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Retirement Planning Basics, And Tips For 2023

Investments in Individual Retirement Accounts (IRAs) and other retirement accounts qualified under Federal law for tax advantages are the main source of funding retirement in America. The retirement financial system that the United States has built over many decades is a partnership between the U.S. government and private sector and it is unique to our free-enterprise capitalist system. Far from perfect, it’s complex but offers opportunities to build wealth and support a standard of living that is the envy of most of the rest of the world.

Retirement Accounts. Tax advantages on IRAs and employer-sponsored retirement plans are designed to be the key to retirement success and also play a role in what your spouse, children and other loved ones inherit when you die.

Backstory. In 1932, when the modern system started, Social Security was enacted to guarantee a monthly income safety net to workers and to company-provided pensions that promise to pay longtime employees’ income monthly for life — both paying incomes starting at age 65. In 1978, after job mobility increased and medical advances lengthened the lifespan of Americans, the system was updated to be less reliant on employer pensions. Instead of guaranteeing employees would be paid a defined monthly benefit, employers were given the option to provide defined contribution plans. Making individuals responsible for funding their retirement income instead of their employers was more consistent with American individualism and free enterprise. Since then, the rules on retirement income planning have been in flux. Throughout modern history, the system has been evolving and tax laws have been subject to countless revisions intended to make things fair and address Americans’ financial needs and the common good.

New Rules. In 2022, a major revision to retirement tax law was enacted. Many changes became effective in 2023, but many others do not go into effect until 2024 or later, and many of the changes are up to employers to adopt. These variables make it more important than ever for individuals to educate themselves and determine the changes that benefit them.

Relaxed Penalty on Missed Distributions. If you fail to withdraw the full amount of a required minimum distribution by the due date, the amount not withdrawn was previously subject to a 50% excise tax. The penalty is dropped to 10% if the missed distribution is corrected within two years.

Hardship Rules Eased. Limitations on hardship distributions from 403(b) plans are relaxed in 2024 by making them subject to the same rules applicable to 401(k) plans. Hardship distributions may be taken without an early withdrawal penalty, if you or your dependents face large medical expenses, are buying a principal residence, or paying tuition and education expenses. Hardship distributions are also allowed for funeral expenses or to repair damage to your principal residence.

Victims of domestic violence may withdraw the lesser of $10,000 or 50% of their vested accrued benefit without triggering an early distribution 10% excise tax penalty.

529 College Plans. If you started a 529 account 15 or more years ago and have not depleted it, you can transfer up to $35,000 from the 529 account to a Roth IRA, provided that you contributed the money to the 529 plan more than five years ago.

Charitable Giving. Beginning in 2023, individuals age 70½ and older can make a one-time charitable gift of up to $50,000 to certain types of charitable trusts in which the IRA owner retains an interest in income generated by assets in the trust. This keeps capital gains and interest earned out of the donor’s adjusted gross income, which can lower your federal income tax bracket and result in annually recurring income tax savings.

Planning Implications. This article discusses only a fraction of nearly 100 revisions made to the retirement tax law. It’s not intended as personal legal, tax, or investment advice but is intended to educate you and motivate individuals to act. For more articles on this topic or to schedule a meeting about how the new rules affect your personal situation, please do not hesitate to contact us.