As the year comes to a close, it’s easy to pack our schedules with festivities. Yet, this is also a crucial time to review and adjust your financial plans. For federal employees, the benefits landscape offers specific opportunities and challenges that require careful attention. 

From retirement account distributions to strategic charitable giving, making the right moves now can help you save on taxes, grow your wealth, and set yourself up for financial success in the new year. Here’s a detailed look at the financial tasks to tackle before December 31.

Required Minimum Distributions (RMDs)

The internal revenue code requires you to withdraw a minimum amount from your retirement accounts each year once you reach a certain age. Failing to do so can result in a hefty penalty of the amount you should have withdrawn.

• Accounts Requiring RMDs: While TSP and many 401(k) plans handle RMDs automatically, traditional IRAs require manual action. Additionally, inherited retirement accounts—including inherited Roth IRAs—are subject to RMD rules, which often catch people by surprise. Note that if you’re still working, retirement accounts tied to that specific job may not have the same RMDs.
• The Charitable Giving Solution: If you plan to donate to charities, consider using a Qualified Charitable Distribution (QCD). QCDs allow individuals aged 70½ and older to donate directly from their IRAs, satisfying RMD requirements while avoiding income taxes. It’s a win-win: you reduce your tax burden, and the charity receives the full benefit of your gift with no tax either.

To Roth or not to Roth

A Roth conversion can be a smart way to lower your long-term tax liability by transferring funds from a pre-tax retirement account into a Roth IRA. The converted funds grow tax-free and are not subject to RMDs in the future. 

Why Convert Before Year-End? Once you reach RMD age, the additional income from required distributions could push you into a higher tax bracket, especially if you’ve been a good saver. Converting funds now may allow you to pay taxes at today’s rates rather than tomorrow’s potentially higher ones. There are many considerations when assessing a Roth strategy, so take care to do so correctly.

A Roth conversion could pay off in more ways than one. Lower taxable income can also reduce Medicare premiums for those on FEHB or TriCare for Life, as Medicare premiums are tied to your income level. A retired fed I spoke to caused himself ~$3,000 more in annual Part B costs by going over the income limit by a mere $400 due to an RMD. Good planning would have easily prevented this.