Planning for the 10-year clean out rule and inherited IRAs

Inherited IRAs and RMDs

The SECURE Act of 2019 eliminated the “stretch IRA,” where children could continue to defer taxes on IRA balances inherited from parents, even passing them on to grandchildren.  This had allowed for decades of tax-free asset growth.  Congress decided to curtail the deferral past spouses by requiring that IRAs passed to non-spouses be fully distributed at the end of 10 years, with a few exceptions. 

Confusion has arisen regarding whether all amounts must be withdrawn annually or “cleaned out” in year 10.  The IRS added to the confusion by offering different interpretations after the law was enacted.  To address this confusion, the IRS responded by not penalizing IRA beneficiaries who failed to take distributions while the rules are finalized. 

The IRS proposed rules require that annual distributions continue if the original IRA owner had begun taking required minimum distributions (“RMDs”), while allowing beneficiaries of IRA owners who had not begun taking RMDs to choose to take some distributions or wait until the 10th year. 

An heir will need to plan to minimize the tax hit.  For example, they may be able to keep their total income in a lower tax bracket.  The simplest approach may be to just take 1/10th each year, so they do not end up in a higher bracket.  This may not be best if the beneficiary’s income has significant changes for bonuses, major stock sales, taking their own RMDs or starting social security.  We reviewed possible strategies with Harold Hallstein IV of the Sankala Group who said that, surprisingly, someone in a low tax bracket who expects to be in a higher bracket in the future may benefit from taking the account balance right away, thereby availing themselves of long-term capital gains rates on future investment growth. 

One note of caution: beneficiaries need to be sure to set up the inherited IRA account and not take a check, as that will be fully taxable.   

Let us know if you have any questions. 

Good luck

Steven

Mid-year planning for SECURE Act 2.0 and inflation impact

Mid-Year planning   

The goal of this post is to help you become informed about tax law changes for 2023, so you can respond during the year and save on what you owe next April.  As with any planning, acting while you can have an impact is crucial.  There may be more new tax laws on the way, so stay informed. 

Your planning may vary depending on whether you owed for 2022 or received a refund.  For more on adjusting withholding (and back-door Roth conversions), see our prior post on mid-year planning 2022.  Also, check out the IRS website Steps to Take Now to Get a Jump on Your Taxes.

Tax Law Changes – SECURE Act 2.0 and inflation adjustments

The SECURE Act 2.0 finally passed in December of 2022, following the 2019 SECURE Act as a continued effort to encourage taxpayers to save for retirement.  We explore some highlights below.

Contemporaneously, inflation has raised contribution limits for 401(k) plans, IRAs and other qualified plans and the income limits for contributing to Roth IRAs have gone up.  Inflation adjustments also raised the income limit for deducting student loan interest and the AMT exemption.  The $100,000 cap on the qualified charitable distribution (QCD) will now be indexed for inflation.  Let us know if you need any details. 

You can start RMDs at a later age now

Some SECURE Act 2.0 changes take effect in 2023 and others in 2024.  For 2023, the age to begin taking your required minimum distribution (RMD) begins at age 73.  Someone turning 73 in 2023 must take the first RMD by April 1, 2024.  Those who continue to work past 73 may be able to delay taking RMDs from their current employer’s 401(k) until they retire.   

Beginning in 2024, Roth 401(k) owners no longer have to take RMDs. 

Considering buying an EV?  The rules changed                       

As we wrote last December, the maximum credit for an electric vehicle or EV is still $7,500, but the rules have changed, focusing on critical mineral and battery content along with assembly in North America.  Furthermore, the manufacturer limit is gone but now there is a vehicle price limit of $55,000 for sedans and $80,000 for vans, SUVs, and pickup trucks, as well as an income limit of $300,000 for joint filers and half that for single filers.  A credit for used EVs was also enacted, with a smaller credit and lower income limits.   

Revamped home energy credits

If you plan to install an alternative energy system, which includes solar, fuel cell, battery-storage, and wind, to your main home, you may qualify for a credit of 30% of the cost for 2023 to 2032, dropping after that and finally expiring in 2035.  The credit is reduced by any rebate from the utility company. 

The 10% credit available for 2022 is now 30% for installing certain types of insulation, water heaters, boilers, central air, etc. and the limit has been increased to $1,200 through 2032.  Other home energy expenditures have lower credits. 

IRS enforcement

The IRS received a massive budget increase, some of which was undermined by the debt ceiling negotiations.  As much as half of that increase is ear-marked for enforcement, and that is supposed to focus on corporations, partnerships and higher income taxpayers, meaning over $400,000.  The IRS is hiring and staffing in order to put their plan into action. 

A new way to convert to a Roth IRA

The SECURE Act 2.0 allows up to $35,000 to be rolled over from a 529 plan to a Roth IRA beginning in 2024. 

We encourage you again to consider converting, see “To Roth or not to Roth?” or check out Pros and Cons here.  Also, we discussed the back-door Roth IRA in our year-end post on 2021 tax planning.  

Coordinate with investing and estate planning

The federal credit for gift and estate taxes jumped to $12,920,000 and the annual gift tax exclusion to $17,000. 

Make sure that any changes that you take for tax reasons do not run counter to your investment or estate planning.  For more on estate planning, see estate planning checkup post

Summary

As you review your 2023 tax planning, check your 2022 returns for ideas on what to adjust, consider the impact of future tax rate increases and act when the impact on other planning also makes sense. 

Let us know if you have any questions. 

Good luck

Steven