Maximizing Your Last Work Year: A Retirement Blueprint

As you approach your final year of full-time work, the excitement of retirement is palpable. But with great anticipation comes the need for strategic planning. If you're in your early 60s, making $200K, and eager to retire soon, here's how you can make the most of your last work year.

Maximize Your Employer Retirement Plans

First things first: maximize your contributions to your employer-sponsored retirement plans. For 2024, you can contribute up to $23,000, with an additional $7,500 catch-up contribution if you're over 50. That's a total of $30,500. For 2025, these limits increase to $23,500 and $7,500 respectively, totaling $31,000. If your monthly cash flow can't handle this, consider supplementing with funds from a checking or savings account. Pre-tax contributions will reduce your taxable income, giving you more bang for your buck.

Front-Load Charitable Contributions

If you're charitably inclined, consider front-loading your donations. For example, if you're in the 24% tax bracket and plan to donate $5,000 annually, make a $25,000 contribution this year. Use appreciated securities and a Donor Advised Fund for maximum tax efficiency. This strategy not only satisfies five years' worth of donations but also saves you more on taxes, keeping more money in your pocket and for the organizations you care about.

Convert Traditional IRA to Roth IRA

Converting a portion or all of your traditional IRA to a Roth IRA can be a game-changer. Although the conversion is taxable, the funds grow tax-free, and qualified distributions are exempt from taxes. Pay the tax due from sources other than your IRA to keep your retirement assets invested and working for you.

Gift Monetary Assets

Gifting monetary assets can reduce your taxable estate. In 2024, you can gift up to $18,000 tax-free to an individual. For 2025, this amount increases to $19,000. Parents and grandparents can support a child’s education by making monetary gifts to 529 plans. Gifts to a 529 plan in 2024 are subject to the $18,000 annual exclusion amount, but you can front-load accounts with up to five years’ worth of gifts, or $90,000 per person. For 2025, this amount increases to $95,000.

Harvest Investment Tax Losses

Tax-loss harvesting can offset realized capital gains, potentially reducing your tax bill. If your capital losses are greater than your capital gains, you could deduct up to $3,000 of the excess loss against other income, and any remaining capital losses could be carried forward. Just be mindful of the IRS’s wash-sale rule.

Plan for Health Care

Health care is typically a retiree's largest expense. Explore options such as continuing employer benefits, using COBRA insurance, or enrolling in Medicare if you're age 65 or older. For those retiring young, obtaining an individual plan until Medicare kicks in is essential. Talk to experts and have a firm grip on the cost and steps needed to maintain coverage.

Year-End Planning Strategies

Before the year ends, meet with your wealth advisor to review tax-advantaged moves. This includes maximizing retirement plan contributions, converting a Traditional IRA to a Roth IRA, giving to charitable organizations, gifting monetary assets, and harvesting investment tax losses. For example, in 2024, individuals can contribute up to $23,000 to an employer-sponsored retirement plan, with an additional $7,500 catch-up contribution for those age 50 and older. Converting a Traditional IRA to a Roth IRA can provide tax-free growth and qualified distributions, while gifting monetary assets can reduce the taxable estate. Harvesting investment tax losses can offset realized capital gains, potentially reducing the tax bill.

Diversified Portfolio Model

A Diversified Portfolio Model of Adaptability can help you navigate the complexities of retirement planning. By diversifying your investments across multiple life experiences, life roles, and relationships, you can promote positive adaptation to life’s challenges. This model integrates attractive features of various models of adaptability, including Linville’s Self-complexity Model, the Risk and Resilience Model, and Bandura’s Social Cognitive Theory. It provides a new integrative model of adaptability across the biopsychosocial levels of functioning, addressing a gap in the literature by illuminating the antecedents of adaptive processes studied in a broad array of psychological models.

Conclusion

Retirement is a significant milestone, and making the most of your last work year is crucial. By maximizing your retirement contributions, front-loading charitable donations, converting to a Roth IRA, gifting monetary assets, harvesting tax losses, and planning for health care, you can set yourself up for a secure and prosperous retirement. Don't forget to consult with a Certified Financial PlannerTM (CFP®) to get the comprehensive guidance you need and deserve.

Ask Aime: How can I make the most of my retirement planning in the last year of work?