Thought Leadership in Action

With the end of the calendar year fast approaching, financial advisors can help clients sort through their finances, including any tax-planning moves they want to make before 2024. This could include tax harvesting, charitable donations or other actions where clients benefit from counsel. Let’s review a few of these scenarios and how you can walk clients through their options.

Tax-Loss and Capital Gains Harvesting

One effective strategy to offset taxable income is through harvesting. For tax-loss harvesting, review investment portfolios with clients to identify potential unrealized losses that can be used to offset current or future capital gains. Clients can potentially reduce their overall tax liability by taking advantage of this strategy. Even if ‌markets have performed well throughout the year, clients might still find opportunities to harvest capital losses.

There are key considerations clients should be aware of before adopting this strategy. One is that losses won’t count if they’re considered wash sales, which occur if the client or their spouse buys a “substantially identical” security within 30 days of the sale. Additionally, make sure clients understand that they can only offset up to $3,000 in net losses each year, although they can use tax-loss carry-forwards to apply the excess to future years. With the S&P 500 losing almost 20% in 2022, many clients who sold during that timespan might find themselves with carry-forwards this year.

Capital gains harvesting is an alternative worth considering depending on clients’ sources of income. Married clients filing jointly with a total 2023 taxable income below $89,250, or single filers with an income below $44,725, can pay a 0% tax rate on capital gains income. Clients with pass-through businesses can find this strategy valuable if they expect a loss in the current tax year but profit going forward.

Maximizing Retirement Contributions

Encouraging clients to maximize their retirement contributions is another crucial aspect of year-end tax planning. Advisors should emphasize the importance of taking full advantage of employer matches offered through workplace accounts. For 2023, the maximum employee deferral for 401(k), 403(b), and 457 accounts is $22,500, with an additional catch-up contribution of $7,500 for people 50 and older. For SIMPLE IRAs, the deferral limit is now $15,500, with a catch-up contribution of $3,500.

Clients should also consider maximizing contributions to traditional IRAs. The contribution limit for 2023 is $6,500 or 100% of earned income, whichever is less, with an additional catch-up contribution of $1,000 for clients 50 and older. It's also important to review the modified adjusted gross income limits for contributions to traditional and Roth IRAs, as they have increased in 2023.

The IRS is raising many of these limits in 2024, so communicate that information to clients so they can get a head start on contribution planning.

Converting to a Roth IRA

For clients planning to convert a part of their retirement savings to a Roth IRA, now could be a good time to do so, especially if the federal tax cuts enacted in 2017 expire in 2025. In that case, income tax brackets will revert to higher levels, with the top rate increasing from 37% to 39.6%.

Clients converting to a Roth IRA in 2023 will incur a tax bill, but the amount will likely be lower compared to delaying the conversion until 2026 or later. Make sure clients understand that they must wait five years before making tax-free withdrawals from Roth conversions, and withdrawals can’t be taken until 59.5 years of age. However, there are exceptions, and you can guide clients through the implications and benefits of a Roth conversion.