Mar 20, 2023
Tax Rule Changes for 2023 (And What it Could Mean for You)
In our experience, the need for tax planning can be triggered by changes in your personal, family or financial life. But even if your situation remains unchanged, the tax code itself changes yearly. That’s why we believe it makes sense to review your plan at least annually. Here are some updates for 2023 and what they might mean for you.
RMD age moves from 72 to 73
If you own a pre-tax retirement plan such as an IRA, 401k or 403b, you must take Required Minimum Distributions (RMDs) starting when you reach a certain age. The SECURE 2.0 Act pushes this age back to 73 for anyone who did not already turn 72 in 2022.1
What could this mean for you? RMDs are taxable as ordinary income. This increases the ordinary income on your tax return, which could lead to higher tax rates on other sources of income, such as capital gains and qualified dividends.2
With the RMD age pushed back, you have a little more time to plan for this change in income. For example, you might consider performing a partial Roth conversion until you reach the top of a certain tax bracket, which would allow future RMDs to be lower and potentially save tax in the long run.
401k matching contributions can now be Roth
Employers now have the option to offer employees matching contributions on a Roth basis instead of a pre-tax basis. If you are an employer who decides to offer this option, not much will change for you, as you will still receive a tax deduction for any contributions you make.3
If you are an employee in a relatively low tax bracket, this change could offer a valuable tax planning opportunity. You could elect to receive your matching contributions on a Roth basis, pay tax now and then benefit from tax-free growth on these assets until the money is pulled from the account in retirement.
SIMPLE IRA deferrals and SEP-IRA contributions can also now be Roth
Under prior law, SIMPLE IRA employee deferrals and SEP-IRA employer contributions had to be made on a pre-tax basis, meaning the account owner received a tax deduction now and paid tax later when the assets were distributed. Now, existing plans can adopt changes that permit contributions to be made on an after-tax Roth basis.4
What could this mean for you? The planning considerations are like those facing someone who is contemplating Roth matching contributions. Based on your current tax bracket and how you expect that to change in the future, you may prefer to take the tax deduction now and pay tax in retirement or pay tax today in exchange for tax-free withdrawals down the road. This rule adjustment gives you the flexibility to decide if your employer plan adopts these changes.
Lower penalties for missed RMDs
It used to be that the penalty for failing to take a Required Minimum Distribution from your retirement account was 50% of the amount not taken. A very steep penalty indeed. The SECURE 2.0 Act lowers this penalty to 25% of the amount not taken or even as little as 10% if the missed distribution is taken as soon as reasonably possible.5
The main takeaway? Avoid these penalties completely by planning to take your full RMDs on time.
More time to elect for estate exemption portability
If you are an estate executor, under old law there was a two-year forgiveness period to elect portability, which allows the surviving spouse to use the remaining estate exemption of the deceased spouse. This window of time has now been extended to five years.6
The tax planning benefit? If someone is outside of the original two-year forgiveness window, but inside the new five-year forgiveness window, that could present significant tax savings if they can re-claim that unused exemption. On top of that, the extra time will allow you to think through your options and make the right decision during a potentially stressful period of life.
Tax rules change frequently, and, in our view, many of the recent changes are designed to provide business owners, workers and retirees with more flexibility to structure their affairs favorably. We recommend sitting down with your wealth advisor at least once a year to review your overall financial plan, including tax updates that might be beneficial for you.
1 https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
2 Ibid.
3 Ibid.
4 Ibid.
5 Ibid.
6 https://www.irs.gov/pub/irs-drop/rp-22-32.pdf
ABOUT THE AUTHOR
Matt Foltz, CPA, CFP, CEPA, MS in Accountancy
Matt sits on BDF's Financial Planning Committee and leads many of the firm's tax-related initiatives. He has a passion for building strong relationships with his clients and helping them make sound decisions. Matt also holds the Certified Exit Planning Advisor designation which helps him advise business owners on how to exit their business and prepare for retirement.
CONTENT DISCLOSURE
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Advisory services are offered through CI Private Wealth and its affiliates, each being a registered investment adviser (“RIA”) regulated by the US Securities and Exchange Commission (“SEC”). The advisory services are only offered in jurisdictions where the RIA is appropriately registered. The use of the term “registered” does not imply any particular level of skill or training and does not imply any approval by the SEC. For a complete discussion of the scope of advisory services offered, fees, and other disclosures, please review the RIA’s Disclosure Brochure (Form ADV Part 2A) and Form CRS, available upon request to the RIA and online at https://adviserinfo.sec.gov/. We also encourage you to review the RIA’s Privacy Policy and Code of Ethics, which are available upon request.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.
