May 23, 2023
By: Marshall K. Brown
Here are the significant changes in the law for IRA retirement accounts and 401 (K) retirement plans.
Required Minimum Distribution (RMD) Starting Age
For retirement plans, a participant can delay retirement minimum distribution until retirement and may delay taking the first year’s distribution until April 1st of the following year. Required minimum distributions must be taken from a traditional IRA in the year in which a participant attains 73 years. Ten years from now, in 2033, the starting age increases to 75. Taking the first year’s distribution after December 31 results in two distributions being due in a single year. This may result in greater income, some of which may be taxed at a higher rate. Using a new provision for a one-time creation of a charitable trust or gift annuity might eliminate this “double tax” problem.
Qualified Charitable Contributions
When the required minimum distribution is satisfied using a qualified charitable deduction, the taxpayer reduces their income by avoiding the tax distribution, but loses the ability to take an itemized charitable deduction for the contribution. This might seem like a wash except that the usefulness of itemized deductions was severely limited in 2017. Further, itemized deduction reduce taxable income, but not adjusted gross income.
The law continues to allow up to $100,000 a year of the required distribution to be funded with qualified charitable contributions, thus reducing the income which must be reported. A one-time charitable contribution through the use of a charitable remainder trust or a charitable gift annuity up to $50,000 indexed for inflation is allowed.
Catch Up Contributions for 401(K) Plans and IRA’S
There is an increase in indexing for catch-up contributions to IRA’s and 401(k) plans. Catch-up contributions are for taxpayers age 50 and over. Since many, if not most, people underfunded their retirement plans in younger years, the catch-up contributions allows older workers to contribute more to these plans. For retirement plans, including 401(k)’s, the current catch-up is $7,500 a year. It will now become $10,000 a year and the $10,000 will be indexed for inflation. For IRA’s, the $1,000 a year catch-up will also begin to be indexed for inflation.
Required Minimum Distribution Penalty
The penalty for failure to make a required minimum distribution is 50% of the amount that should have been taken. This penalty has been reduced to 25% or only 10% if corrected in the year following the failure. The draconian 50% penalty was subject to what was a very generous IRS policy for waiver of the penalty especially for first time offenders. Query whether the policy will be any near that generous for the lower penalty amounts.
There are also changes in the rules applying to Roth accounts in retirement plans. Retirement plans are allowed to offer Roth accounts. Similar to Roth IRA’s, the contributions to such an account are not deductible, and withdrawals from the Roth are not taxable. Inexplicably, the Roth accounts within a retirement plan were subject to required minimum distributions unlike Roth IRA’s. That is now eliminated.
Another new rule provides that contributions to a 401(k) plan from an individual earning more than $145,000 a year from the employer sponsor must designate their contributions as a Roth contributions and are ineligible for a deduction. Another provision allows unused Section 529 College Savings Plan to be rolled over to a Roth IRA, thus avoiding the 10% penalty.