Smart Financial MovesTax Strategies to Finish the Year Strong

As the year draws to a close, it’s the ideal time to review your financial strategy. Making smart, well-timed decisions now can have a significant positive impact on your tax situation for the current year and for your future in retirement. These strategies mainly focus on making the best use of retirement accounts and minimizing the amount of money you owe the government.

Required Minimum Distributions (RMDs): Don’t Miss the Deadline

One of the most crucial tax deadlines for older adults involves Required Minimum Distributions (RMDs).

Generally, if you are a taxpayer who has reached age 73 or older, the government requires you to withdraw a certain amount of money from your tax-deferred retirement accounts (like Traditional IRAs and 401(k)s) before the year ends.

• The Deadline: For most people who have already hit this age, the RMD must be taken by December 31st of the current year. (There is a specific exception: individuals who reach the RMD age threshold in 2025 have until April 1st of the following year to take their very first distribution.)
• The Penalty: Ignoring this deadline can be very costly. If you fail to withdraw the required amount, you may face a steep 25% penalty on the portion of the RMD you did not take out.

If you are worried that the extra income from your RMD might push you into a higher income tax bracket, it’s wise to start working with your financial professional now. Planning ahead can help you find ways to potentially lower your RMD obligations in the years to come.

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Calculating Your RMDs

You must correctly calculate the RMD amount based on your retirement account balances and your age. Several financial tools and online RMD calculators can help you determine the exact minimum amount you need to withdraw to satisfy the Internal Revenue Service (IRS) requirements.

Maximize Your Workplace Retirement Savings

A key year-end strategy is maximizing contributions to your work retirement plan. This move benefits you in two main ways: boosting your retirement nest egg and reducing your current year’s taxable income.

Get the Full Employer Match

If your employer offers to match your contributions to your 401(k) or similar plan, this is essentially free money. You should always contribute at least enough to your plan to receive the full employer match, as this provides an immediate, guaranteed return on your investment.

Contribute the Maximum Allowed

If your financial situation permits, you should strongly consider contributing the maximum amount allowed by the IRS to your tax-deferred workplace plan.

• Standard Limit: For 2025, the contribution limit for 401(k)s and similar plans is $23,500.
• Catch-Up Contributions: The IRS allows older workers to save even more. If you are age 50 or older, you can add an extra $7,500 (totaling $31,000). For workers ages 60–63, a larger supersize catch-up contribution is available, up to $11,250 (totaling $34,750).

Using these high contribution limits helps reduce your total taxable income for the present year. This is a particularly strong strategy if you anticipate your tax rate will be lower once you retire than it is right now.

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The Roth Alternative

If, however, you believe your tax rate will be higher during retirement, funding a Roth account might be the better long-term strategy. Roth accounts are funded with after-tax dollars, meaning you pay the taxes now, but your future withdrawals in retirement are tax-free.

If your employer’s plan offers a Roth option and you haven’t yet maxed out your contributions, you can make after-tax contributions to a Roth 401(k). The same limits apply ($23,500, or more with catch-up contributions), minus whatever you put into your traditional 401(k).

A Note on Future Catch-Up Rules (Starting in 2026): Tax laws are always changing. Be aware that beginning in 2026, there is a specific rule change: individuals with income above $145,000 may only make catch-up contributions using after-tax dollars into a Roth 401(k), assuming the employer offers this plan.

Exploring Roth Conversions

A Roth conversion is a powerful tax strategy that allows you to move money from a traditional retirement account (which is taxed when you withdraw it) into a Roth account (which is never taxed again).

Traditional IRA to Roth Conversion

Even if your income is too high to contribute directly to a Roth IRA, you can still gain the benefit of tax-free retirement withdrawals by converting your Traditional IRA to a Roth IRA.

The catch is that when you convert the pretax savings from the Traditional IRA, those funds are treated as income for the current tax year, and you must pay taxes on that amount now.

• Staying in the Tax Bracket: To avoid a large and unexpected tax bill, you should generally aim to convert only enough money to keep your total income within your current tax bracket. Converting funds that spill into the next highest bracket means paying a higher federal income tax rate on that converted amount.
• Example Scenario: Imagine you are a single filer in 2025 earning $180,000. Your current tax bracket (the 24% bracket) covers income up to $197,300. You could convert up to $17,300 ($197,300 minus your $180,000 income) without being forced into the next, higher tax bracket.

Determining if a Roth Conversion is Right for You

Deciding whether to convert to a Roth IRA depends entirely on your personal financial situation, your expected future tax rate, and your current liquidity (cash flow to pay the tax bill). Many financial advisors recommend using a Roth IRA conversion calculator to model different scenarios and help determine the optimal amount to roll over.

Advanced Tax-Saving Tactics for High Earners

High-income earners have specific tax-planning strategies available that allow them to save even more money in tax-advantaged accounts, often by bypassing the strict income limits associated with Roth IRAs.

After-Tax Contributions and Rollovers

This strategy, sometimes called a mega-backdoor Roth conversion, uses an employer’s 401(k) plan to save extra money into a Roth account.

1. Max Out the Regular Contribution: First, contribute the maximum allowed to your normal 401(k) plan ($23,500, plus catch-up amounts) for the year.
2. Add After-Tax Dollars: If your employer’s plan permits it, you can then contribute additional after-tax dollars up to the 2025 overall account limit, which includes employer matches: $70,000 (or more for those eligible for catch-up contributions).
3. Quick Rollover: To prevent any investment gains on these after-tax contributions from being taxed later, you must quickly convert or roll over those specific funds into a Roth 401(k) or a Roth IRA.

Be aware that funds contributed to a 401(k) are typically difficult to access before retirement without facing penalties. Always make sure you have enough money readily available in taxable savings before committing to these additional contributions.

The “Backdoor Roth”

If your employer’s plan doesn’t allow the “mega-backdoor” method, you might still consider a backdoor Roth. This strategy involves two steps:

1. Contribute after-tax dollars to your Traditional IRA (up to the $7,000 limit, or $8,000 if age 50 or older, for 2025).
2. Immediately convert that Traditional IRA to a Roth IRA.

The IRS currently allows both the mega-backdoor and backdoor Roth strategies, but the agency has not issued formal guidance regarding whether using a backdoor Roth violates the “step-action rule” (a tax principle that treats related multi-step transactions as a single one). Tax laws can change at any time. Because of the potential complexity and legal uncertainty, you should always consult a tax advisor to ensure you are following the rules correctly when using these advanced strategies.

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