It’s that time of year again – time for holiday shopping, family gatherings, festive cheer and resolution-making! While tax planning may not be on the top of your holiday to-do list, consider a few simple year-end tax-saving strategies and ensure you’ve complied with IRS rules regarding retirement plan distributions.


Take your Required Minimum Distributions (RMDs). Retirement funds cannot be left in retirement savings accounts forever. Those over 70 ½ are required to take withdrawals from their IRAs, Simple IRAs, and SEP IRAs and, if no longer working, certain other retirement plans. You must take your first RMD by April 1st in the year following the year that you turn 70 ½. Each year thereafter you must take your RMD by December 31st. Your RMD will vary depending on your prior year retirement account balances and your age. Most of us will use the IRS’ Uniform Lifetime Table to find our current year distribution period but the rules differ if your spouse is the sole beneficiary of your IRA and more than 10 years younger than you.


RMDs for IRAs inherited from a non-spouse are a totally different ball game. Generally, regardless of your age, distributions must begin no later than December 31st of the year after the account holder’s death. Also, while Roth IRAs that you started with contributions from your earnings are exempt from RMD rules, inherited Roth IRAs are generally subject to the same RMD rules as inherited IRAs. It is important to note that RMDs from inherited IRAs are taxable, while RMDs from inherited Roth IRAs are not taxable.


Calculating RMDs for your various retirement accounts may not be a trivial matter. You don’t want to miscalculate your RMD. If you fail to take the correct RMD, there is a 50 percent penalty on the shortfall! So, don’t hesitate to consult with your financial planner or tax advisor about the correct amount!


Convert traditional IRAs to Roth IRAs.  Depending on your estimated taxable income for 2015, it may make sense to convert a portion (or all) of your traditional IRA to a ROTH IRA. Although a conversion will trigger taxable income in the current tax year, converting traditional IRAs to Roth IRAs is another way to reduce future taxable income.  Once converted, the funds are allowed to grow tax-free and you are not required to take an RMD from your Roth IRA.


Contribute the maximum to your employer-sponsored retirement plan.  In general, you are well advised to maximize contributions to your retirement plan(s).  See below for important details about maximum allowable contributions to these plans.


  • The 2015 contribution limit for employees participating in 401(k), 403(b), and the federal government’s Thrift Savings Plan is:
      • $18,000 for those under 50
      • $24,000 for those 50 and older
  • The 2015 contribution limits for a Simple IRA plan is:
      • $12,500 for those under 50
      • $15,500 for those 50 and older
  • If you participate in more than one employer-sponsored retirement plan, your contributions to all your plans  is generally limited to the lesser of your compensation or $18,000 (or $24,000 if age 50 or older).  If you exceed your contribution limits, to avoid tax penalties, contact your plan administrator to distribute excess amounts.
  • It is important to note that you have separate deferral limits if you’re also eligible to participate in a 457(b) plan and these deferrals are NOT combined with your deferrals made to a 403(b) or other plans.
  • All in all, it can be a bit complicated. Your plan administrator, human resources department or financial advisor will be happy to assist you in understanding your maximum allowable contribution. The tax savings can be significant. For example, if you are taxed at a federal marginal tax rate of 28%, you will save approximately $5,000 in current year taxes by contributing $18,000 to your retirement account. It’s a win-win. You save taxes today and save for your eventual retirement!
  • If you are self-employed, it is especially important to consult with your financial planner or tax advisor about your best retirement plan options as well as contribution deadlines.


Donate appreciated stock to qualifying charities.  If you plan to make charitable contributions before year-end, consider donating long-term appreciated securities instead of cash. Why? Depending on your taxable income level, you will avoid paying a 15%, 20% or 23.8% capital gains tax on the appreciated portion of the securities.  For example, if you donate stocks valued at $10,000 that you purchased for $5,000, then you save upwards to $1,200 in capital gains taxes in addition to receiving a $10,000 income deduction. Please note that long-term appreciated securities (including mutual fund and ETF shares) are securities that you purchased more than one year ago with a current value greater than their original cost. In general, the value of the donated securities can be fully deducted; however, there are tax rules that may limit your current year deduction and require you to carryforward a portion of your donation.


Consider tax loss harvesting.  Another strategy for reducing your tax liability is employing a concept known as tax loss harvesting. Let’s say you have an investment or a portion of an investment that you no longer wish to hold and its purchase cost was higher than its current value. By selling, you can use the loss to offset your realized capital gains. If your losses exceed your gains, you can offset ordinary taxable income by up to $3,000. However, don’t let the tax tail wag the dog. Ideal candidates for tax loss harvesting are run-down securities that no longer fit your investment strategy or have poor future prospects. If you believe an investment loss is temporary and you want to keep the investment because of its long-term potential, then sell the security, take the current year tax loss, and immediately buy a similar (but not exact match) security. If you wish to rebuy the same security, then wait 30 days or you will run afoul of the IRS’ wash sale rules and the loss will be disallowed.

Gift to family members (or others).  If you are planning monetary gifts to family or friends, or you are concerned about future estate taxes, then take advantage of the annual gift tax exclusion. For 2015, you may gift up to $14,000 annually to as many individuals as you wish. These gifts are tax-free to the recipients and your lifetime gift exemption of $5,430,000 (adjusted annually for inflation) is not impacted.  Couples may gift up to $28,000 to as many individuals as they wish but should alert their tax advisor to the gifts since the filing of a gift tax return (Form 709) for informational purposes may be required.  For medical or tuition payments made on behalf of another, the gift tax exclusion is unlimited. The only caveat is that you must directly pay the medical provider or educational institution. This is an excellent method for grandparents to transfer significant amounts of money to future generations tax-free!


With the recent introduction of the Medicare surtax and 20% capital gains tax rate, gifting low cost basis stock with a high fair market value to an individual in a low tax bracket offers a potential tax advantage over gifting cash—especially if you are in a high tax bracket.


To determine if any of these year-end tax-reducing strategies are a good fit for you, we recommend that you immediately seek the expert advice of your financial planner or tax advisor.