5 Year-End Tax Planning Strategies to Consider Now

It's no secret that smart timing of income and deductions can go a long way toward reducing your tax liability. That's among many reasons why year-end tax planning is such a critical part of the financial planning process. For example, if you are in a higher tax bracket this year than you expect to be next year, there are several strategies you may want to consider now to help reduce your 2021 taxable income. These might include maximizing retirement plan contributions or bunching charitable deductions, among others.

If you expect to see an increase in your marginal tax rate in 2022, due to an increase in income or a change in the tax laws, you may want to take a different approach that could include accelerating income into the current tax year.

Whether you expect to be in a higher, lower or the same tax bracket in 2022, below are five key areas to focus on as we approach year-end.

  1. Maximize retirement account contributions
  2. Consider a ROTH conversion
  3. Harvest investment losses
  4. Take advantage of unique charitable giving opportunities
  5. Use intrafamily loans for multigenerational asset transfer

1. Maximize retirement plan contributions?

If you're still working, maximizing contributions to any qualified retirement plans you are eligible to participate in, such as a 401(k), 403(b), individual retirement account (IRA) or SEP IRA, can help reduce taxable income.

Pre-tax contributions

Making pre-tax contributions to tax-deferred workplace retirement plans and IRAs has the potential to substantially increase the amount of retirement assets you accumulate since you postpone paying federal and state tax on the initial contributions until such time that those amounts are distributed from your retirement account. In the meantime, any future earnings from your contributions can continue to grow on a tax-deferred basis. Those age 50 and older are also eligible to make catch-up contributions.


Retirement plan annual contribution limits 2021

Annual contributions

After-tax contributions

Unlike a traditional IRA, Roth IRA contributions are not tax-deductible. However, withdrawals are income tax-free and earnings compound tax-free, rather than on a tax-deferred basis. In addition, Roth IRAs are not subject to the required minimum distribution (RMD) rules that typically apply to traditional IRAs at age 72 (70 ½ if you reached age 70 ½ before January 1, 2020). This means assets can compound tax-free for life if they are not needed for income. In addition, Roth IRAs are protected from creditors by federal and some state laws.

Keep in mind, if you participate in a workplace retirement plan, you may not be eligible to make a tax-deductible IRA contribution. That's among many reasons to work closely with your professional tax and financial advisors when determining the strategies for you.

2. Is the timing right for a Roth Conversion?

What if you expect to be in a lower tax bracket this year?

According to Mark R. Parthemer, Managing Director, Private Client Planning at TIAA, during periods when tax rates are stable from one year to the next, taxpayers are often encouraged to accelerate deductions into the current tax year and defer income into the next. However, if you expect to be in a lower tax bracket this year than you will be in the future, you may want to consider accelerating bonuses or deferred payouts into the current tax year or initiating a Roth conversion to take advantage of today's lower tax rate. Since qualified withdrawals from a Roth are generally income tax-free, they can provide a distinct advantage over Traditional IRAs, which are taxed as ordinary income in retirement.

A Roth IRA conversion may be a
good choice if you want to:

Receive income-tax-free earnings in retirement

Keep funds in a retirement account as long as possible

Leave income-tax-free assets to your family and your heirs

How it works?

A Roth conversion takes place when you convert or roll over assets from an existing Traditional IRA and/or tax qualified plan, such as a 403(b), 401(k) or 457 into a Roth plan. Unlike direct Roth contributions from after-tax dollars, you may convert any amount from a traditional IRA to a Roth IRA regardless of income or filing status. You may also convert a SEP IRA to a Roth IRA, and you may convert a SIMPLE IRA to a Roth IRA if it has been more than 2 years since you began participation in the SIMPLE IRA.

Although there is currently no limit on the amount that you can convert, the IRS treats a conversion from a Traditional plan to a Roth plan as a taxable distribution. Thus, the conversion amount is included in your gross income and is subject to tax in the year of the distribution, as if you took an actual distribution of the same amount from your Traditional plan. Partial conversions to a Roth plan are also permitted.

Roth conversions can be complex. Because the amount that you convert will be added to your taxable income for the year, it is important that you speak with your tax advisor to understand the implications.

3. Harvest investment losses?

The large market drop that occurred in March 2020 created significant opportunities to recognize tax losses by selling securities, a practice commonly referred to as tax loss harvesting.

How does tax-loss harvesting work?

Tax-loss harvesting is the process of selling individual securities in your portfolio that are trading below your purchase price to lock-in the tax loss, while simultaneously purchasing a security with a similar exposure. By applying the loss against the gains, you effectively lower your investment tax burden. However, you also have to pay attention to the type of losses you have. Short-term losses are losses associated with assets held for a period of less than 12 months, while long-term losses are associated with assets sold after being owned for 12 months or more.

Offsetting investment gains with losses can help lower your investment tax burden.

4. Get as good as you give with these charitable giving strategies

For taxpayers who are subject to taking required minimum distributions from their qualified retirement plans in 2022, there may be an opportunity to reduce all or a portion of the income that is subject to taxes through a Qualified Charitable Distribution (QCD).

What is a QCD?

A QCD is a direct transfer of funds from your IRA, payable directly to a qualified charity. The IRS allows amounts distributed from an IRA to charity to be counted toward satisfying your RMD for the year, up to $100,000. Unlike a regular withdrawal from an IRA, the QCD is excluded from your taxable income.

Important rules when considering a QCD


It must be distributed directly from your IRA custodian to a qualified charity. If you take the withdrawal yourself, and make a charitable contribution later, that withdrawal will be treated as taxable income.


It must be completed by December 31 of the calendar year the RMD is taken.


A QCD can only be implemented through an IRA. If your retirement assets are located in your employer plan, you will need to roll assets to an IRA before you can initiate a QCD.

Colleen Carcone, Director of Wealth Planning Strategies at TIAA, urges those who normally take required minimum distributions in January, and do not anticipate needing that income to pay for essential living expenses in 2022, to reach out to their TIAA advisor. "Your advisor can work with you now to help ensure you're ready to initiate a QCD at the start of the new year," she said.

Maximize cash contributions

If you itemize on your return…
Generally, donations of appreciated stock provide the biggest tax-saving opportunities, but this year cash donations might offer greater opportunities. That's because, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, the deduction limit for such gifts increased in from 60% of adjusted gross income (AGI) to 100% of AGI. This was extended for 2021.

If you take the standard deduction…
Normally, if you don't itemize deductions, you can't deduct charitable donations. However, the CARES Act allowed taxpayers who claim the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020. This was not only extended to 2021, but the maximum deduction was increased to $600 for married couples filing jointly.

Before you donate, make sure the charity you’re considering is a qualified charity that is eligible to receive tax-deductible contributions. Access the IRS search tool hereOpens in a new window. Donations must be made by December 31, 2021, to qualify under these special provisions.

Keep in mind that taxes are only one consideration when it comes to choosing a charitable giving strategy. Today’s low interest rate environment also plays a role, benefiting some charitable giving techniques while challenging others. That makes it important to work with your professional advisors, including your tax, legal, and financial advisors to determine the right strategies for you and your family.

5. Consider the benefits of intrafamily loans

While the low interest rate environment has posed challenges for those seeking income in retirement, taxpayers who want to take advantage of current low rates before they normalize and begin to rise, may want to consider an intrafamily loan. Intrafamily loans can be a tax-efficient way to transfer money from one generation to another. One advantage of an intrafamily loan is that the applicable federal rate (AFR)—the lowest interest rate that can be charged on a loan for it not to be considered a gift—is used regardless of the creditworthiness of the borrower. The IRS has three rate tiers for the three different "terms" of intrafamily loans


Since intrafamily loans are not subject to underwriting, they can be made based on whatever terms you, as the lender, deem appropriate, as long as the interest rate charged is the AFR or higher and actual loan payments are made. There is also flexibility in how loans are structured. For example, it could be structured as a balloon loan with the principal due at the end. However, keep in mind that if no interest is charged, or an interest rate below the AFR is used, then the interest that should have been charged on the loan would be classified as a gift by the IRS.

"Today's historically low AFR rates make this a good time to consider the advantages of intrafamily loans or to refinance an existing note that may have a higher interest rate," Parthemer said.

Intrafamily loans are one of many options for transferring wealth in a tax-smart manner. Consider scheduling time to meet with your tax, legal and financial advisors to discuss which wealth transfer strategies best align with your needs and goals.

What does this mean for your lifetime income?

Ongoing tax planning is an integral component of a comprehensive financial plan. One reason is because taxes represent one of the greatest risks to your income in retirement. That makes managing them a key consideration where your retirement income strategy is concerned. However, before implementing these or other strategies, plan to meet with your tax, legal and financial advisors first, to help determine which strategies may be appropriate for you.

If you anticipate a higher tax rate next year, talk to your advisors about ways to accelerate income into 2021, to potentially lower the amount of income subject to FICA and other taxes. If you are subject to taking RMDs, make sure you have taken any required distributions before year end. If you don't need the income for daily living expenses, consider how gifting an IRA to charity may help reduce taxes on RMD income. If you do not anticipate a change in your tax rate next year, but are considering itemizing on your 2021 return, meet with your advisors to discuss ways to potentially bunch deductions before year end for medical expenses and charitable giving. Also, consider opportunities for tax loss harvesting.

If you're working, plan to maximize your retirement plan contributions before year end. And if you're retired, consider talking to your advisor about whether now is the right time to consider a Roth conversion.

Remember, always meet with your tax advisor before making decisions that could impact your tax exposure, now or in the future. Your TIAA advisor can help coordinate the advice you receive from all of your professional advisors to update your planning and help ensure the advice you receive is aligned with your goals and time frame.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Watch for additional information and insights on the markets and economy from IMG in future issues of In Balance. To learn about ways to optimize your planning to remain on course toward your important financial goals, schedule time to meet with your TIAA advisor.

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