2025 Year End Financial Planning Tips
By: Brian Seay, CFA
Tax time is NOW, not in March of next year. Once we turn the page to next year, your ability to reduce your taxes and take advantage of some of these strategies will be gone! In our year end planning tips episode, I breakdown 10 strategies for you to consider before we close out 2025.
1) Why you need Tax Projections
2) Retirement Account Planning and Contributions for IRAs and 401(s)
3) ROTH Conversions
4) Flex Spending Accounts
5) Saving Taxes with Health Savings Accounts (HSAs)
6) Avoiding Mutual Fund Distributions / "Phantom" Distributions
7) Tax Loss Harvesting
8) Income Planning
9) Charitable Giving Strategies
10) Portfolio Rebalancing – Avoiding a big drawdown.
Transcript:
2025 Year End Financial Planning Tips
Hello and welcome to the Capital Stewards podcast. I want to start out by shifting your mental framework for when to think about taxes. TAX TIME IS NOW! That’s right – in the 4th quarter of 2025, not the 1st quarter of 2026. Once the year turns, there are only a few things you can still do that impact your 2025 taxes. Now is the time to start thinking about strategies to manage your 2025 taxes and it’s also a great time to find professional support to help prepare your returns. After the calendar page turns, CPAs quickly book up and it becomes difficult (if not impossible) to find tax guidance before the end of April.
So in this episode of the podcast, we’re going to talk about year-end financial planning strategies and tips that you should consider. A lot of those are tax related, but I will cover some portfolio and planning items as well towards the end. Alright – lets dive in.
Let’s start with a public service announcement – or as some would say – one of Brian’s soapbox issues. That issue is tax projections. Tax projections are so important. If you have significant assets or income that’s more than $250,000 or $300,000 each year, you need to have tax projections to help you understand what moves to make at year end. Here are a couple of examples of decisions that rely on understanding where your potential taxes sit before year end:
If you have employer stock options, the amount you exercise this year is likely the amount that fills up the tax bracket that you are in, but doesn’t create so much income that you move up into the next higher tax bracket. You won’t know how much to exercise without a tax projection.
Seniors, the expanded deduction that you receive, starting this year that offsets some Social Security income phases out between $150,000 and $250,000. So if you are doing a ROTH conversion, you now need to consider the impact that increasing your income will have on your ability to qualify for the higher senior standard deduction. The amount you convert might be reduced to keep your income below one of the thresholds. You need to know what your year to date income is to make a plan.
I will also throw IRMAA in the mix, that is the rate that you pay for Medicare. The higher your income, the higher rate you pay for Medicare. You want to make sure any tax planning move that you make takes those premium thresholds into account, and you want to try to stay just below them if possible so that your Medicare insurance premiums are as low as possible. You need an income projection for that.
So just a couple of examples. All of the tax planning tips we will talk about are helpful on their own, but they are the most powerful when you use them in concert with a tax projection so that you know exactly how much income you are generating and how that will impact your taxes short and long-term. Without a projection, you are sort of flying blind and that may lead to a sub-optimal outcome.
Alright now that you have your tax projection underway, let’s move to my year-end planning strategies that you can execute based on the results of your projection. And we'll take these in a couple of buckets. The first bucket is items to think about that are related to retirement accounts, then we will talk about healthcare and employee benefits, business income and finally investment strategies as we come into year end.
One of the most powerful tools for reducing taxable income is contributing to retirement accounts. Remember, retirement account contributions are generally tax deductible. For 2025, the employee contribution limits for 401(k) plans have increased. The limit for those under 50 is $23,500, and for those 50 and older, the catch-up contribution allows for an additional $7,500, bringing the total to $30,500.
Remember, that is only your contribution, your employer’s contributions can go beyond your employee contribution. A total of $70,000 can be put into retirement accounts on your behalf. The most common form of additional contribution is employer matching contributions. But, if you have a side gig, own a business, or have cash flowing real estate, you might be able to contribute to a retirement plan as an employer. That potentially means additional deductions for your business and personal taxes. So don’t forget to think about all your income and the different ways you can contribute to retirement plans as both the employee AND the employer.
If you are 73 or older, ensure you take your RMDs from retirement accounts before the end of the year. Proper planning can help manage the tax impact of these distributions by spreading them out over time.
If you own an inherited IRA, make sure you review the distribution rules with your tax and planning professionals. You likely need to distribute all of the assets in that Inherited IRA over 10 years, regardless of your age, unless you meet certain qualifications. Careful planning is required here and the rules have been in flux since the Secure Act passed congress in 2020, so don’t forget to review your distribution requirements with your tax advisor if you’ve inherited an IRA from a spouse or parent or grandparent.
Consider ROTH Conversions…plural. Remember, ROTH conversions generally work best over multiple years to spread out the tax impact. So, think about this as a series of ROTH conversions, not a one-time event.
A Roth conversion involves moving funds from a traditional IRA or 401(k) to a Roth IRA, paying taxes on the converted amount now to enjoy tax-free growth and withdrawals later. This can be particularly advantageous if you expect to be in a higher tax bracket in the future. Even if overall tax rates remain low under the Trump administration, your income may go up and increase your tax bracket. Further, when you get into retirement, the required minimum distributions in your 80s and 90s can drive your taxable income more than you expect. This unnecessary increase in income is often the rationale for converting funds to a ROTH prior to or early in retirement.
It’s essential to do long-term planning and income forecasting with your financial planner and tax professional to get this right – remember my soapbox from earlier.
So second bucket of things I want to talk about are related to healthcare accounts. They're tied often to your health insurance and the benefits that you get through your employer.
The first topic here is flexible spending accounts. If you're going through the benefits process still, FSAs are great things to have. They allow you to set aside pre-tax dollars for medical and dependent care expenses. So can also be some childcare and potentially elder care, parent care thrown in there. You can use those FSA dollars for those kinds of things. And you don't have to pay taxes on that money as income. There are contribution limits $3,300 for 2025, but still a worthwhile tax savings for most folks.
But the most important thing as we get to the end of the year is that Fsa's, different than health savings account, Your Flex spending account may be a use or lose it setup. Some employers allows rollovers between years, but not all. So you want to make sure you don't have a few thousand bucks sitting in there that you lose going into next year.
So if you have flex spending account money and you don't have lots of medical bills coming up make sure you use that money before the end of the year.
Year End Planning Tips: Take Advantage of HSAs…the only “triple tax advantaged” account that exists.
Health Savings Accounts are not only a way to save for medical expenses but also a strategic tool for tax savings. Contributions to HSAs are tax-deductible, and the money grows tax-free. When used for qualified medical expenses, withdrawals are also tax-free. That’s right, taxes are never paid on HSA contributions that are used for healthcare expenses.
For 2024, the contribution limit is $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up contribution for those 55 and older. That’s a lot of tax deferral power, especially for families with health care expenses. So don’t miss out on this one.
Alright, so lets talk about investing in taxable accounts for those that have assets outside of traditional retirement accounts. One commons December headache is mutual fund capital gains distributions. Especially in years when the market has been up.
If you are investing through mutual funds, you may receive those “phantom” year-end capital gains distributions. These distributions occur when mutual funds sell stocks for a profit, or a gain. The capital gains taxes on those investment gains must be paid by taxable investors in the fund. Typically, funds “distribute” those gains to investors in December, which may increase the total amount of gains you take for the year unexpectedly.
If you are receiving capital gains regularly from a fund, it may be worth considering using ETFs instead of mutual funds, especially if the mutual fund is underperforming. In that case, you’re paying the taxes but not getting the results! In an ETF, you only pay capital gains taxes on your actual realized gains in the fund. This is one of the main reasons why ETFs are more “tax efficient” than mutual funds. The proliferation of ETFs mean that you can probably come close to replicating your existing mutual fund strategy with better tax outcome and perhaps a lower cost by using an ETF instead.
The next consideration for taxable investors is tax loss harvesting. this involves selling investments that are down right and realizing those losses, and then you can use those to offset gains that you take and other points in the year that can help reduce your capital gains, tax liability, and then you can use a little bit of that To offset your ordinary income.
You should be proactively harvesting losses from your portfolio as you go through the year, so this isn’t really only a year end issue. However, if you haven't been doing it throughout the year, you want to make sure that you're actively looking at potential losses and realizing those to generate a tax benefit.
The next bucket is is controlling your income This is actually something that a lot of people You sort of forget to think about as a tax strategy to sort of think about, Hey, I've got deductions for retirement accounts, and maybe I do some health care insurance things. I definitely want to make sure that I offset capital gains for my investment portfolio, but they forget that maybe I can just control my income and that'll help manage my taxes.
You should review your projected taxable income for 2024 and for 2025. If you own a business or if you manage a partnership where you have some control over your personal income think about accelerating or deferring income. It's especially true if your business income tends to be really high in some years and low in other years.
If it's particularly cyclical or if you just have really kind of banner years and then other years that aren't as good. You might be better off paying out sort of a smooth tax rate rather than extraordinarily high tax rate in one year And a much lower rate the next year. So that means you might think about either accelerating you know your income into 2020 for or Potentially deferring some of it into 2025 depending on how you need to manage that but you want to make sure that you're that You're controlling that This also is a strategy if you have paid alternative minimum taxes or if you think you might be in in a bucket where you're exposed to the alternative minimum tax regime That controlling your business income can be a way to to avoid that And similarly to controlling the income that you take personally you want to strategize around your business expenses as you get to the end Of the year.
So if you're self employed or if you own a business you should consider accelerating deductible expenses into the current year or Next year, so maybe you buy office supplies, equipment, things that, you know, you're going to need next year. Maybe just go ahead and make those purchases now so that you can write them off for tax purposes or say, hey, I'm okay.
This year. My income is lower. So I'm going to wait and push some things off into next year. So you want to control those business expenses so that you can control your overall taxable income.
And then lastly, I always talk about. Charitable deductions in this category and my general thesis around, you know, contributing charities.
First, I encourage you to be generous to your church, to your family and to your community. I always suggest defining your giving goal before you start planning for taxes. Your philanthropic goal should be the main driver, not takes. But once you figure out where to give, think about potential ways to maximize your gift or reduce your taxes before write a check.
Charitable gifts slightly less beneficial from a tax perspective starting next year under OBBBA so perhaps bunch gifts into 2025 instead of waiting until 2026. Gifts have to exceed 0.5% of your AGI to be deductible and then high income tax payers only receive a deduction at the 35% level – not the top 37% rate.
Markets are up significantly this year, so consider donating appreciated assets such as stocks or mutual funds. This not only provides a deduction based on the asset's fair market value but also avoids capital gains taxes on the appreciation. Most organizations know how to facilitate these transactions, so just reach out to the gifts coordinator or financial manager and they can help you transfer assets directly.
Additionally, if you are 70½ or older, you can make a Qualified Charitable Distribution (QCD) from your IRA. This allows you to donate up to $100,000 directly to a charity, which counts towards your Required Minimum Distribution (RMD) but is not included in your taxable income. So you can meet your RMD requirement, and help out a good cause.
So Give! But think before you do it!
Lastly, lets discuss your investment portfolio for a minute. I already covered tax-loss harvesting, and that alone may create some natural rebalancing, but if you have not been actively rebalancing throughout the year, now is an ideal time to do that. Returns have been strong this year in the stock market and in gold. Nothing goes up forever and no one, even the sharpest investment minds in the world powered by AI, can predict when the market will turn around. In the outlook episode for this quarter, I made the case that I don’t yet view this is a stock market bubble, but I do think prices are elevated after a year of strong returns. The goal of investing is to sell high, so now is an excellent time to take some of those gains off the table and rebalance your portfolio by adding to investments that have not grown quite as much. The best way to prevent a disaster if we do get into a market bubble and subsequent down turn isn’t to be able to predict the downturn, its to stay diversified so that your portfolio is somewhat insulated from a stock market drawdown. So use year end as a reason to rebalance and reset for what will hopefully be another year of strong gains in 2026.
Alright. Anytime we go deep on tax situations, I want to remind all of you that taxes are very personal. They're very different from situation to situation. So this episode is meant to be a starting point to spur deeper conversation between you and your advisors. You need to talk to your CPA, to your financial planner and the other professionals that you work with before you make any decisions that have a direct impact on your taxes. If you don’t know who to talk with, you can reach out to me directly, I’m happy to help you get moving in the right direction on any of these topics.