The Retired Investor: End-of-Year Homework for Tax-Deferred Investing

It is the season to be jolly, but don't let your busy schedule interfere with some "must-do" planning for this year and next. At the top of your financial list should be reviewing your tax-deferred accounts.

 

First things first. If you are required to take a minimum required distribution from your IRA or 401(k) by the end of the year, you are running out of time. The new rules state that if you are 73 years of age in 2023 you are required to take a mandatory MRD before January 2024. This requirement includes both pretax and Roth 401(k) accounts, and most IRAs.

 

If you skip your yearly RMD or don't withdraw enough, there is a 25 percent penalty on the amount you should have withdrawn. You can reduce that penalty to 10 percent if the RMD is corrected within two years, according to the IRS.

 

By now, you may know that the Internal Revenue Service has increased the amount of money you can contribute to a qualified IRA plan for 2024. The standard tax-deductible contribution limit for next year has risen from $6,500 per taxpayer (49 years and younger) to $7,500. If you are 50 years or older, the IRS will allow you to make a catch-up contribution. The amount has been increased from $7,500 in 2023 to $8,000 in 2024.

 

Contribution limits apply to all your IRA accounts in total as an individual taxpayer. So, if you decided to split your contributions between your two Roths and a traditional IRA, that is fine with the IRS, if the total contributions are within the limit. If you are married, that means that you both have the right to contribute the same equal amounts. That means you can double the limit in your combined accounts. However, remember that the contributions apply to only earned income. Income from investments, dividends, or excess student loan money does not qualify.

 

Once you reach the age of 73, you can no longer contribute to a traditional IRA. However, for a Roth IRA, you can continue to make contributions at any age. As a rule, you will have until Tax Day to make IRA contributions for the 2023 year. That means you can still contribute toward your 2023 tax year limit of $6,000 and the catch-up limit (depending upon age) until April 15, 2024. After Jan. 1, 2024, you can also make contributions toward your 2024 tax year limit until Tax Day, 2025.

 

There are limits on who can contribute to tax-deferred accounts depending on your income level. The IRS phases out some of the tax advantages of an IRA for wealthier savers. As you earn more money, the government decides that you need less help saving for retirement. Jeff Bezos or Elon Musk, for example, do not need as much help as you or I in saving for retirement. However, if either men or their spouses are enrolled in an employer retirement plan, such as a 401(k), they can make the full IRA contribution regardless of income.

 

Those interested in the cut-off income levels, partial phase-outs, and single versus couples' income, can get all that information easily at the IRS website. 

 

As far as employee contribution plans, those who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plans, have seen their contribution limit raised to $23,000, up from $22,500. The catch-up limit for 50 years and older in 2024 will remain the same ($7,500), For those contributors, the overall contribution limit is now $30,500. However, the IRA catch-up limit was amended under the SECURE 2.0 Act of 2022 to include an annual cost-of-living adjustment but remains at $1,000 for 2024.

 

If I were you, I would take the time this weekend to review where you are as far as your 2023 tax-deferred contributions and what you plan to do in 2024. You still have time to make changes and if married please, please talk it over with your spouse.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.