Actions To Consider For Your IRA Before The Year Ends

We’re well into the third quarter of the year, so it’s a good time to review the actions you should consider taking with your IRAs before Dec. 31.

Most people don’t consider their options until late in the fourth quarter. Then, they make decisions in a hurry and miss opportunities. Examining the choices now and acting well before the year-end scramble can greatly reduce lifetime taxes for you and your family.

Begin analyzing these critical options.

Repositioning traditional IRAs should be considered by those who have large traditional IRAs, whether they are retired or years from retirement.

There are several ways to reposition a traditional IRA. All or part of the IRA can be converted to a Roth IRA. Or IRA distributions can be taken, and the after-tax amounts put in a taxable investment account.

Another option is to use the after-tax amounts of IRS distributions to purchase a permanent life insurance policy. This can be done with either a lump sum distribution or a series of annual distributions.

For those who are charitably inclined, the after-tax amount of a traditional IRA distribution can generate lifetime income when it is used to fund a charitable gift annuity or charitable remainder trust. Details about these strategies are in our December 2024 issue.

These strategies should be considered by anyone with a large traditional IRA or 401(k), especially those who have income and assets in addition to the IRA.

Why would someone consider taking a traditional IRA distribution and incurring income taxes before required? It can be a good way to reduce lifetime income taxes and reduce your heirs’ income taxes.

One reason is that after age 73 required minimum distributions (RMDs) from traditional IRAs often create unwanted tax burdens.

For many people, RMDs increase each year. As someone ages, RMDs often exceed spending needs and increase both annual and lifetime taxes. Also, federal budget deficits make it likely that in the future income taxes will increase on retirees and their IRA distributions.

When the intention is to have most of the IRA inherited, repositioning should decrease taxes on the heirs and increase their after-tax inheritances. Repositioning avoids future income tax rate increases and avoids the effects of the SECURE Act on inherited IRAs. Repositioning includes actions such as converting a traditional IRA to a Roth IRA, taking extra distributions and putting the after-tax amounts in taxable accounts or in permanent life insurance policies.

The decisions of whether and how to reposition a traditional IRA should be made only after a careful, detailed analysis. That’s why it’s important to start planning now.

Traditional IRA owners older than age 70½ should maximize the benefits of qualified charitable distributions (QCDs) when making charitable contributions.

The qualified charitable distribution is the most tax-efficient way for those age 70½ or older to make charitable gifts. In a QCD, you direct the IRA custodian to send money directly to a chosen charity. The distribution isn’t included in your gross income but counts toward your RMD. There’s no deduction for the QCD.

In 2025, you can make QCDs up to $108,000. The cap is indexed for inflation annually.

If you plan to use this strategy, it’s best to implement it as early in the year as possible. When an IRA owner must take RMDs, the first distributions from traditional IRAs during the year automatically are labeled RMDs. When regular distributions are taken before QCDs are made, the IRA owner might have already satisfied the year’s RMD before making a QCD. The owner won’t gain the full benefit of the QCD. I have written in more detail about QCDs.

In addition to using QCDs, traditional IRA owners should optimize the year’s RMDs.

The beginning age for required minimum distributions (RMDs) is 73 for those who turned 72 after Dec. 31, 2022, and it will jump to 75 in 2033.

Don’t wait until December to plan RMDs. Procrastinating can create two major problems.

Unexpected events might prevent you from taking the full RMD by the Dec. 31 deadline. Also, IRA custodians can become overwhelmed with last-minute requests in the final weeks of the year. Some won’t accept RMD orders late in the year, while others won’t guarantee execution by Dec. 31.

If you turn 73 this year, that first RMD doesn’t have to be taken until April 1 of next year. Taking it by Dec. 31 of this year might be wiser. Otherwise, both the first and second RMDs will be taken next year, potentially pushing you into a higher tax bracket and increasing Stealth Taxes, such as the Medicare premium surtax and inclusion of Social Security benefits in gross income.

Remember, you don’t have to sell investments and distribute cash to take an RMD. You can make in-kind distributions by having your custodian transfer shares of stocks, mutual funds or other investments directly to a taxable account. The distribution amount equals the asset’s value on the transfer date.

Beneficiaries of IRAs should be sure to comply with the rules for RMDs from inherited IRAs.

The rules for inherited IRAs changed dramatically after the SECURE Act in 2019, with additional surprises from IRS regulations finalized in 2024. Most beneficiaries now must follow the 10-year rule, which requires full distribution of the inherited IRA by the end of the 10th year after inheriting.

In addition, if the original owner was older than the beginning age for RMDs, beneficiaries must take annual RMDs during years one through nine and fully distribute the account by year 10. These rules apply to both traditional and Roth IRAs.

One action an IRA owner should take throughout the year is to plan IRA distributions to minimize income taxes.

Retirement account distributions should be planned with tax brackets in mind. Distributions from traditional IRAs face ordinary income tax rates, while Roth IRA and health savings account distributions usually are tax-free. Sales of assets in taxable accounts have varying tax consequences depending on the assets that are sold.

Start by estimating your non-discretionary taxable income for the year. This is income that will be received without any action on your part, including Social Security benefits, RMDs, interest, and dividends.

When that income won’t meet your spending needs for the year, carefully plan the sources of the rest of the cash flow by considering the tax effects of each option.

If a taxable IRS distribution might push you into a higher tax bracket or increase Stealth Taxes, consider taking money from tax-free accounts instead. When you’re in the 0% long-term capital gains bracket, consider selling appreciated investments until you reach the bracket’s top.

Some years you’ll be in a lower tax bracket than you expect to be in the future. In those years, you might want to take taxable distributions from traditional IRAs or 401(k)s and save the tax-free and lower-tax income for the future.

People who are leaving an employer or who have multiple retirement accounts should consider consolidating accounts, such as by using rollovers to combine money to one or two retirement accounts.

This would simplify your finances, making it easier to manage them and potentially increasing your after-tax returns. It also might decrease investment expenses and expand your investment choices.

Effective rollovers must be planned carefully to comply with the tax rules so that you reap the benefits and avoid the tax traps.

IRAs can be used to avoid penalties for underpaying estimated taxes.

Most retirees must make estimated tax payments four times during the year since they don’t have taxes withheld from paychecks. These payments must be made as income is received throughout the year. Penalties can’t be avoided by making one large payment near year-end.

An alternative to estimated tax payments is to have income taxes withheld from a traditional IRA distribution before year-end. Taxes withheld from income are treated as being paid evenly throughout the year, even if one large amount was withheld in December.

Of course, you must take a distribution from the IRA late in the year for this to work. But if you are taking a distribution and didn’t make adequate estimated payments earlier, direct your IRA custodian to make a distribution and withhold enough for income taxes to meet your estimated tax requirements.

At some point during the year, review your beneficiary designations to ensure you’ve named the right people and that the information is current. Also, name contingent beneficiaries in case something happens to your primary choice.

This step is crucial but often overlooked. IRS rulings and court cases consistently show that retirement accounts go to the beneficiary named in the custodian’s records, regardless of what your will or other documents say.

If you plan charitable bequests from your estate, consider naming charities as IRA or 401(k) beneficiaries rather than bequeathing other assets. This strategy can leave your heirs with more after-tax wealth, because retirement account distributions would be taxable to individual heirs but not to charities.

Consider maximizing contributions to IRAs and other retirement accounts. There’s no longer an age limit for IRA contributions, so anyone with employment or self-employment income can consider making contributions.

The 2025 contribution limit for IRAs is $7,000, with an additional $1,000 catch-up contribution for those 50 and older. The contributions can’t exceed your employment or self-employment income.

The limit is the same for traditional and Roth IRAs. If you want to contribute to both types of IRAs, the limit is split between them. You can’t contribute $7,000 to each type of IRA.

Roth IRA contributions are phased out as modified adjusted gross income increases. For single taxpayers, the phase out begins when modified adjusted gross income is $150,000 and is completed at $165,000. For married couples filing jointly, the phase out begins at $236,000 and ends at $246,000.

If you’re under 65 and eligible for health savings account contributions, consider maximizing HSA contributions before IRA and 401(k) contributions. HSAs offer triple tax benefits — deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses.

For those still working and participating in 401(k) accounts, review your paycheck deferrals for next year. Consider the “mega Roth IRA” strategy using after-tax 401(k) contributions if your plan allows.

Take time this quarter to review your situation, consult with advisers as needed, and implement the strategies that make sense for your circumstances. Your future self — and your heirs — will thank you for the proactive planning.