Important Tax Tips for Retirement Savers

With the end of 2023 fast approaching, now is an opportune time for advisors to discuss various tax strategies with clients.

There are plenty to pick from and many are highly relevant to clients who are actively saving for retirement and those nearing retirement. This year, tax-advantaged retirement planning takes on added importance and brings new opportunities thanks to the passage of the SECURE Act 2.0, which includes several points advisors and clients need to be aware of. That is to say advisors can leverage SECURE Act 2.0 as an avenue for connecting with clients as 2024 approaches.

“The most notable provision in the new bill increases the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73 from 72, beginning January 1, 2023. In 2033, the RMD age will increase again, to 75,” notes Michael Townsend of Charles Schwab.

Speaking of contributions to and withdrawals from retirement accounts, those subjects are prime opportunities for advisors help clients navigate a new retirement landscape. Consider the following.

IRA Contribution Tips

Advisors should remind clients with penchants for procrastination that the deadline for contributing to IRAs for the 2023 tax year is Tax Day 2024, or April 15, 2024.

It’ should also be noted that the IRA contribution limit this year for investors younger than 50 years is $6,500. For investors that turned 50 during the calendar year, they can contribute up to $7,500 to an IRA. Those limits are applicable to standard and ROTH IRAs combined. There are other considerations for advisors to discuss with clients who are business owners, freelancers and self-employed.

“If you are self-employed or a small business owner, consider establishing an IRA-based retirement plan such as a Simplified Employee Pension Plan (SEP IRA), and fund that SEP IRA with employer contributions made under that plan,” notes Morgan Stanley. “Note that if your business employs any employees, the SEP IRA will likely have to cover the employees as well if they qualify. For 2023, the maximum employer contribution to a SEP IRA (or to your own SEP IRA) is the lesser of (a) 25% of your employees’ eligible compensation (or, if you are self-employed, 20% of your net earnings from self-employment), or (b) $66,000 for 2023, and the deadline to contribute is the due date of the federal income tax return for your business, which typically has the same due date as your individual federal income tax return.”

For big earners and highly affluent clients, they may not be able to contribute directly to Roth IRAs due to income limitations. Enter the Roth IRA conversion.

“If you are considering a Roth conversion, speak with your tax advisor about the appropriate time to execute this strategy,” adds Morgan Stanley. “It may be prudent to execute a Roth conversion (utilizing an in-kind transfer of securities) when those securities have a relatively lower market value as opposed to a higher or appreciated market value, so that the conversion generates less ordinary federal income tax.”

Minding Required Minimum Distributions

The Secure Act 2.0 altered the required minimum distribution (RMD) environment by moving the age at which RMDs from retirement must start to 73 from 72. However, this isn’t as straight-forward as it sounds, indicating that advisors and tax professionals can help clients navigate some thorny issues.

“Specifically, the RMD Age is (a) age 70 ½ for individuals born before July 1, 1949, (b) age 72 for individuals born after June 30, 1949, but before 1951, (c) age 73 for individuals born after 1950, but before 1960, or (d) age 75 for all others – note, there is an apparent drafting error in the statutory language, which makes it unclear when age 75 starts to apply in lieu of age 73, but it appears age 75 is intended to apply if born after 1959,” concludes Morgan Stanley.

Related: When It Comes to Retirement Planning, Mindset Matters