As year end approaches, we can be sure of several things: shorter days, cooler weather, and IRS cost-of-living adjustments (COLAs) coming out late again. But while we wait for COLAs in order to plan for 2025 retirement savings, we can still take some important steps in 2024. Whether you are just starting your retirement savings journey or are well into your decumulation phase, you may want to consider the following suggestions, depending on your situation.
Consider a Conversion
Converting Traditional IRA assets to a Roth IRA can make sense at any age—and for a variety of reasons. But it’s clearly not for everyone. You should carefully assess whether a conversion is the right decision for you based on multiple factors, which you should discuss with an able advisor. Here are just a few.
- What is your current marginal tax rate, and what do you expect it to be when you retire?
- Do you have sufficient liquid assets to pay the tax on a conversion, or would you have to rely on withholding taxes from the Traditional IRA distribution?
- What is your time horizon for accumulating tax-free earnings in a Roth IRA?
- Is it important that you leave your beneficiaries with a tax-free IRA inheritance?
If you decide to convert any Traditional IRA assets for 2024, make sure that you physically take the distribution this year to ensure that any taxable income is reported for 2024. Even if you convert assets indirectly (within 60 days after the distribution) in 2025, any withdrawal in 2024 will be included on your 2024 tax return. In addition, conversions can no longer be recharacterized, or “reversed.” So before you make this move, be sure that you can pay the additional tax that comes with a conversion.
Don’t Forget Your RMDs
One of the most obvious year-end concerns is making sure that you take any required minimum distributions (RMDs). If you are age 73 or older this year, you must take an RMD for 2024 based on any IRA that you own. Many rules apply, but here are some that come up most often.
- If this is your first IRA distribution year (i.e., you turned 73 this year), you may delay your first RMD until April 1, 2025.
- If you have multiple IRAs, you may aggregate your RMDs by taking them from any combination of your IRAs.
- You cannot roll over your RMDs.
- If you fail to take a timely RMD, a 25 percent penalty applies (but this can be reduced ti 10 percent if you fix the failure within a certain time frame, which is usually within two years).
Remember that beneficiaries may also be subject to RMDs, irrespective of age. If you own an inherited IRA, make sure that you understand the distribution requirements—and take an RMD this year if one is needed.
Qualified Charitable Distributions (QCDs)
Speaking of RMDs, IRA owners and beneficiaries have a way to minimize taxation once they reach age 70½. As long as the distributing financial organization makes the payment directly to an eligible charitable organization, the distribution (up to $105,000 in 2024) is not included in the IRA owner’s taxable income. Without going into all the benefits of QCDs, the fundamental advantage is that you can support your favorite charity without any adverse tax consequences—while also being able to use the standard deduction instead of itemizing your deductions.
Fair Market Value (FMV) Determinations
This item applies especially to self-directed IRAs (SDIRAs). If you invest in hard-to-value assets in your SDIRA, you may have to provide Mainstar Trust with the FMV of the investment so that we can generate proper year-end reporting. Many investments can be valued without special appraisals. For example, publicly traded securities are easily valued based on their market price. Alternative investments, however, may be more difficult to value. A small, limited liability company, for instance, is not required to disclose all the information that a large, publicly traded company is required to disclose. But financial organizations that allow alternative investments must still report their IRAs’ FMV to the IRS at the end of each year. So they may require a qualified appraisal in order to fulfill the reporting requirements. This expense is typically borne by the IRA itself. Because the IRS seems to be enforcing this FMV reporting requirement more vigorously, SDIRA owners should be prepared to provide (or authorize) an accurate FMV for any hard-to-value alternative investments within their IRAs.
Mainstar Trust Can Help with Your Year-End Questions
Even as we await information on 2025 IRA contribution limits and other helpful details, there is plenty to do in the remainder of 2024. Whether you have questions on RMDs, conversions, QCDs, or anything else related to your IRAs at Mainstar, feel free to reach out to our SDIRA experts. We stand ready to help you now—and into a bright retirement future.