Year-End Planning (2023)

December 31 is an important date for anyone who is at a point in their life where they rely on their retirement accounts as a major source of their annual income. If this is you, there are a few things that you want to be sure are taken care of before we close the books on 2023.  

Most IRA contributions can be done until your tax filing deadline for the 2023 tax year, so let’s forget about those for now. 

I want to talk about the JUICY stuff: distributions. Let’s get that 2023 money out of your IRAs as efficiently as possible by the end-of-year deadline. Keep in mind: December 31 is on a Sunday this year (2023), so you should try to get done any year-end actions by December 29 (especially those involving securities transactions). Not all financial institutions are open on Saturdays and the investment markets aren’t trading on the weekends. 

In this blog, I have some tips for the following groups: 

Individuals over age 73 

If you turned 73 this year or you’re older than 73, you need to take your required minimum distribution (RMD). This is a taxable distribution you need to take from your traditional IRA whether you need the money or not. 

John’s top tip: If you’re in the camp of folks who don’t need the forced distribution to cover your expenses, you can actually cut a check directly from your IRA and send it to the non-profit organization of your choice.  

How does this help you? Great question.  

It keeps the amount that you send to the charity out of your taxable income all together, instead of just being able to deduct the amount of the charitable contribution (as if you just sent a check from your checking account). This is the most efficient way to donate to charity especially since the 2018 tax reform made it harder for households to deduct charitable gifts from other sources.  

There’s a lot of nuance here, so be sure to reach out to us at Generation Capital Management if this situation applies to you. 

Those with retirement assets (IRA, 401(k), 403(b), 457) inherited from a non-spouse 

Since pensions have become less common, 401(k), 403(b), and 457 plans have become more popular. This leads many retirees to have these types of accounts or IRAs into which they roll over their hard-earned savings. As those retirees pass away, their children (or other beneficiaries) inherit those accounts. 

If you inherited a retirement account from someone other than a spouse a few years (or longer) ago, you likely need to take a taxable beneficiary RMD. Again, the IRS doesn’t care if you need the money or not. To satisfy an RMD, you must move the money from that inherited retirement account to a bank account, non-retirement investment account, or take it as a check. The amount distributed will be included in your ordinary income amount. Any amount not distributed will be subject to a 50% penalty imposed when you file your taxes. 

But wait, there’s more! As if this wasn’t confusing enough, the SECURE Act of 2019 changed inherited retirement asset rules for any accounts inherited in 2020 or after. Now, there’s no annual required RMD but the entire balance of the account needs to be distributed by the end of the 10th year after the death of the original owner. 

John’s top tip: If you inherited retirement assets in 2020 or after, it may still be beneficial to take a distribution from the inherited account each year to help spread out the tax liability. Otherwise, taking it all in the 10th year may not only lead you to have a big tax bill that 10th year, but it will likely bump you into a HIGHER tax bracket for the entirety of that year’s income. 

Households considering Roth conversions 

You’ve likely heard of Roth contributions, but maybe not Roth conversions. This feature of the tax code allows you to take an unlimited amount of your tax-deferred assets and make them tax-free. You must pay tax on the amount that you convert in a given year, but then it’s never taxed again. 

If you’re wondering why you would want to pay MORE tax than you need to, you’re not alone. This strategy is only applicable if you trigger a few criteria in your financial plan, but it’s such a powerful tool that you should certainly talk to a financial planner about it. 

John’s top tip: Roth conversions and contributions are typically recommended for folks who know that their income this year will be lower than their usual income OR for retirees who have not yet reached age 72 and meet certain criteria. Give us a call and we can help you figure out if a Roth contribution or conversion is right for you. 

Households taking money from their portfolio in preparation of a big expense next year 

So here’s a good one: if you have a big expense coming up in 2024 (or beyond) and you’re currently taking distributions from your retirement accounts, it might be a good idea to take a distribution from your qualified account before the end of 2023 to spread out the tax liability. This can be a little tricky to get right but if you do, it might be able to keep your total tax liability lower than if you were to take it all in one shot. Your planner should work with your tax preparer to figure out the correct amount of the distribution. 

While not related to taking distributions from an IRA by year-end, but this last one is still year-end sensitive and a bonus for everyone who’s read this far down: 

Those looking to take advantage of the annual gift exclusion

Gifting and the associated taxation is often hard to understand, but it’s pretty simple: the recipient doesn’t pay tax; the gift giver MIGHT. That’s a very big ‘might’ because it’s highly unlikely. 

You can gift $17,000 (2023) per person per year without triggering any gift tax reporting. If you have a spouse and you both want to gift to an individual, you can gift share a total of $34,000 to that individual without triggering reporting. Does the recipient have a spouse? If so, the total that you and your spouse can gift to that couple is $68,000 before triggering any reporting requirements. 

If you gift more than the limits in a year, then you need to report the amount above the annual limit to the IRS and the amount above that $17,000 goes against your lifetime unified exclusion allowance. Most of us will never have to worry about this as the current (2023) lifetime gift credit is $12.92 million per individual. This essentially means that one could gift $12.92 million above their $15,000 per person per year limit without having to pay a dime in gift tax. Once the current tax changes expire in 2025, this will drop back down to previous levels (approximately $5-6 million). 

If you typically make larger gifts or need to get money out of your taxable estate, you may want to take advantage of the annual gift exclusion ($17,000) to the fullest extent possible by December 31 of each year. The team at Generation Capital Management can also give you guidance on reducing your taxable estate or answer any other questions that you might have.

Did your eyes glaze over during any of this? Yeah, I get it. Just give me a call at 585-232-8560 x105 and I’ll be happy to walk you through some year-end planning tips. Are there any financial clean-up items that you do in December of each year? Email me at jhowe@gencapmgmt.com and let me know! 

John Howe-Wemett, CFP®, M.S.