Advisors have two years to make big tax-saving moves for their clients, says Ed Slott. After that, a legislative window could close that opportunity forever.
“We all know that we’re going into 2024 and 2025 with low rates, but after that the rates under today’s law are scheduled to go back up to what they were before the Tax Cuts and Jobs Act,” said Slott, founder of tax consultancy Ed Slott & Co.
The Tax Cuts and Jobs Act of 2017 lowered the income tax rates for many earners across the wealth spectrum, but, more importantly, also included a very generous gift and estate tax exclusion that, in 2023, has risen to nearly $13 million. However, many of those provisions are scheduled to sunset at the end of 2025 unless they are extended by Congress.
“You can help out by doing some of the things I talk about,” said Slott. “For example, looking at year-end gifting. That almost $13 million exemption for estate planning goes up to over $13 million this year. … You have two years to get IRA income out at these lower rates. You can be a real hero to your clients by getting better educated on these issues.”
Required Minimum Distribution Confusion
“The number one question we get from every financial advisor is, ‘Who has to take an RMD before year’s end,” said Slott. “It’s very complicated.”
For IRA owners, required distributions depend on their year of birth, he said. This year, 2023, is a transition year. In 2017, the SECURE Act raised the age at which RMDs start. Previous law has them beginning in the year the client turns 70.5. The first SECURE Act raised that to age 72, and last year’s SECURE Act 2.0 raised the starting age again, this time from 72 to 73.
If a client turned 72 last year, in 2022, they had to start taking RMDs and would be required to take their second distribution this year. However, if the client turned 72 this year, in 2023, then they fall under SECURE Act 2.0’s umbrella and would not have to start taking distributions until 2024, the year in which they turn 73.
“Anyone born 1950 or earlier will have to take an RMD this year,” said Slott. “Anyone born in 1951 or later will not—they get to use age 73 as their beginning year.”
Tougher For Beneficiaries
However, required distributions are now more complicated for heirs inheriting assets from traditional IRAs. While under previous law they could “stretch” their IRA distributions over the rest of their lives, resulting in a lower annual income tax bite and more opportunity to grow the assets, the SECURE Act imposed a new 10-year rule on inherited IRA distributions, stating that most heirs would have to empty the IRA by the end of the 10th calendar year after the account holder died.
Initially, Slott and other tax experts assumed that, under the new rule, inherited traditional IRAs would be exempt from required minimum distributions until the 10th year after they changed hands, but subsequent IRS rulings have made clear that many heirs are required to take distributions before that 10-year mark is reached.
Slott says that, to determine whether distributions need to be taken, an account owner or advisor needs to ask three questions: “Two ‘whens’ and one ‘who.’”
First, when did the original IRA owner die? (Or when did the beneficiary inherit the account?) If it was in 2019 or earlier, the beneficiary still qualifies for the stretch IRA rule, and though they’re subject to required distributions, they can usually take much smaller annual withdrawals from the account than those subject to the new regime because their distribution is calculated using their projected life span.