Q1 2023 Tax Updates

Congress recently passed Secure Act 2.0.  The law gives individuals more options for retirement, expands contribution limits, allows more time for retirement plan earnings to accumulate, and reduces the penalties for withdrawals from and excess contributions to retirement accounts. 

Some relevant changes to retirement plans include:

  • Increased age for Required Minimum Distributions (RMDs) from qualified retirement plans, including Traditional IRAs, to 73 (for individuals who attain age 72 after December 31, 2022, and before January 1, 2033), or 75 (for individuals who attain age 74 after December 31, 2032).
  • Increased catch-up contribution limit for defined contribution retirement plans (e.g., 401k) to up to $10,000 starting in 2025 (subject to limits).
  • IRA catch-up contribution for individuals over 50 years old will be indexed for inflation beginning January 1, 2024. The current catch-up limit is $1,000.
  • Annual withdrawal from certain tax-preferred retirement accounts of $1,000 without paying a 10% penalty are allowed. Withdrawals must be paid back within three years.
  • Tax-free rollovers of unused 529 account funds to a Roth IRA after December 31, 2023 are allowed (subject to limits).
  • Starting January 1, 2024, one-time election for up to $50,000 Qualified Charitable Distribution (QCD) from a Traditional IRA to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts are allowed. The charitable accounts must be entirely funded through QCD to qualify.
  • QCDs from an IRA to a qualified charity, currently limited to $100,000, will be indexed to inflation starting January 1, 2024.

The changes of the Secure Act 2.0 provide additional funding and flexibility for charitable giving. Raising the age for RMDs, for example, allows IRAs to accumulate more earnings. Indexing QCDs from a Traditional IRA to inflation will allow taxpayers to give more money to charity and meet their RMD. 

One interesting provision is the ability to make a one-time QCD from a Traditional IRA to fund a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust.  The amount cannot exceed $50,000 per individual and the election can only be made once.  Any charitable split-interest account funded through QCD must be entirely funded through QCD.  A husband and wife, for example, could elect to fund $50,000 each to a charitable remainder unitrust through a QCD.  Each spouse can still make another $50,000 QCD to a qualified charity for a total of $200,000 for the year.

The IRS is beginning to process 2022 tax returns. The processing time for paper returns and correspondence remains a problem for the IRS and taxpayers.  Ren recommends taxpayers electronically file tax returns where available. Unfortunately, federal Form 5227 for charitable remainder trusts can only be filed by mail. For Form 5227 and other IRS forms and letters needing to be mailed, Ren highly recommends sending with a tracking feature, such as priority mail or certified mail. Taxpayers should retain proof the return or letter was mailed prior to its due date. Expect paper processing time to be months after mailing.

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