As the end of the year approaches, many people begin thinking about taxes only after the calendar year has closed. But some of the most valuable tax-planning opportunities require action before December 31.
The fourth quarter is a good time to step back, look at your projected income for the year, and consider whether there are opportunities to reduce your current tax liability, or intentionally recognize income when doing so may benefit you in the future.
The key is to think beyond this year's tax return. Effective tax planning considers not only what you owe today, but also how today's decisions may affect your taxes in future years.
Some effective strategies to consider are tax-loss harvesting, Roth conversions, and Qualified Charitable Distributions.
What Is Tax-Loss Harvesting?
If you have investments in a taxable account that have declined in value, the fourth quarter can be a good time to review whether realizing some of those losses makes sense.
Selling an investment at a loss can potentially offset capital gains realized elsewhere in your portfolio. If your losses exceed your gains this year, up to $3,000 may also be deductible against ordinary income, with any additional losses still leftover carried forward to future years.
Tax-loss harvesting shouldn't be viewed as simply selling investments that have declined. The investment decision still comes first. If you continue to believe in the investment, you may be able to reinvest in a similar—but not substantially identical—investment while maintaining your overall portfolio strategy. The wash-sale rules should be considered before making these transactions.
Can Increasing 401(k) Contributions Reduce My Taxable Income?
If you receive a salary, the fourth quarter is a good time to review how much you have contributed to your employer-sponsored retirement plan.
Increasing contributions to a traditional 401(k) or 403(b), where appropriate, can reduce current taxable income while increasing retirement savings.
If you haven't yet maximized your contributions, you may have an opportunity to increase your payroll deferrals for the remainder of the year. Keep in mind that the tax treatment of traditional versus Roth contributions are different, so the right choice depends on your circumstances and broader retirement plan.
For those age 50 and above contributing to a 401(k) or 403(b), you can make “catch-up” contributions of an additional $8,000 above the standard IRS limit of $24,500. Secure Act 2.0 passed in 2022 also introduced a unique exception for employees aged 60, 61, 62, or 63 allowing them to make “catch-up” contributions of $11,250 above the standard limit of $24,500. After age 63 the “catch-up” limit goes back to $8,000.
Another important detail to keep in mind thanks to Secure Act 2.0 is if you earned more than $150,000 from your employer in 2025, any catch-up contributions you make in 2026 will be made with Roth dollars. This is true even if your income from that employer in 2026 will not exceed $150,000. Your employer’s payroll system will handle the switch to Roth automatically if applicable.
Roth Conversion Realities
One of the most frequently discussed year-end tax strategies is converting money from a traditional IRA to a Roth IRA. A Roth conversion can be a powerful planning tool, but it isn't automatically beneficial for everyone.
The basic concept is straightforward: when you convert pre-tax money from a traditional IRA to a Roth IRA, the amount of the conversion is generally included in your income and is taxable for the year of the conversion. In exchange, the money moves into a Roth account, where future withdrawals can be tax-free (with some exceptions).
That creates an important trade-off, whether the tax rate you pay on the conversion today is attractive relative to the tax rate you or your heirs may face on that money in the future.
When Might a Roth Conversion Make Sense?
A Roth conversion may be worth considering when you have a low-income year or expect your future tax rate to be higher.
For example, someone who retires before beginning Social Security and Required Minimum Distributions may experience several years in which taxable income is substantially lower than it was during their working years. Those years can create an opportunity to convert a portion of traditional retirement assets to Roth, while still staying in a low tax bracket.
Similarly, someone who has experienced an unusually low-income year, maybe due to a job change, may be able to convert money while staying within a desired tax bracket.
How Much Should I Convert?
The goal isn't necessarily to convert as much as possible. A partial conversion designed to "fill" a particular tax bracket is usually more appropriate, and that target can change from year to year depending on income, deductions, investment gains, retirement income, and other factors. If you are projected to remain below the 22% tax bracket and want to stay below it, you could consider converting enough pre-tax retirement funds to Roth to bring your taxable income close to, but not above, the threshold of $105,700 that would put you into the 22% bracket.
What Is a Qualified Charitable Distribution?
For individuals who are subject to required minimum distributions, a Qualified Charitable Distribution (QCD) can provide another valuable year-end planning opportunity.
A QCD allows eligible individuals to make a charitable contribution directly from an IRA to a qualifying charity. When the requirements are met, the distribution can generally satisfy part or all of the individual's RMD while being excluded from taxable income.
That distinction is important. Taking an RMD and then donating the cash generally creates taxable income first, followed by a potential charitable deduction if the taxpayer itemizes. A properly executed QCD can instead allow the qualifying distribution to be excluded from taxable income, potentially reducing adjusted gross income without requiring the taxpayer to itemize.
For someone who is charitably inclined and taking RMDs, a QCD can therefore be an especially useful way to incorporate charitable giving into an overall tax strategy and financial plan.
The Bigger Picture
The best year-end tax strategy isn't necessarily the one that produces the smallest tax bill this year.
Instead, consider how today's decisions fit into your broader financial plan.
Tax-loss harvesting may reduce your current tax liability. Increasing traditional retirement contributions may reduce current taxable income. A Roth conversion may intentionally increase taxes today in exchange for potentially greater tax flexibility later. And a QCD may allow charitable giving while reducing the taxable impact of an RMD this year.
Each strategy can be useful on its own, but the greatest value often comes from looking at them together.
Before year-end, consider running a tax projection that incorporates your expected income, investment gains and losses, retirement contributions, charitable giving, and potential Roth conversions.
The goal isn't simply to minimize taxes in 2026. It's to make informed decisions that manage your tax liability across the years ahead.
Tax laws and individual circumstances vary, and strategies discussed above may not be appropriate for everyone. Consider consulting with your tax professional and financial planner before implementing year-end tax strategies.