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Year End Financial Planning Considerations

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Retirement Plan Contributions:
Retirement Plan contributions are due by the time you file your taxes in 2023. The table to the right displays the maximum contributions you can make to the plans you participate in for this year and next. Many employers also provide matching contributions, which can be a huge benefit to the compounding growth of your accounts as you plan for retirement. At minimum you should consider contributing the amount which your employer matches.

Required Minimum Distributions:
A required minimum distribution, or RMD, is the minimum amount required to be withdrawn from retirement accounts each year for those over 72 years old. These retirement accounts include traditional IRAs, simplified employee pension (SEP) IRAs, SIMPLE IRAs, and many employer sponsored retirement plans such as 401(k) and 403(b) plans.
Generally, you must take your RMD by December 31 of the year it is due. However, for the first year you are required to take a distribution, the IRS permits you to take your first RMD by as late as April 1 of the next year.

It is important to take your RMD: If a participant fails to take an amount at least equal to his/her RMD amount for any year, he/she will be subject to a federal penalty tax. The penalty tax is a 50 percent tax on the amount of the RMD that was not satisfied for the taxable year.

If this is your first RMD(age 72), you have the option to delay: Normally, RMDs must be taken by December 31. However, your first RMD can be delayed until April 1 of the year after you reach the relevant RMD age (72 if you were born after June 30, 1949).
However, keep in mind that if you delay your first RMD, you’ll still need to satisfy that year’s RMD the following year, meaning you’ll be taking two distributions within the same calendar year, which could push you into a higher tax bracket.

Taking RMDs when markets are down: Volatile markets add a layer of complexity to taking Required Minimum Distributions. As the RMD amount is determined by the retirement account’s value at prior year-end as well as your life expectancy, a quick downturn in the stock market at the beginning of the year can cause a lot of stress for individuals who are then required to take a distribution.

Use cash, if available: If you’re already holding cash in an account you have to withdraw from, take advantage of it. If there’s not enough cash, sell thoughtfully. You and your financial advisor can discuss which assets would be best to sell to satisfy the RMD amount.

If you don’t need the income, you can Reinvest or consider an In-kind distribution: You can also choose to reinvest any money you withdrew to satisfy RMDs by moving it to an after-tax brokerage account. This can help provide an opportunity for that money to grow if markets recover. Another option if you don’t need the cash flow is an “in-kind distribution.” This involves requesting that securities in your IRA be transferred to your after-tax brokerage account – which is particularly beneficial if you’re holding a position you don’t want to sell. An in-kind IRA distribution will also reset the cost basis of your holding once in the brokerage account.

Qualified Charitable Distributions:
Giving during your lifetime can take many forms, one of which is using qualified charitable distributions (QCDs).
Doing good is often reward enough, but charity and tax deductions seemingly go hand in hand. If you are age 72 or older and own an IRA, you are required to take minimum distributions whether or not you need the money. Generally, these distributions are treated as taxable income, however QCDs up to $100,000 can be taken directly from your IRA and given to a charity without being taxed.

Rules to follow:
You must be eligible. You must be age 70 1/2 or older at the time of the required distribution. SEPs and SIMPLE IRAs are generally excluded.
There is an annual limit. Your RMD taken as a QCD cannot exceed $100,000 per tax year (even if your RMD is greater than $100,000).
Only qualified organizations count. The IRA trustee or custodian must make the distribution directly to a qualifying charity (private foundations and donor advised funds are not eligible). For instance, you cannot take the distribution yourself then write a check to the charity.

By Scott Crosby CFP and Matt Muench CFP.

Matt Muench

Scott Crosby


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