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Take advantage of beneficial retirement account breaks.

As December nears, many of us are hopefully starting to prepare for the upcoming tax season, especially those in the thick of retirement planning. If you’ve been busy with other end-of-the-year festivities, there is a checklist of things you can still implement in order to “take advantage of certain beneficial retirement account breaks,” as Ed Slott, IRA guru, says. Here are some of things Ed Slott says you should consider doing before December 31…


1) Take Your Required Minimum Distribution (RMD)

IRA owners who are age 72 or older must take RMDs. Participants in employer plans who are age 72 or older are also subject to RMDs — assuming they do not qualify for the “still-working exception.” Beneficiaries may also be subject to RMDs. December 31, 2022 is the deadline for taking a 2022 RMD. However, there is an exception for a retirement account owner’s first lifetime RMD. If 2022 is the first year an RMD is required, the deadline for that RMD is extended to April 1, 2023.

While RMDs are not required from Roth IRAs during the owner’s lifetime, don’t forget that RMDs may be required from both inherited IRAs and inherited Roth IRAs. (Under new rules from the IRS, this could be the case even if the inherited traditional IRA is subject to the 10-year rule!) Missing the December 31 deadline can be catastrophic, as a hefty 50% penalty on the amount of the RMD not taken could apply. Advisors can steer clear of this mammoth penalty by closely monitoring clients’ accounts. Process RMDs early to avoid last-minute errors.


2) Do a Qualified Charitable Distribution (QCD)

As the holiday fun gets dialed up in late 2022, don’t forget about qualified charitable distributions (QCDs) before year’s end. Many people make their charitable gifts in December. QCDs remain a great tax break. IRA owners and beneficiaries who are at least age 70½ are eligible to transfer up to $100,000 tax-free to charities directly from their IRA in 2022. Another benefit of a QCD is that it can satisfy the IRA owner’s RMD (as long as the RMD hasn’t already been withdrawn). Just make sure the QCD is received by the charity by year’s end.

*Note: The account owner must already be 70 ½ to make charitable gifts that are tax-free. If you process a QCD even one day before you turn 70 ½, then it is still taxable. These funds must come out from the IRA account and go directly to the charity.

**Please note that we need all signed documents to be sent to our team by Dec 2nd, 2022.


3) Consider Roth Conversions

Although Roth conversions generate immediate taxation, federal tax rates are historically low and may not stay that way for long. Take advantage of today’s low rates by converting traditional retirement accounts to Roth accounts. To qualify as a 2022 Roth conversion, the funds must leave the IRA or company plan by December 31, 2022. (There is no such thing as a “prior-year conversion.”) Those who are reluctant to absorb a big tax bill might consider a series of smaller partial conversions over time, using up lower tax brackets. Remember, Roth conversions are permanent, so be certain there are enough funds to pay the taxes before completing the transaction.

*Please note that we need all signed documents to be sent to our team by Dec. 2nd, 2022.


4) Use the Net Unrealized Appreciation (NUA) Strategy

NUA is a great tax-planning tool for clients with highly appreciated company stock in their 401(k). NUA allows an individual to pay ordinary income tax on the cost basis of the shares — not the total value of the shares — when withdrawn. The difference between the two (the NUA) isn’t taxable until the shares are sold — and at favorable long-term capital gains rates. Although the NUA strategy can be lucrative, the eligibility rules are strict. For example, the participant’s entire account must essentially be emptied (with a few limited exceptions) within one calendar year. Individuals planning to use the NUA strategy need to start the process early enough to ensure the lump sum distribution occurs by December 31.


5) Split IRAs into Separate Accounts

Another critical December 31 deadline involves splitting inherited IRAs into separate accounts. Beneficiaries have until December 31 of the year following the year of death to split inherited IRAs. One important reason for creating separate accounts is to allow beneficiaries to take advantage of favorable distribution payout rules. But be forewarned, it may take the IRA custodian some time to establish the separate inherited IRA accounts, so pay attention to the calendar.


6) Take 72(t) Distributions for 2022

IRA owners can tap their accounts before age 59½ without the 10% early distribution penalty if they commit to a series of withdrawals according to rules set out in section 72(t) of the tax code. These payments must continue without modification for five years or until age 59½, whichever is longer. The payments must be taken at least annually. For those using a calendar year schedule, the deadline for the 2022 payment is December 31, 2022. Be sure to leave enough time to take the distribution. Simply starting the process of requesting the payment will not suffice. The payment must be distributed and reported on a 2022 Form 1099-R.


7) Update Beneficiary Forms

Advisors should keep beneficiary forms for clients’ retirement plans on file. These forms should be reviewed at least annually to ensure accuracy. The end of the year is a good time to contact clients to discuss updating their beneficiaries in the wake of life events that may have occurred. Marriage, divorce, death, or having a baby are all reasons where financial planning needs may change.

If you’re behind on your checklist, don’t worry! There’s still time to complete this year-end list. Just please keep in mind that “rule changes resulting from both the SECURE act and new IRS regulations make the 2022 year-end review more critical than ever.”

Have questions? Or interested in a consultation? Click here to contact us now. Or click here to learn more about our Financial Planning and Investment services.


Copyright ©2022, Ed Slott and Company, LLC Reprinted from Ed Slott and Company, LLC, October 2022, with permission. [“2022 Year-End Checklist”] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year on conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take and required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ed Slott is not affiliated with LPL Financial.


Blog by Kiran Sharma – Financial Advisor

Learn more about Kiran and the rest of the Storen Financial team here.