There are only a few weeks left in 2023, but there’s still plenty of time to make some smart moves before the end of the year. Many of the planning tips we shared last year are valid for 2023, as well, but there also are some new updates this year related to SECURE Act 2.0. Please read on for our checklist of recommendations to help you navigate around year-end planning and to get ready for 2024.
One of the first things you should do is check to see if you’ve met any significant age milestones this year. Here are a few of the key rule changes along with their corresponding ages:
- Age 50: You can make ‘catch-up’ contributions to IRAs and some qualified retirement plans.
- Age 55: You can take distributions from 401(k) plans without penalty, if retired.
- Age 59 ½: You can take distributions from IRAs without penalty.
- Ages 62-70: You can apply for Social Security benefits.
- Age 65: You can apply for Medicare.
- Age 70 ½: The Qualified Charitable Distribution (QCD) gifting strategy becomes available.
- Age 73: You must begin taking Required Minimum Distributions (RMDs) from IRAs.
Note that SECURE Act 2.0 raised the RMD age from 72 to 73 this year – this means that no one needs to begin taking RMDs in 2023 based solely on age.
Charitable and Non-charitable Gifting
Anyone can give up to $17,000 to another individual this year without having to worry about gift taxes or filing a gift tax return. For example, this means a married couple can give up to $34,000 to each of their children in 2023 if they desire. Sizable gifts above $17,000 are still not likely to be taxable but will require you to fill out IRS Form 709 along with your tax return. This form helps the IRS keep track of any reduction in your Lifetime Unified Federal Gift and Estate Tax Exemption, which is $12.92MM per person this year. Also, remember that gifts are generally not considered taxable income to the recipient.
Gifts made to charities may be deductible for you if certain conditions are met, and if you are over age 70 ½, you may be able to take advantage of a QCD strategy. These are charitable gifts that are made directly from a traditional IRA account and excluded from your taxable income. Please see your tax advisor for more information on the rules and limits for QCDs.
Offsetting Capital Gains with Capital Losses
Depending on your tax bracket and where your investment assets are located, you may owe taxes on any capital gains this year. Since the tax code allows realized losses to offset realized gains, you may be able to lower your 2023 tax bill by “recognizing” some of these losses in your taxable account. Capital gains tax is owed on the net realized gains at year end, which is calculated by summing up all realized gains and subtracting any realized losses. If realized losses exceed realized gains, losses can also offset ordinary income (up to $3,000), whether married filing jointly or for single filers. Note that ‘excess’ losses can be carried forward to offset future gains indefinitely.
Making contributions to an IRA, SEP-IRA, or Roth Account for 2023
Not all year-end planning actions have a December 31 deadline. Making contributions to non-employer sponsored retirement plans can generally be made up to the tax filing deadline of the following year. These would include traditional IRA accounts, ROTH accounts and SEP-IRA accounts.
Be aware that there is an earned income requirement; contributions must be made from salary, wages, commissions, or otherwise “work-related” income. E.g., if your only income is from investments, pensions, and/or Social Security, you cannot make contributions to these kinds of retirement accounts.
The 2023 contribution limits are $6,500 for IRA or ROTH accounts, plus a $1,000 “catch-up” limit for those over age 50. The deadline for 2023 IRA and Roth contributions is April 15, 2024 (the general tax filing deadline), whereas the deadline for SEP-IRA contributions is your personal tax filing date, including extensions.
The Clock is Ticking on Lower Federal Tax Rates
The Tax Cuts and Jobs Act of 2017 reduced most federal income tax rates by 1-4% depending on the bracket. For example, the highest marginal rate fell from 39.6% to 37% in 2018. Unless Congress acts to preserve these lower rates, they are slated to expire at the end of 2025. Strategies that seek to take advantage of lower income years (and lower tax rates) through Roth conversions, IRA distributions, or other methods of recognizing additional income are likely to be less valuable after 2025. Estate tax exclusion amounts are also scheduled to be reduced by about 50% in 2026. These pending changes in the tax code should be reflected in your long-term tax planning.
Changes related to SECURE Acts 1.0 and 2.0
The original SECURE Act of 2019 revised the distribution rules for non-spousal inherited IRA accounts. IRA accounts that were inherited on or after January 1, 2020, became subject to two distribution rules. First, the “Ten Year” rule requires the IRA account would need to be fully withdrawn within 10 years. Secondly, non-spousal inherited IRAs are also subject to annual RMDs if the original IRA owner were themselves already taking RMDs. Note that these distributions will be based on the life expectancy of the new beneficiary. Due to some initial confusion regarding this second distribution rule, the IRS is waiving the RMD requirement for non-spousal inherited IRAs (and any penalties) for tax years 2021, 2022, and 2023.
SECURE Act 2.0 was signed into law on December 29, 2022, and introduced several changes related to retirement account contributions, college savings plans, and RMD ages. Starting in 2024, workers in the narrow age range of 60-63 will be granted enhanced “catch-up” contribution limits of 150% of the prevailing amount for workers over age 50. Since the “standard” catch-up contribution limit is $7,500 now, the enhanced limit will be at least $11,250. Note that beginning in 2026, all “catch-up” contributions will need to be made post-tax to a Roth type account.
SECURE Act 2.0 also raised the beginning ages for RMDs to start from retirement accounts like IRAs and 401(k)s. If you have not begun taking RMDs yet from a retirement account yet and you were born before 1960, your new beginning RMD age is now 73. If you were born after January 1, 1960, it will be 75.
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