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Daniel R. Cuddy, CPA, CFP®

Personal Financial Representative

 

Cuddy Financial Services

7 William Street

Auburn, NY 13021

 

Phone:  315-252-3600

Fax:      315-252-3625

 

Email: dcuddy@cuddyfinancial.com

2023 Tax Planning Guide

New and Noteworthy - Retirement Accounts

retirement plan label on document folder

Let's take a closer look at some tax law changes that have an impact on your retirement accounts, including an increase to retirement plan contribution limits.


RETIREMENT PLAN LIMITS INCREASE
Thanks to the highest rate of inflation in four decades, most retirement plan limits increased in 2023. For example, the limit on IRA contributions jumped from $6,500 in 2022 to $7,000 in 2023, while limits for employee contributions made to 401(k) plans, 403(b) plans and 457 plans increased to $22,500 from $20,500 in 2022, subject to plan documents and a variety of federal tax rules and restrictions.


INHERITED IRA 10-YEAR RULE
Some non-spouse beneficiaries of IRAs must withdraw all funds from inherited accounts within ten years, although the only annual required minimum distribution is the last one. This rule does not apply to a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner or a child of the IRA owner who has not reached the age of majority.

The ten-year rule also applies to trusts that receive IRA assets on behalf of beneficiaries, except for certain trusts named as an IRA beneficiary. Beware that a conduit trust must forward all IRA income to income beneficiaries, which potentially exposes the inherited IRA assets to heirs’ creditors and any bankruptcy or divorce proceedings.


You should consult an attorney to determine if you will need to redraft the conduit trust to allow the trust to retain the assets, rather than distribute income to beneficiaries. Distributing assets in this way, however, typically results in less favorable trust tax rates.


REQUIRED MINIMUM DISTRIBUTIONS (RMD) START AT AGE 73
Taxpayers must begin taking required minimum distributions if turning age 72 in tax year 2022. However, new legislation changed the RMD starting age to 73 starting in 2023, and to 75 in 2033. When individuals turn 73, they must take their first distribution no later than April 1 of the following year. The distribution for subsequent years must be made by December 31 of each year. Failure to do so results in a 50% penalty taken in 2022 and a 25% penalty in 2023 on the required amount not taken.


PENALTY-FREE WITHDRAWALS FOR NEW PARENTS
Thanks to the SECURE Act, which became law in 2020, new parents may qualify for an exception to the 10% penalty that normally applies to early distributions (prior to age 59½) from IRA or 401(k) accounts. You can take the withdrawal within a year of a qualified birth or adoption of up to $5,000 per parent, per eligible retirement account. You have the option to repay at a later date, but repayment isn’t required. Consider consulting your financial professional before withdrawing funds early.


PART-TIME EMPLOYEES MAY PARTICIPATE IN 401(K)
The SECURE Act also made it easier for part-time workers to contribute to their employers’ 401(k) plan. Employees age 21 and older are eligible to contribute once they have worked 500 hours for three consecutive 12-month periods after January 1, 2021. Employers are not required to match contributions. Some employees, including seasonal and union workers, may not be eligible to participate. Consult your tax advisor as there are several elements to consider.


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