Don't Forget These IRA, 401(k) Planning Tasks Before Year-End

With the holiday season now in full swing, now is an ideal time for clients to be reminded about year-end retirement planning items. 

Many important items must be accomplished for 2023 by Dec. 31 — and, as we move into December, time inevitably seems to move faster. With the Thanksgiving rush in the rear view, clients should take the opportunity to get a jumpstart on end-of-year retirement to-do items — both with respect to IRA transactions and transactions involving company-sponsored retirement plans.

Many of these year-end issues are fairly basic, so it’s easy to overlook them during the busy holiday season. The objective is to help clients get their ducks in a row when it comes to year-end retirement planning.

Year-End IRA Planning Items

Most clients are aware that contributions to traditional IRAs can be made up until their tax filing deadline for the tax year. That typically is April 15 of the following calendar year. However, for most other IRA-related transactions, Dec. 31 is the relevant deadline.

Of course, clients subject to the required minimum distribution rules must take their RMD by Dec. 31. Taxpayers born on or before June 30, 1949, are subject to the original, pre-Secure Act rules. Those clients should have already begun taking distributions from retirement accounts in the year after they turned 70.5.

Clients born after June 30, 1949, but before Jan. 1, 1951, are subject to the age-72 rule under the original Secure Act. Clients born on or after Jan. 1, 1951, are subject to Secure Act 2.0’s age-73 rule. 

The deadline for making qualified charitable distributions is also Dec. 31. Charitably minded clients can direct up to $100,000 in IRA funds per year to charity. That donation is not included in the taxpayer’s income and, if conditions are satisfied, the donation counts toward the taxpayer’s annual RMD. The $100,000 cap is a per-person cap, so married taxpayers can direct up to $200,000 to charity each year so long as each spouse has an IRA. 

Clients considering Roth conversions should act quickly. Roth conversions for 2023 must be started before Dec. 31, or they will not count for the 2023 tax year. However, some custodians impose earlier deadlines. Clients should check those deadlines to avoid missing the direct transfer option — but should also be aware that they have the option of withdrawing the funds from their traditional IRA and executing a 60-day rollover into the Roth account. 

Year-End Deadlines for Company Plans

As with traditional IRAs, the required beginning date for required minimum distributions is now 73 for clients born on or after Jan. 1, 1951. 

One wrinkle may arise for clients considering a net unrealized appreciation tax strategy. That is the growth of the stock value over and above what the client originally paid for it, which can often be substantial in cases where a client’s employer provided a discount to employees purchasing company stock years ago.

If the client’s 401(k) holds employer stock that has appreciated over the years, the client may be eligible for long-term capital gains tax treatment when the stock is sold, rather than the ordinary income tax treatment that would typically apply to 401(k) distributions. Further, the 3.8% net investment income tax that is often added to the long-term capital gains rate for higher income clients is not applied to net unrealized appreciation, which is treated as a qualified plan distribution. 

In order for clients to take advantage of that strategy, they must be eligible to take a lump-sum distribution from the 401(k) plan in question. This means that the entire value of the account (and all accounts sponsored by the same employer) must be distributed, whether to a taxable account or IRA, within one single tax year. All distributions need not occur at the same time. 

Clients should generally be advised to begin evaluating the potential net unrealized appreciation strategy fairly early in the tax year. However, clients who have already begun the process of doing so by this point must complete the transaction before Dec. 31. 

Conclusion

Year-end is a perfect time for clients to step back and take stock of their retirement planning strategies. However, when it comes to year-end planning, sooner is better, so clients should act now to make sure that important to-dos don’t get forgotten in the shuffle.