As 2024 draws to a close, you're likely seeing a lot of headlines about end-of-year strategies to reduce your tax burden and keep more of your hard-earned money. It's hard to argue with the basics—“save more, invest wisely, and avoid tapping into your retirement savings too early.” However, for those of us who have self-directed IRAs (SDIRAs) or other specific retirement plans, the end-of-year advice can feel too generic. If you're in this boat, you may need guidance that's more tailored to your unique financial situation.
Retirement savings are more than just a side project—they should be part of a comprehensive financial strategy. And for many, retirement accounts make up a significant portion of their overall portfolio. The reason is clear: retirement accounts come with tax advantages that can help you grow your wealth over time. But as we approach the end of 2024, it's time to think strategically about how to take advantage of those opportunities. Some strategies are best implemented before the year ends, while others can set you up for success in 2025 and beyond.
Let’s dive into a few strategies that can help you maximize your savings and potentially reduce your tax bill, whether you have an SDIRA or another type of retirement account.
Roth vs. Traditional IRA Contributions: Which is Right for You?
Good news: You don’t have to make IRA contributions for 2024 by the end of the year. You have until April 15, 2025, to contribute to your IRA for the 2024 tax year. This gives you extra time to consider which type of IRA is right for you.
- Roth IRA: If you qualify, Roth contributions are made with after-tax dollars, but the big advantage is that your withdrawals in retirement will be tax-free.
- Traditional IRA: You can deduct contributions from your taxable income in the year you make them, lowering your tax bill for 2024. However, you'll owe taxes when you withdraw in retirement.
Deciding between these two options requires some analysis. You know your current tax rate, but you don’t know what your tax rate will be in retirement. Tax laws may change, and your income level will likely vary. Some savers prefer the certainty of tax-free withdrawals and choose a Roth, while others want to defer taxes and take the deduction now with a Traditional IRA. Take the time to weigh the pros and cons of each and choose what works best for your long-term strategy.
Maximizing Your Employer-Sponsored Retirement Plan
If your employer offers a retirement plan, now’s the time to review it and see if you’re contributing enough to maximize your benefits.
- Increase Your Contributions: If you're not already contributing enough to receive the maximum employer match, consider increasing your contributions. Even small increases can add up significantly over time. Plus, these increases often don't reduce your take-home pay as much as you might expect—especially for pre-tax contributions.
- Self-Employed? Don’t Miss Your Chance to Contribute to SEP or SIMPLE IRAs: For self-employed individuals or those with side gigs, there’s another opportunity that’s often overlooked: creating your own retirement plan. While the deadline for a SIMPLE IRA has passed, you can still set up a SEP IRA until the tax return deadline (including extensions). Many small-business owners assume these plans are too complicated or expensive, but the benefits can be substantial. You can contribute far more to these plans than to an IRA, and your contributions are tax-deferred.
Three Additional Tax-Saving Options to Consider
Beyond the typical end-of-year advice, here are three strategies that could work for you in 2024—and even help you plan for 2025:
Qualified Charitable Distributions (QCDs)
If you're age 70½ or older, you can make tax-free charitable donations directly from your IRA to an eligible charity. For 2024, you can donate up to $105,000 via QCDs, which can also count toward satisfying your Required Minimum Distributions (RMDs) for the year. This strategy not only reduces your taxable income but also helps support causes you care about.
Roth IRA Conversions: The Long-Term Gain
Converting assets from a Traditional IRA to a Roth IRA can be a smart move for some, especially if you're in a lower tax bracket now than you expect to be in the future. By paying taxes on the converted amount now, you’ll enjoy tax-free growth and withdrawals in retirement. Keep in mind that Roth conversions must be completed by December 31, 2024, if you want to count them for this tax year.
Back-Door Roth IRAs: A Workaround for High Earners
Not everyone is eligible for a direct Roth IRA contribution, especially if your income exceeds certain limits. But there’s a workaround called the Back-Door Roth IRA. This involves making a nondeductible contribution to a Traditional IRA and then converting those funds to a Roth IRA. While this can be an effective strategy for high earners, the rules are complex, so consulting with a tax professional is a must before taking this route.
Looking Ahead to 2025
Some of these strategies need to be executed by the end of 2024, but many of them can continue to benefit you well into 2025 and beyond. Whether you’re considering a Roth conversion, establishing a self-employed retirement plan, or taking advantage of a QCD, it’s never too early to plan for your future.
Stay tuned for our upcoming article, where we’ll dive into even more strategies to boost your financial security in the coming year. In the meantime, if you have questions about your self-directing an IRA, contributions, or alternative options available, our team of experts at STRATA is here to help.
Back to all