It's Not Too Early to Start 2024 Tax Planning

Secure 2.0 and Surviving Spouses

A number of rules under Secure Act 2.0 have kicked in already or will take effect this year or in 2025. One rule that takes effect in 2024 regards RMDs and deceased spouses.

The rule allows surviving spouses to wait until their deceased spouse would have been required to start RMDs, age 73 or 75 under the latest rules. Perhaps more importantly, surviving spouses can choose the Uniform Lifetime Table rather than the Single Life Expectancy Table to calculate these RMDs. This will generally result in a lower RMD for the year, saving taxes and allowing more of a deceased spouse's IRA assets to remain invested.

This can be especially beneficial if the deceased spouse was younger than the surviving spouse. 

Roth IRA Conversions

A Roth conversion can be an effective strategy for clients at various life stages, offering tax diversification in retirement and helping reduce future RMD requirements.

Additionally, since the passage of the Secure Act, Roth IRAs have become a key estate planning tool for clients with non-spousal beneficiaries.

Clients' projected tax situation for the year can help determine how large a conversion they can reasonably manage if it fits with their overall financial planning strategy. Since the conversion will trigger a current-year tax liability, it generally makes sense to schedule one in years in which income is lower than normal, or at least isn't anticipated to be higher than normal.

Clients can also consider a backdoor Roth conversion, as this can be an especially good strategy for those with little or no money in a traditional IRA. In this case, the conversion would result in little or no income taxes to be paid.

Tax-Conscious Rebalancing

Rebalancing is a key element of ensuring that a client's portfolio retains the right balance between growth potential and protecting against downside risk.

Tax-loss harvesting is a common strategy used in rebalancing within a taxable account. Flipping this around, it can pay to consider using tax-gain harvesting in years in which a client's projected income may be a bit lower than normal. Tax-gain harvesting involves selling appreciated securities whose holding period qualifies for long-term capital gains. The proceeds would be reinvested elsewhere in the portfolio, and the client would simply pay the taxes.

Clients who are charitably inclined can donate appreciated shares in asset classes that need to be pared back to their preferred charity. This reduces the balance in that asset class, and they can receive a charitable deduction if they can itemize and there are no capital gains taxes to pay. The same strategy can be used if the client has a donor-advised fund.