Max Out the 401(k) Before the Final Paycheck
Although Vanguard has long recommended contributing as much as possible early in the year to maximize compounding, 401(k) plans and other employer-sponsored accounts require all contributions by December 31 or the last payday of the year. There’s no grace period here the way there is with IRAs. For 2025, the contribution limit was $23,500, with an additional $7,500 catch-up for those 50 or older, and a special $11,250 catch-up for anyone between ages 60 and 63. If you had room to contribute more but simply didn’t get around to it, December is your last real shot.
Execute a Roth Conversion Before the Year Closes
A Roth conversion moves assets from a traditional IRA into a Roth IRA, creating a tax bill now in exchange for tax-free growth and withdrawals later. Financial planners are especially focused on this move in years when a client’s income happens to be lower than expected, since that creates a window to convert at a more favorable tax rate. With tax changes ahead and current market performance, year-end may be an opportune time to convert part of a traditional IRA to a Roth, but to count for your current-year taxes, the conversion must be completed by December 31. Unlike IRA contributions, there is no extension here, and there’s no undoing the conversion once it’s done.
Take Your Required Minimum Distribution
December 31 is the firm deadline for required minimum distributions (RMDs) if you are age 73 or older, and also for beneficiaries with inherited IRAs. Missing this date can result in significant penalties. Failure to take the RMD by December 31 results in a 25% excise tax on the shortfall, though that may be reduced to 10% if corrected promptly. Planners typically address this well before the holiday rush, since processing delays can cause people to miss the cutoff even when they intended to act in time.
Harvest Tax Losses in Taxable Accounts
The deadline for tax-loss harvesting is typically December 31, which makes December the prime time to review a portfolio for opportunities. Tax-loss harvesting means selling investments that have lost value and using those losses to offset capital gains from other investments, which can potentially lower your tax bill. If any taxable investments are sitting at a loss, selling them can offset gains taken earlier in the year or reduce up to $3,000 of ordinary income. Since US securities moved to T+1 settlement in May 2024, trades settle one business day later, so many practitioners place harvesting sales by the second-to-last business day of December to be safe. Waiting until the final day of the year is genuinely risky.
Rebalance the Portfolio While the Window Is Open
Year-end is a natural checkpoint for rebalancing. If markets have pushed a portfolio off target, the smart sequence is to rebalance inside retirement accounts first, direct December cash flows to underweight assets, and pair unavoidable taxable sales with harvested losses. It’s also worth checking for capital gain distributions from mutual funds, which are typically declared in November and December and can create taxable income even in a flat year. Harvested losses absorb them. Planners treat the two moves, rebalancing and loss harvesting, as a single coordinated exercise rather than two separate tasks.
Spend Down Your Flexible Spending Account
If you have a flexible spending account (FSA) through your employer, the funds typically follow a use-it-or-lose-it rule with a December 31 deadline, though there are exceptions, so it’s worth checking your specific plan’s rules before assuming the balance will roll over. The numbers on how many people miss this are striking. Each year, the share of employees who miss the typical December 31 deadline and end up forfeiting their FSA money to their companies runs between roughly forty and half of all FSA holders, according to ongoing research from the Employee Benefit Research Institute. Of the FSA owners who forfeited money in 2023, the average amount lost was $436. That’s a meaningful sum to leave on the table for something that’s entirely preventable.
Make Charitable Gifts Before the Deadline
Charitable donations can reduce your tax burden as long as they’re completed by December 31, which is the deadline for deductible gifts to apply to your current-year return. In 2026 specifically, the stakes around timing have grown. Starting with 2026 income, itemized charitable deductions are now subject to a floor equal to 0.5% of adjusted gross income. One way to maximize gifts under the new law is bunching charitable gifts you’d have otherwise donated gradually into a single year. For those who are 70 and a half or older, qualified charitable distributions allow you to send up to $108,000 from your IRA directly to a qualified charity, which counts toward RMDs and reduces taxable income.
Use the Annual Gift Tax Exclusion
The annual gifting exclusion allows you to give up to $19,000 per person in 2025 without touching your lifetime gift tax exemption. This is one of the cleaner year-end moves available, since it requires no complex paperwork and the benefit is immediate. Gifts must be completed before December 31 to count toward the annual exclusion for the current tax year. Families who make regular gifts to children or grandchildren often treat this as a December ritual, transferring wealth in a way that’s tax-efficient now and reduces the size of a taxable estate over time.
Review and Adjust Tax Withholdings
The IRS does not enforce a deadline for amending withholdings, but the only way to prevent surprises and ensure the correct withholding for all of the coming year is to submit a new Form W-4 by December 31. Planners also look at estimated tax payments at this time of year. Adjusting a W-4 to increase withholding for the final paychecks of the year, or making a one-time estimated tax payment before December 31, can help a client avoid underpayment penalties come filing season. This step gets overlooked far more than it should, particularly by people whose income changed significantly during the year, whether from a new job, a bonus, or investment activity.
Fund Education and Health Savings Accounts
If you have a high-deductible health plan, contributing to a Health Savings Account (HSA) offers triple tax benefits: tax-free contributions, tax-free growth, and tax-free withdrawals for qualified expenses. The 2025 contribution limits were $4,300 for individuals and $8,550 for families, with an extra $1,000 catch-up for those 55 and older. On the education side, states often provide deductions or credits for 529 plan contributions made before year-end. HSA contributions do allow an April deadline like IRAs, but many planners prefer to close these out in December to simplify tax prep and avoid any confusion between tax years.
The Takeaway
Most of these moves aren’t complicated. They’re just time-sensitive. The challenge isn’t knowing what to do, it’s actually doing it before the calendar flips. December 31 is a hard stop for a long list of financial decisions, and unlike most financial goals, there’s no catching up after the fact. The planners who consistently build wealth for their clients tend to treat the last few weeks of December with the same urgency most people reserve for tax day. That mindset shift, from passive to proactive, is probably the single most underrated move on this entire list.
AI Disclaimer: This article was created with the assistance of AI tools and reviewed by a human editor.