As the end of the year approaches, individuals and families must consider various financial strategies to optimize their tax situations. The period leading up to December 31, 2025, presents several opportunities that taxpayers should not overlook. Here are three significant year-end tax moves that can enhance financial outcomes.
Contribute to Retirement Accounts
One of the most effective strategies is to maximize contributions to retirement accounts. While contributions to traditional IRAs and Roth IRAs for the 2025 tax year can be made until April 15, 2026, contributions to 401(k) plans must be completed by December 31, 2025. Taxpayers should assess their financial situation and decide on their contributions to ensure they make the most of these accounts.
It’s crucial to remember that while contributing to an IRA may defer taxes for the current year, it does not eliminate them altogether. Therefore, having a long-term tax strategy is essential. A well-planned approach to when and how to pay taxes can significantly impact one’s financial future.
Consider Roth Conversions
Roth conversions for the 2025 tax year must also be completed by December 31, 2025. If a conversion is on the agenda, initiating the process as soon as possible is advisable, as it can take a week or more for processing, depending on the financial institution. Taxpayers do not need to pay the tax on the conversion until January 15, 2026, which can provide some flexibility.
Utilizing outside funds to cover the tax implications of a Roth conversion allows the new Roth balance to grow more effectively. For many, it may be beneficial to “fill up” their current tax bracket with conversions. Given the current tax law changes, including increased standard deductions and stable tax brackets, now may be an opportune time to pay taxes at a lower rate rather than deferring them to a higher rate in the future.
Capture Gains and Rebalance Investments
Despite market fluctuations, many equities have shown strong performance over the past few years. This period may be a strategic time to realize gains in nonqualified or brokerage accounts. Depending on one’s overall income, there may be an opportunity to pay a 0% tax rate on capital gains. For instance, a married couple over 65, drawing approximately $80,000 from Social Security and IRA withdrawals, could sell up to $60,000 in appreciated stocks without incurring capital gains taxes.
The challenge arises in determining the best route for reinvestment of these gains. Individuals may consider using proceeds to fund Roth conversions or invest in guaranteed options such as fixed annuities, which can defer taxes similarly to IRAs but without the burden of required minimum distributions (RMDs).
In conclusion, taking proactive steps before December 31 can yield significant benefits for taxpayers. Whether through maximizing retirement contributions, exploring Roth conversions, or strategically capturing gains, individuals should adopt a long-term perspective when planning their tax strategies. It is crucial to act now, given the current favorable tax environment, to ensure effective financial management in the years to come.
For personalized advice, consulting with a financial professional is recommended. This article reflects insights from a participant in the Kiplinger’s Adviser Intel program, which connects readers with trusted financial experts.