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