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Financial Planning > Tax Planning

It’s Not Too Early to Start 2024 Tax Planning

By Roger Wohlner

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What You Need to Know

  • A good first step is to assess clients’ likely tax situations and what, if anything, will be different from 2023.
  • In many cases, tax and financial planning for the current year can affect future years.
  • Consider taking steps now to reduce future RMDs, such as making a Roth conversion, buying a QLAC or taking a QCD.

While we are in the heart of tax season for the 2023 tax year, it’s a good time to think about tax planning for 2024. It’s early enough in the year for any changes to have an effect, and taxes are likely top of mind with clients. 

Here are some things to consider for clients’ tax and financial planning for 2024 and beyond.

Projected 2024 Income

A first step is to look at clients’ projected income for 2024. This will guide a wide range of tax planning tasks within the realm of their overall financial planning for the year.

A good place to start is to review their 2023 tax return. Will their 2024 income situation be relatively the same, or will it be significantly higher or lower? Changes in the amount of investment income, compensation from their job and a host of other things could be changing for 2024. Do clients have a concentrated position in company stock that could trigger taxes in 2024 as they attempt to diversify this position? Any number of things could change for 2024 resulting in a higher or a lower projected income for the year.

Retirement Income Planning

Clients’ projected tax situation for the current year should be a key consideration in their retirement income strategy for 2024. Clients in the gap period before taking Social Security and before starting required minimum distributions often have a degree of flexibility in terms of which accounts to tap and when to generate retirement income.

For clients whose income will be lower than in past years, it can make sense to tap a traditional individual retirement account or 401(k) to cover some or all of their income needs for the current year and reduce the impact of RMDs in future years. In other words, they will pay taxes now when the rest of their income is relatively low to save taxes later via reduced RMDs.

Situations may be different next year or in subsequent years, so this analysis needs to be revisited each year for clients who are in or near retirement.   

RMDs

Whether clients are at the age where they need to take their RMDs or have a few years until that time, there are some planning steps to consider based on their projected tax situation for the year.

For clients who will be taking their RMD in 2024, consider a qualified charitable distribution for all or part of their RMD amount. Any portion of an RMD made via a QCD will not be taxed. This distribution can be taken as early as age 70.5 and can serve as both a tax-efficient way to make charitable contributions and a way to reduce future RMDs. 

Another RMD planning option is the purchase of a qualified longevity annuity contract up to $200,000 (indexed for inflation) in a qualified retirement plan account such as a 401(k) or IRA. Annuity payments must commence by age 85. The annuity contract allows the money used to purchase it to be excluded from RMDs until payments commence. While not something that will affect the year of the purchase, QLACs can help reduce future RMDs until distributions are taken. 

Beside the tax benefit from lowering RMDs, the annuity contract can be a deferred source of retirement income in later years.

Secure 2.0 and Surviving Spouses

A number of rules under Secure Act 2.0 have kicked in already or will take effect this year or in 2025. One rule that takes effect in 2024 regards RMDs and deceased spouses.

The rule allows surviving spouses to wait until their deceased spouse would have been required to start RMDs, age 73 or 75 under the latest rules. Perhaps more importantly, surviving spouses can choose the Uniform Lifetime Table rather than the Single Life Expectancy Table to calculate these RMDs. This will generally result in a lower RMD for the year, saving taxes and allowing more of a deceased spouse’s IRA assets to remain invested.

This can be especially beneficial if the deceased spouse was younger than the surviving spouse. 

Roth IRA Conversions

A Roth conversion can be an effective strategy for clients at various life stages, offering tax diversification in retirement and helping reduce future RMD requirements.

Additionally, since the passage of the Secure Act, Roth IRAs have become a key estate planning tool for clients with non-spousal beneficiaries.

Clients’ projected tax situation for the year can help determine how large a conversion they can reasonably manage if it fits with their overall financial planning strategy. Since the conversion will trigger a current-year tax liability, it generally makes sense to schedule one in years in which income is lower than normal, or at least isn’t anticipated to be higher than normal.

Clients can also consider a backdoor Roth conversion, as this can be an especially good strategy for those with little or no money in a traditional IRA. In this case, the conversion would result in little or no income taxes to be paid.

Tax-Conscious Rebalancing

Rebalancing is a key element of ensuring that a client’s portfolio retains the right balance between growth potential and protecting against downside risk.

Tax-loss harvesting is a common strategy used in rebalancing within a taxable account. Flipping this around, it can pay to consider using tax-gain harvesting in years in which a client’s projected income may be a bit lower than normal. Tax-gain harvesting involves selling appreciated securities whose holding period qualifies for long-term capital gains. The proceeds would be reinvested elsewhere in the portfolio, and the client would simply pay the taxes.

Clients who are charitably inclined can donate appreciated shares in asset classes that need to be pared back to their preferred charity. This reduces the balance in that asset class, and they can receive a charitable deduction if they can itemize and there are no capital gains taxes to pay. The same strategy can be used if the client has a donor-advised fund. 

Roger Wohlner

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