As 2023 draws to a close, we have a few year-end reminders for those who already have an Individual Retirement Account (IRA) or plan to open one soon.
Be aware of the contribution and deduction limits
This year you can contribute up to $6,500 ($7,500 if you’re 50 or older) to a traditional or Roth IRA. As long as you file a joint tax return, you and your spouse can each contribute to an IRA even if only one spouse has earned income. If you haven’t already reached your contribution limit, you have until April 15, 2024 to make contributions for 2023.
When you contribute to a traditional IRA, your contributions are deductible on your tax return. If you’re covered by a retirement plan at work, the phase-out ranges for 2023 are:
• Single – $73,000 and $83,000
• Married filing jointly – $116,000 and $136,000
• Married filing separately – $0 – $10,000.
Avoid making excess contributions
If your contributions exceed the IRA limits for 2023, you will have to pay a six percent tax on the excess amount. This is not a one-time penalty, you will continue to pay taxes on the excess amount as long as the money remains in your account. In order to avoid the taxes, the excess must be withdrawn by the tax deadline.
Take your Required Minimum Distribution (RMD)
The Secure Act 2.0 has changed the timing of when you must start taking Required Minimum Distributions (RMDs). Beginning in 2023, you must take your first RMD at age 73. So if you turned 73 this year, you have until April 1, 2024 to take a RMD. Under the previous rules, if you turned 72 years old in 2022, you were required to take your first RMD by April 1, 2023. You must take you second RMD by December 31st.
Another major change is that the steep penalty for failing to withdraw your full RMD has decreased. It has dropped from 50% to 25% of the amount not taken.
IRA distributions may impact your premium tax credit
If you plan to take an IRA distribution at the end of the year and expect to claim the premium tax credit, choose your distribution amount carefully. Taxable distributions increase your income which may make you ineligible for the premium tax credit. If your distribution boosts your household income over the 400% federal poverty line for your family size, you’ll have to repay all of the advance credit payments made on your behalf.