

11. Review your age for IRA minimum distributions.

If you turned age 73 in 2024 and will be taking your initial RMD, you can delay it until April 1, 2025. You will however be subject to two RMDs in calendar year 2025—both your delayed 2024 and 2025 RMD. Each subsequent year, you must take your RMD by December 31. (We’ve written in detail about how Secure Act 2.0 affected RMDs.)

If you’re actively employed past age 73, RMDs are generally not required from your 401(k)—until the year you retire. This rule is called the “still-working exception” and is available only if you do not own more than 5% of the company sponsoring the plan, and the plan offers it. In other words, the still-working exception is discretionary. We suggest checking with your employer to see if it’s available.

12. Are you planning on using Net Unrealized Appreciation (NUA)?

If you hold appreciated company stock in your 401(k), NUA is a tax-planning strategy that allows you to pay ordinary income tax on the cost basis only, when the stock is distributed. The difference between the two amounts (NUA) isn’t taxable until the shares are sold—and at favorable long-term capital gains rates—even if sold within a year.

NUA treatment requires a taxpayer to satisfy several requirements. One such requirement is that all plan funds must be distributed by the end of the year. Should funds remain in the retirement plan, the lump sum distribution requirement will not be satisfied.

13. Did you inherit an IRA?

Inheriting an IRA (traditional, SEP, SIMPLE, Roth) may require the beneficiary to take annual distributions and or receive funds over a specific number of years. The payout schedule depends on several factors, including the named beneficiary (spouse, non-spouse, estate, charity, etc.), type of account (401k, IRA, etc.), and age of the account owner upon their death. (Read more on some recent updates to RMD requirements.)

We offer more details about inherited IRAs in this October 2024 article.

14. Review qualified charitable distributions (QCD) requirements.

A QCD serves as a tax-free, direct transfers of funds up to $105,000 (2024) from your IRA, payable to qualifying charities. Moreover, a QCD counts toward satisfying your RMD.

Eligible individuals can begin making QCDs at age 70 ½. Notably, QCDs can be made only from traditional IRAs, inactive SEPs, and SIMPLE IRAs.

The distribution will be reported on IRS Form 1099-R. Although the distribution will be reported, there is no code signifying the distribution as a QCD. Therefore, a QCD can easily be missed on your tax return, resulting in a taxable IRA distribution. Be sure to properly report the QCD.

A 2024 QCD must be received by a qualifying charity by December 31, 2024; we suggest not waiting until the last minute. (We recently discussed some important timing considerations for QCDs.)

15. Did you make a 60-day IRA rollover?

Verify that the 60-day IRA rollover was completed in a timely manner. Also, confirm that only one 60-day IRA-to-IRA rollover was done in a 365-day period (not by calendar year). This rule prevents an unwanted IRA distribution from being rolled back into the same or another IRA via a 60-day rollover if another IRA-to-IRA 60-day rollover has been completed during the past 365 days.

Owners who received multiple IRA distributions can still roll over such funds and bypass the 365-day rollover rule by rolling subsequent distributions into qualifying, non-IRA employer-sponsored retirement plans (i.e., 401(k), 403(b), etc.). If an employer plan rollover is not available, you still can receive benefits via a Roth conversion, which is not subject to the once-per-year rollover rule. Funds, however, will generally be subject to income tax.

16. Are you taking substantially equal periodic payments under section 72(t)?

Taking substantially equal, periodic (commonly known as Section 72(t) payments allows an IRA owner under age 59 ½ to access their funds without the usual 10% early distribution penalty tax. Importantly, such payments are subject to several rules. For example, payments must be taken annually and must continue for at least five years, or until the age 59 ½, whichever period is longer.

17. Did you make a 529 plan rollover to a Roth IRA?

Beginning with distributions made after December 31, 2023, a beneficiary of a section 529 qualified tuition program is permitted to roll over a distribution from the section 529 account to a Roth IRA for the beneficiary if certain requirements are met.

More information can found in this column from January 2024.

18. Establish a Coverdell Education Savings Account (ESA).

The deadline to establish and/or fund a Coverdell ESA for 2023 is April 15, 2024. The total contributions for the beneficiary cannot exceed $2,000 in any year, no matter the number of accounts established. Any individual can contribute to an ESA if their household income (MAGI) for the year is less than $110,000. For married couples filing joint returns, it increases to $220,000.

19. Fund a 529 ABLE Account.

Section 529 ABLE (Achieve a Better Life Experience), also known as a 529A, is a tax-advantaged account for individuals who become disabled before age 26. An ABLE account helps pay for qualified disability expenses without affecting eligibility for benefits such as Medicaid.

If a beneficiary makes the contribution, he/she will be able to claim the Saver’s Credit, which is generally reserved for retirement account contributions.

Health Savings Accounts (HSAs)

20. Fund a Health Savings Account.

You may be eligible to contribute to a Health Savings Account (HSA) if you are enrolled in a high-deductible health plan. An HSA is triple-tax-advantaged and designed to cover future qualified medical expenses. In 2024, an eligible individual with single coverage can contribute $4,150. For those with family coverage, the limit is $8,300. A $1,000 catch-up contribution is available to those individuals aged 55 and older.

A 2024 HSA contribution, like an IRA, can be made as late as April 15, 2025.

21. Did you contribute to or take a distribution from your Health Savings Account?

The account owner is required to file IRS Form 8889 "Health Savings Accounts.”

HSA contributions include those made by an employer.

22. Did you inherit a Health Savings Account?

Like retirement accounts, an HSA requires an account owner to name a beneficiary who inherits the account after the owner’s death. You can name anyone as beneficiary (spouse, non-spouse, estate, etc.). Notably, the beneficiary payout options differ from retirement accounts such as a 401(k) or IRA. See IRS Publication 969 "Health Savings Accounts and Other Tax-Favored Health Plans” for details.

23. Did you make a qualified transfer from an IRA to your Health Savings Account?

Once in a lifetime, an IRA owner can transfer funds to his or her HSA (referred to as a ‘Qualified HSA Funding Distribution” (QHSAFD)). A QHSAFD allows for a tax-free transfer of traditional IRA funds to an HSA, and subsequent “qualified medical expenses” are also distributed tax free.

Properly reporting a QHSAFD is critical to ensure you receive the tax benefit. Get more info on the topic in this column.

Business Owners

24. You may be eligible for a retirement plan tax credit.

Secure Act 2.0 of 2022 includes new tax incentives for businesses when starting a plan for their employees. Other incentives include a tax credit for adopting Auto Enrollment and making employer contributions.

See this March 2024 column for more details.

25. Distribute SIMPLE IRA plan notifications to eligible employees.

An employer that sponsors a SIMPLE IRA is required to distribute notices to eligible participants with plan information such as the opportunity to make or change salary deferrals, a summary plan description, and the employer contribution formula for the following year. The election period is generally a 60-day period immediately preceding January 1 of a calendar year.

Questions? Please contact your Lord Abbett representative at 888-522-2388.