Even though tax season feels far away, the end of the year can be one of the best times to get your financial ducks in a row. Some tax strategies do need to be handled before December 31, while others can wait until you file. Taking a few strategic steps before the end of the year can support your tax planning and help you maximize your retirement savings. This guide highlights practical year-end moves to consider, along with actions you can take leading up to Tax Day.
1. Max Out Your Workplace Retirement Contributions
One of the simplest ways to reduce your taxable income and maximize your retirement nest egg is to contribute as much as you can to your workplace retirement plan.
401(k) Contribution Limits for 2025
- Standard contribution: $23,500
- Catch-up contribution (age 50+): $7,500
- Total possible contribution for age 50+: $31,000
- Contribution deadline: December 31, 2025
401(k) Contribution Limits for 2026
- Standard contribution: $24,500
- Catch-up contribution (age 50+): $8,000
- Total possible contribution for age 50+: $32,500
- Contribution deadline: December 31, 2026
If your employer offers a 401(k) match, make sure you contribute enough to get the full benefit. That’s essentially extra money for your future. Maxing out contributions can also help lower your taxable income for the year while giving your retirement savings extra time to grow.
2. Consolidate Old Retirement Accounts into a Single IRA
Year-end is a great time to review your retirement accounts, especially if you’ve changed jobs or have multiple accounts. Keeping several 401(k)s or IRAs in different places can make it harder to track performance, monitor fees, or plan withdrawals.
Rolling old 401(k)s or other retirement accounts into a single IRA can help simplify record-keeping and give you a clearer view of your total savings. A consolidated IRA also makes it easier to manage future contributions, investment choices, and tax strategies.
3. Take Your Required Minimum Distributions (RMDs)
If you’re 73 or older, you’re required to take minimum distributions from retirement accounts like 401(k)s or Traditional IRAs. Missing the deadline can trigger a penalty from the IRS of 25% of the amount you should have withdrawn.
Tip: If you just reached RMD age, your first distribution isn’t due until April 1 of the following year, but after that, it’s due by December 31 each year. Planning now can help you avoid surprises and even manage your tax bracket if withdrawals might push you into a higher one.
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Get started4. Roth Conversions and Backdoor Roth IRAs: Why They Might Make Sense
As a year-end tax strategy, you might consider moving money into a Roth IRA using either a Roth IRA conversion or a backdoor Roth IRA. Each approach works differently, and both allow money to potentially grow tax-free, which could affect your tax planning for the year.
Roth IRA Conversion
A Roth conversion moves money from a Traditional IRA to a Roth IRA. This gives you more flexibility in retirement and may reduce taxes later.
Why it can make sense:
- Market swings: If markets are volatile or stocks have grown a lot, converting sooner could save taxes on pre-tax funds in the future.
- Future tax rates: Today’s rates are set, but no one can guarantee they won’t increase.
- RMD flexibility: Roth IRAs aren’t subject to required minimum distributions. Converting reduces mandatory withdrawals later.
- Current tax advantage: Paying taxes now at a potentially lower rate could be smart if you expect to be in a higher bracket in retirement.
When you convert, you’ll owe taxes on the pre-tax portion of your IRA. Converted funds generally need to stay in the Roth IRA for five years before being withdrawn tax and penalty-free, with exceptions like death, disability, or age 59½. Earnings follow a separate five-year rule, so careful planning is essential.
Backdoor Roth IRA
If your income is too high to contribute directly to a Roth IRA, a backdoor Roth can help. You make after-tax contributions to a Traditional IRA and then roll that money into a Roth IRA.
Why it can make sense:
- High-income workaround: Allows individuals above the Roth income limits to still take advantage of tax-free growth and withdrawals.
- Tax-free growth: Contributions and future earnings can typically grow tax-free once in the Roth IRA.
- RMD flexibility: Like other Roth IRAs, backdoor contributions aren’t subject to required minimum distributions during your lifetime.
When considering a Backdoor Roth IRA, it’s important to follow IRS rules carefully to avoid penalties and ensure proper reporting. Be aware that taxes may apply if you have other pre-tax IRA funds due to the pro-rata rule, and generally, contributions need to remain in the Roth IRA for five years before they can be withdrawn tax and penalty-free.
5. Charitable Giving
Charitable giving before the end of the year can be part of a tax planning strategy. Donations to qualified charitable organizations may reduce your taxable income if you itemize deductions, helping manage your tax liability for the current year.
Ways to consider charitable giving:
- Cash donations: Cash gifts to eligible charities may be deductible if you itemize deductions, up to limits set by the IRS.
- Donor-advised funds (DAFs): Contributing to a DAF allows you to take a deduction in the year of the contribution while deciding later which charities to support.
- Employer giving programs: Some employers match charitable donations, which can increase the impact of your gift.
Key considerations:
- Timing: Contributions must be made by December 31 to count for that tax year.
- Deduction limits: Deductions may be limited based on your income and the type of contribution. For high earners, there are caps on how much of their charitable gifts can be deducted.
Reviewing charitable giving before year-end allows you to make informed decisions that align with both your financial and tax goals, without assuming specific outcomes.
Take Control of Your Retirement Before Year-End
Year-end is the perfect time to review your finances and take steps that can help potentially reduce your tax bill while setting up future savings. From contributing to retirement accounts and taking RMDs to charitable giving and Roth conversions, even small moves can make a difference.
Keeping track of your retirement accounts can also help with managing your finances. PensionBee helps make it simple to roll over your old 401(k)s and IRAs into one account, giving you a clear view of your savings. Many rollovers happen automatically, but if yours needs extra attention, our personal rollover managers (called BeeKeepers) are ready to guide you every step of the way. Your investments are in diversified portfolios with ETFs like SPY and MDY from State Street Investment Management, one of the world’s largest asset managers.
Frequently Asked Questions (FAQs)
1. Can I still contribute to an IRA for the previous tax year?
Yes. You can make contributions to a Traditional or Roth IRA for the prior year up until Tax Day (usually April 15).
2. What is a Roth IRA conversion, and how does it work?
A Roth IRA conversion moves money from a Traditional IRA to a Roth IRA. Converted funds are subject to income taxes for the year of the conversion, but future earnings and qualified withdrawals in retirement may be tax-free. Planning is important, as converted funds generally must remain in the account for five years before being withdrawn tax and penalty-free, with certain exceptions.
3. What is a backdoor Roth IRA, and who can use it?
A backdoor Roth IRA allows high-income earners who exceed Roth IRA contribution limits to indirectly fund a Roth IRA. This is done by making after-tax contributions to a Traditional IRA and then converting those funds into a Roth IRA. Some 401(k) plans also allow a “mega backdoor Roth” using after-tax contributions.
4. What are Required Minimum Distributions (RMDs), and when are they due?
RMDs are mandatory withdrawals from retirement accounts like Traditional IRAs and 401(k)s, generally starting at age 73. Failing to take the required amount can trigger a penalty of 25% of the missed distribution.
5. How can charitable giving impact my taxes?
Donations to qualified charities may reduce taxable income if you itemize deductions.
6. What year-end contributions can I still make after December 31?
Some contributions can still be made up until Tax Day, including:
- Health Savings Accounts (HSAs): Tax-deductible contributions grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
- Traditional IRAs: Contributions may reduce taxable income, depending on eligibility.
- Roth IRAs: Contributions are after-tax but grow tax-free. Income limits apply.
7. Why Does Consolidating Into An IRA Make Sense?
Consolidating into an IRA can help simplify your retirement savings, giving you a single view of your accounts, easier investment management, and streamlined record-keeping.
