Amanda Cook
ABOUT Amanda

Amanda Cook, Esq., CPA has been practicing in San Diego County since 2011. Amanda’s career has focused on issues relating to the intersections of small business, personal finance, and income tax. In her career, she has worked with people across the income spectrum to help them achieve their financial goals through tax planning and budgeting. [...]

There are several actions you can take to lower your 2023 tax bill, but they need to be implemented before December 31! These strategies include Roth conversions, tax loss harvesting, tax gain harvesting, the Backdoor Roth IRA, net unrealized appreciation, and charitable giving strategies such as a donor-advised fund. Watch this year-end tax planning webinar with Pure Financial’s Tax Planning Manager Amanda Cook, CPA, Esq., to learn how these strategies can help you reduce your tax liability, and which ones fit your specific needs and goals.

Download the Guide to End of Year Tax Strategies


  • 00:00 – Intro
  • 02:21 – Tax Basics – Tax Terms: Adjusted Gross Income, Standard Deductions, Itemized Deductions, Taxable Income, Tax Credits
  • 07:53 – Tax Time Bomb: Historical Income Tax Rates, 2023 Tax Brackets, Capital Gains Tax Rates
  • 12:02 – Tax Diversification: tax-free, taxable, tax-deferred pools of money, ordinary income, and required minimum distributions (RMD)
  • 18:29 – Roth IRA conversion strategy, when not to do a Roth conversion (QBI, IRMAA, pro-rata rule)
  • 22:23 – Tax Planning Tips: Tax Loss Harvesting, Tax Gain Harvesting, Back Door Roth IRA, Net Unrealized Appreciation (NUA)
  • 29:22 – Charitable Gifting Strategies: Donor-Advised Funds
  • 32:56 – Viewer questions:
    • Can you deduct mortgage interest from a second home?
    • Can you get a tax credit for installing solar electric system on a rental house?
    • Will tax rates and tax brackets increase for single filers as well as those married filing jointly?
    • Is tax-deferred money that’s taxed at ordinary income rates also subject to capital gains tax?
    • Can money be moved from tax-deferred to tax-free if the employer does not allow in-service rollovers?
    • Do you have until April 15 to do a Backdoor Roth conversion for the previous tax year?
  • 39:26 – SECURE 2.0 Act – new Roth options: no RMDs for Roth 401(k) and Roth 403(b), catch-up contribution changes, 529 plans, and RMD changes
  • 47:30 – Sign up for a free tax reduction analysis
  • 48:46 – Viewer questions:
    • Does IRMAA take the standard deduction into account when looking at earned income?
    • Is there any benefit to waiting until the deadline to file taxes?
    • Can the funds from a qualified IRA distribution be given to children?
    • Is there any tax difference between a Roth IRA conversion and a contribution to a Roth 401(k)?

Tax Reduction Analysis


Kathryn: We are here for the End of Tax Year Planning Webinar. My name is Kathryn Bowie with Pure Financial Advisors, and thank you all for joining us. We have Amanda Cook, Esquire and CPA. She is our tax planning manager here at Pure Financial Advisors.

Amanda: Thank you for the introduction. I’m really excited to be talking with you all about the end of the tax year and some last minute things that you can do before December 31st to manage what your tax burden will be for 2023 and preview some of the things that will be coming up in 2024. But before we get into the end of this tax year, I did want to just have a brief reminder for anybody who’s in California who received the extension to file taxes. That extension was first to May 15th, then it was extended to October 16th, and then on October 16th, it was extended to November 16th. So if you have not filed your 2022 tax return or paid your 2022 tax return, doing so by tomorrow is the last chance to be on time for that. So, that’s a really important deadline. Missing it by a day is a penalty based on the amount that you owe. So even if you can’t pay the full amount due by tomorrow, it’s really important to pay as much as you can, close out as much as you can of the 2022 tax year before even worrying about 2023 so much.

With that, let’s talk about 2023. Just a quick agenda, we’re going to go through some of the basics on taxes, make sure that we’re all on the same page, we’re all using the same terminology, and we all understand the basics of what’s going on. Then we’re going to talk about why, for a lot of people, tax rates, manipulating your tax rates throughout your life is going to help you diffuse what we call the “tax time bomb”. And then we’ll talk about a couple of other tax planning tips for the end of the year and then some secure 2.0 updates, that are going to be in effect for 2024 or not as the case may be.

Tax Basics – Tax Terms

So starting with tax terms, your gross income is all of your income from whatever source derived. I always say everything is taxable unless it isn’t, so anytime you’re thinking, I received something of value, something that was a benefit to me, is it taxable? The default answer is going to be yes, and it’s going to go into this gross income number. The next part is adjustments. These used to be called above the line deductions. They come off your gross income to get you to your adjusted gross income, but they are deductions that are allowed against your gross income even if you do not itemize. Some common examples are IRA deductions, which you can make up until the deadline for your tax return, and the student loan interest deduction, alimony if you have deductible alimony from an older return, and a couple of deductions that are applicable only to self employed people. So those are the common adjustments. They’ll come off the gross income and bring you to adjusted gross income. This number is super important because this number is usually used as the phase out or phase in for different things that might happen on your tax return. It’s used as the threshold for your Medicare premiums, using your two year old adjusted gross income. It’s used to determine whether or not you’re eligible for Roth IRA contributions, whether you’re eligible for the premium tax credit, and whether you are eligible for a deduction for traditional IRAs. So those are some of the more common things that are phased in or out based on AGI. Often this is modified, so something that might not be taxable gets added in or something that is taxable gets subtracted, then it’s called modified adjusted gross income or MAGI. So you’ll see that a lot from your AGI.

You can take either a standard deduction or an itemized deduction. Your standard deduction is set each year. It’s subject to inflation. So this year, going into 2024, the new amounts have come out. It’s about a 5% increase over these numbers, but it’s based on your filing status. So if you’re single or married filing separately, it’s $13,850. If you’re married filing joint or qualified widow, it’s $27,700 and if you’re head of household, it’s $20,800. You also get a little bit of a boost if you’re over age 65 or if you’re blind. You also have the option to itemize your deductions.

Now, you never have to itemize your deductions, unless you’re married filing separately and your spouse itemizes, but other than that, you can choose whichever one is going to give you the greater tax benefit. Usually, that’s whichever one is higher. In some states, they’ll have a really low standard deduction at the state level, and you have to do the same thing federal and state. So sometimes it makes sense to take the standard or to itemize even when one’s not higher than the other, but most of the time you just want to use whichever one is higher. Your itemized deductions are all limited, so the common ones are state and local income tax, which includes property tax as well, that is limited to $10,000 under the Tax Cuts and Jobs Act. Mortgage interest is limited to the interest on the first $750,000 unless you have grandfather debt from before the Tax Cuts and Jobs Act, in which case it may be up to a million. And in the state of California, we do not conform to that, so you can deduct more mortgage interest on your state tax return than you can on your federal. Medical expenses begin to be deductible when they exceed 7.5% of your income, so there’s a floor there that you have to be over before you start getting the benefit of the deduction. And then charitable donations are limited to 50% of your AGI, or 30% if you’re doing capital gain property.

So all of these have limitations associated with them, and then the hurdle to be over for most people is the standard deduction amount, whichever one is higher is the one that you’ll take. You’ll subtract it from your AGI and come to your taxable income. The taxable income is the number that you look to, to determine what tax bracket you are in and what your tax is going to be. So if you’re following along with your tax return, you’ll see that these come along in order, with this calculation. After you’ve determined your taxable income and then your tax that corresponds with that, you can potentially take tax credit. So some of the common credits are the EV credit for electric vehicles, solar credit for putting solar panels on your home, sometimes there’s certain business credits, if you have students that are in college you might claim an education credit, or you may claim a credit for your dependent.

Tax Time Bomb

So going into the tax time bomb, one of the things that we look at over time is what your tax rate is going to look like throughout your life. One of the ideas of saving for retirement or using some of these special accounts, tax favorite accounts, is to make sure that you’re deferring tax, but you want to defer tax to when your tax rate is going to be lower. And as you can see on this chart, tax rates are pretty low right now compared to how they have been over time. So just the last 30 years or so, tax rates have been at pretty historically low rates. The current tax rates, which we’ll discuss later, do expire in 2026. So there’s going to be a little bit of a boost to rates in 2026, but nowhere near what we were seeing in the 70s and 80s and before that. The current tax brackets go from 10% to 37%. These top rates are the current tax brackets. When you’re paying your taxes, you’re going to be in one of these brackets. That’s your marginal tax rates. So that’s the amount of tax that you pay on the last dollar. But you actually pay all of the rates before that, too. So if you’re in the 24% tax bracket, you would pay the 10% the 12% the 22% and then that last income is going to be taxed at 24%. In 2026, these tax rates are all going to increase to what they were before the Tax Cuts and Jobs Act was passed in 2017. So those were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The other thing that’s important to note is that these don’t line up exactly. If you’re in a 24% tax bracket now, depending on your filing status and your income, you might fall in 25%, 28%, or 33%, because the 24% tax bracket is really big right now. So it’s a good rate to take advantage of, a little bit of a lower rate compared to all 3 of these.

For 2023, when you look at your taxable income line, this is what’s going to tell you which tax bracket that you fall in. If you have your tax return handy you can look at that taxable income line and your filing status and see where you’re at, in terms of what tax bracket you are in for 2023. These numbers change every year. So again, there’s about a 5% inflation rate going into 2024, but the tax bracket numbers in 2024 will be the same. So still 10%, 12%, 22%, 24% and so forth. One thing to note here is that this is your tax rate on your ordinary income. So if you happen to have a capital gains income, there’s a different tax scale that applies to capital gains income. That’s normally going to be your qualified dividends and long term capital gains. Those are taxed at more favorable rates, 0%, 15% or 20% typically. And those types of income are on top of your ordinary income. So when you’re looking at your taxable income, if you wanted to see why your tax is lower than what it looked like it would be just based on the regular tax rates, usually it’s going to be because you have some capital gains type income that’s being taxed at one of these rates. This is not scaling. So, if your income is over, let’s say $89,250 and you’re married filing jointly, you don’t pay any of the 0% tax rate. You go straight into the 15% tax rate.

Tax Diversification

So why is this important? One of the things that you want to be able to control on your tax return is what are the different types of tax rates on the different types of income. So you can have 3 main places where you store your money over time. One of them is the taxable account. That’s your regular brokerage account. Another is your tax deferred account. That’s your typical retirement style account. And then there’s the tax free account, which is the Roth account.

So if we think about how money goes in and out of these accounts, your typical retirement account is going to be a pre tax deposit. That means you don’t pay tax on the money that’s going into it. Everything that’s in this account, it’s going to be growing over time. And then when it comes out, it’s going to come out at those ordinary income tax rates. So that’s 10% to 37%. Those are those rates that we were just talking about that eventually will change to 10% to 39.6%. So when this money comes out, that’s the tax that you pay. So the highest tax rates are these ordinary income tax rates. The idea here is that over the course of your life, you’re going to put money into these accounts while you’re in a high bracket and then you’re going to take that money out when you’re in a lower bracket. But as we discussed, we’re already in very low brackets. So it may make sense for some people to take advantage of these lower tax brackets now, because you can’t just wait for the optimal tax time. Once you turn a certain age, for most people now who are not already subject to required minimum distributions, RMDs, that age is going to be 73 or 75. For people who turned 72 in 2022 or earlier, RMD has already started. So this makes you have to pay the tax because you have to take money out of these accounts. Also, if you pass away with money in these accounts, your beneficiaries also have to pay the tax. That’s called income in respect of the decedent, and under the first secure act, they only have 10 years to completely wipe out this account. There’s been a lot of debate over whether or not they have to take RMDs themselves during that 10 year period. There’s a proposed regulation from the IRS that suggests that the answer would be yes. But that regulation is on hold right now. it will not go into effect until at least 2024 when it’s expected to be finalized, but this came out in 2022, so they said it won’t be in effect until at least 2023, and now they’re saying won’t be in effect until at least 2024. So for now, it’s just any time in those 10 years. But they have to take it out. They have to pay the tax. So there’s really no avoiding the tax on this account, save for a few charitable strategies, which we’ll talk about.

This account, the taxable account is your typical brokerage account. The money that comes in out of this account usually comes out at either the 0%, 15% or 20% tax brackets. These are your capital gains style incomes. So if you’re holding on to the assets for at least a year and a day, you get long term capital gains rates when you sell the asset. And also qualified dividends come out at these more favorable rates. Ordinary dividends and interest can also be generated in this account. That’s going to come out as ordinary income. But for the most part, you’re looking at these more favorable rates. And you’re only going to pay on the growth. So when you put money into this account, it’s after tax. You form a basis here. And that basis is always going to be removable tax free. If you have a loss in the account, that’s also tax free, it creates a tax asset for you.

Finally, we have our Roth accounts up here. Roth account money goes in after tax, and it comes out, as long as it’s a qualifying distribution, completely tax free. So what that means is you prepay the tax now, and then the money that’s in the account can be invested, can grow, and when you pull it out, you pay no tax on that growth. So similar concept, you have a basis in that account, which is the after tax money that you put in there, but all the growth comes out tax free. So it’s really a good place to put high growth assets.

So over the course of your life as you’re saving money, one of the things that you would like to ideally have is some money in all 3 of these different kinds of accounts that allows you to really control your taxes going forward. But what we find is a lot of people are over balanced in this tax deferred pool, because for most of your working life, you’re putting pre tax contributions into your 401(k) or 403(b) or other similar savings plan and that forces you then to have to live on your RMDs or your distributions all at ordinary rates. So it’s really hard to control your taxes at that point. One of the things that you can do in the meantime is move money from this account to this account, and in some limited cases from this account to this account. So we’re gonna talk about those strategies and how to get yourself more in balance so you can control your tax rate long term.

Roth IRA Conversion Strategy

So the first piece of that is moving the money from that tax deferred account into the tax free account. That’s called a Roth conversion. And what you do in that case is you take money that was pre-tax, you pay the tax when you take it out, just because you’re always going to pay the tax on that money, except for one limited circumstance. So you pay the tax on the money that comes out and you move it into your tax free account. In any given year, you want to make sure that you’re being tax smart about how much to do. One of the common mechanisms for doing that is to fill up whatever tax rate you happen to be in. In this example, this person would be in the middle of the 22%. We could fill up the 22% in the current year so that they don’t end up in the 24% or a higher percent in a later year.

There’s a number of situations where doing a Roth conversion might not make sense. You want to be tax smart every year, as you’re thinking about, is this something that you want to do? So now that we’re at the end of the tax year, you have a better sense of what’s going on with your taxes for the year, and you’ll want to see, does it make sense? And then how much makes sense this year. If you’re in the 0% capital gains rate, you might want to just make sure that you preserve that 0%. Otherwise, you’ll push that money into the 15% and it’ll be like adding a 15% tax to your conversion. So a lot of times you don’t really want to do that unless you have a really big imbalance in your account. Similarly, your qualified business income deduction phases out at a certain taxable income. And that includes both your ordinary income and your capital gain style income. So, if you’re adding a bunch of income, you may reduce a deduction that you’re otherwise eligible for if you have a business.

For Medicare, your premiums are based on your modified adjusted gross income, your MAGI. Increasing your MAGI in 1 year is going to increase your Medicare premiums in 2 years if you go past the different tiers. So it’s important to make sure that you know what tier you are in? What tier do you expect to be in the long term? And does it make sense to fill up maybe a tier instead of a tax rate?

And then the final thing is, one of the common Roth conversion strategies is what’s called a backdoor Roth, and this is an annual contribution to a traditional IRA and then conversion. But if you already have balances in your traditional IRA that are pre tax, that is not a tax free conversion. So it is really important that you understand how the money comes out of the traditional IRA before you do the conversion. A lot of people think this transaction is going to be tax free because they’re putting in after tax money and immediately converting it. But if there’s other money in there, it’s actually going to come out on a pro rata basis. You will never recover your after tax money until all the money is out of that account.

Going into some things that you can think about for the end of the year, making sure that you’re really maximizing every tax opportunity that you have. 1st, we’re going to talk about some capital gain strategies. So, if you have a non qualified brokerage account, that’s the taxable account from the tax triangle, these are the things that are taxed at 0%, 15% and 20%, you can look at that account each year and see what’s moving, what’s gaining money, what’s losing, and determine if it makes sense to realize any of those gains or losses.

Tax Planning Tips

Tax loss harvesting is exactly what it sounds like, right? You’re realizing your tax losses, but that doesn’t necessarily mean that you’re losing money. One of the things that you want to think about is that the stock market tends to move up, but it also goes down. It has these like little dips throughout time. So as this market value is going up, you want to realize these losses at these points and stay invested.

The IRS has a rule that you cannot claim a loss and then within 30 days buy that same stock back. So you’ll need to buy something that’s a little bit different so that you stay invested in the market, but you get to claim this loss. These losses can offset up to $3,000 of ordinary income, up to all of your capital gains, and they can be carried forward from year after year. So then when you have high gains years, you can use losses from prior years to offset them.

The opposite side of that is tax gain harvesting. So, for example, if you are in the 0% long term capital gains rate you’re probably going to want to realize gains year by year. The more that you hoard those gains inside of your account, the more likely it is that you’re going to have a situation in the future where you really just have to realize a lot of gains that you didn’t have control over. But if you’re balancing your account on a regular basis, you can take advantage of the 0% rate every year that you’re eligible.

Other thresholds that make sense is if you’re a higher income, you might want to maximize the 15% bracket in years when you’re eligible. Also, there’s another tax on gains called the Net Investment Income Tax. The Net Investment Income Tax is a 3.8% tax. And it comes into play if you’re single and you have income over $200,000 or married and you have income over $250,000. That’s again based on your AGI. So if you’re under those thresholds but some years you’re over, again that might be a limit that you want to watch for and realize some gains while you’re under it to avoid this 3.8% tax.

The backdoor Roth IRA, I touched on this, but this is a contribution to a traditional IRA and then a conversion to a Roth. This is a tax free transaction, if you don’t have any other traditional IRA money. So what happens is you put in after tax money into your traditional IRA, and then you immediately convert it into a Roth IRA. Who’s going to do this? This happens most of the time when your income is too high to be able to contribute directly to a Roth IRA. So, again, depending on your filing status, there’s different income limits. There’s a phase out for how much you can contribute. If you exceed those limits, this is the only way to contribute your IRA contribution to a Roth IRA. If you have pre tax money, it’s this traditional IRA money that’s going to be coming out mostly, and this basis is going to get trapped in there as part of the conversion.

I mentioned there’s another way that you can take money from that tax-deferred pool and move it into the taxable pool. This is that way. It’s called net unrealized appreciation. And this happens when you’re holding inside of your retirement account a lot of your employer stock. A lot of times you get to buy employer stock at somewhat of a lower rate and then you’re holding it in your account for a long time. So hopefully it has grown quite a bit. That means your basis inside of your retirement account is going to be relatively low, but the value might be really high. So what this allows you to do is to move just that employer stock from your retirement account into your taxable account. You pay ordinary income tax on the basis. So the amount that your retirement account paid for that stock, that’s going to be ordinary income. And then all the rest of the gain that’s associated with that stock, so the difference between that initial purchase price and the current value, is eligible for long term capital gains treatment right away. You don’t have to hold it for the whole year. So it’s a really valuable way to beef up your taxable pool if you don’t have a lot of assets available there. A few words of caution, this is still a retirement distribution. So if you’re under age 59.5, it is subject to the 10% penalty for early withdrawal. But conversely, because it’s a retirement distribution, it also counts for your RMD. So if you’re over RMD age, you can use this strategy to satisfy that requirement.

Then we want to talk about charitable gifting strategies. So going into year end there’s a couple of different concepts to keep in mind. The first one is, of course, you can just give to charity. You can bunch all your deductions for 2 years. That’s a really common strategy. So in December, do what would be your 2023 and your 2024 contributions to charity. That allows you to take full advantage of your charitable gifting. If you want to, you can do it through a donor advised fund. The advantage of using a donor advised fund is that you can put that money, those two years worth of gift into the account in the same year. You take the deduction in that year, but you can also stretch out your distributions to the charities. So from the charity’s perspective, they’re getting a donation from you every year, but from a tax perspective, you’re doing the whole donation in one year. So this is a really valuable strategy for that.

The other thing that a donor advised fund allows you to do is avoid capital gains tax on highly appreciated stock or other capital assets. So, if you have stock in your taxable account, or if you’ve utilized the NUA strategy, you can avoid the tax on that capital gain by donating the stock directly to your donor advised fund. Then you get the deduction on the full value of that stock and avoid the capital gains. So, it’s a really powerful tool, particularly if you’re already itemizing.

An additional charitable strategy if you’re over age 70.5 you can do what is called a qualified charitable distribution. And this is where you take money directly from your IRA and you give it to charity. This strategy cannot be put into a donor advised fund, but it’s the one exception where you can take money out of your pre tax account completely tax free. So you never pay tax on the money that you donated to charity if it goes directly from your pre tax to your charity of choice. Also, if you have basis in your pre tax account, so again, that pro rata rule, that basis stays behind. So this is going to be only money that would have been taxable and it comes out completely tax free. You can start this at age 70.5. So even before the RMD age. This used to be the old RMD age. But also it satisfies your required minimum distribution if you’re subject to them. The limit is $100,000 per year, and starting this year, under the SECURE Act, it’s going to start being adjusted for inflation. So that $100,000 limit will be higher next year, and so forth.

Kathyryn: Before you head into the Secure Act 2.0, maybe you could just touch on a few questions. Would that be all right?

Amanda: That would be great.

Viewer Questions

Kathryn: Okay. First, somebody was asking, can you deduct your mortgage interest off of a second home?

Amanda: You can. You are allowed a first and a second home. But it’s only a first and a second, not a first, a second, a third, a fourth. So you can choose any second home that you want plus your primary residence.

Kathryn: And then another was if they put a solar system on their rental house, do they still get the tax credit?

Amanda: Yeah. That’s a really good question. The rules around business property are a little bit different, but yeah, there is a solar credit that is applicable to rental property. There’s a few extra rules. There’s certain kinds of contractors that wouldn’t qualify. So it’s a little bit tighter than it would be on your primary home, but it is possible.

Kathryn: Okay, and you don’t happen to know the form? She asked for the form as well.

Amanda: I think it goes on the general business credit form, which is the 3800.

Kathryn: And just to clarify, you showed the married filing jointly tax rates going to increase and they were asking, are they going to increase for singles? Which they are, correct?

Amanda: Yes. The tax rates across the board are going to increase. And also the brackets are going to increase right to the level at which each tax rate takes effect will go up each yea.

Kathryn: When you’re talking about the money that’s withdrawn from your tax deferred account, and that’s taxed at ordinary income, they ask, is any of that taxed at capital gains rates? There’s no way that tax deferred money is taxed at capital gains rates, correct?

Amanda: It’s not. And it’s a little bit confusing, right? Because you think you’re putting this money aside, it’s invested in the market, it’s generating capital gains, why would that not be taxed at capital gains rates? That’s the trade off that you have between the tax deferred accounts and the taxable account. So the tax deferred account, the money goes in pre tax. So theoretically, because you’re not paying tax on it upfront, you can put more into it to start with. And then the tax each year is also deferred. So every year the investments are kicking out interest dividends, capital gains. There’s trades happening. All of that’s happening tax free. So the trade off to that is when you pull the money out, it’s ordinary income. The one exception to that is the net unrealized depreciation strategy for employer stock. So if you have stock in the place where you work, you can move that money out. Partially ordinary income, partially capital gains.

Kathryn: Someone else asked, can I move money from the tax deferred bucket to the tax free bucket if my employer does not allow in service transfer or rollover?

Amanda: Well, I think there’s 2 pieces to this. One is there’s this concept called a mega backdoor Roth and that’s an in plan rollover. I don’t think that’s what you’re talking about. The other one is when you’re still working and you have your 401(k) or your 403(b) or something like that. You’re past age 59.5. Your employer does not allow you to move that money from your employer sponsored plan into an IRA. If you can’t move it out, then you generally can’t do a conversion in that year. But if you have prior 401(k)s or prior 403(b)s from other employment, you can move that into an IRA and use that as your pool for doing conversions. It’s probably the best way.

Kathryn: Do you have until April 15th to do a backdoor Roth conversion for the previous tax year? Or must it be done by December 31st of the current tax year?

Amanda: That’s a really great question. Let’s go back to that slide. This gets people turned around quite a bit. Even professionals who are really familiar with this. This is a two step transaction. First, you’re going to go into the traditional IRA. That’s going to be your contribution. The deadline for a contribution is the filing deadline of your tax return. No extensions. One caveat to that, I mentioned at the beginning, we’re still in 2022 in California. You actually can still make contributions for 2022 until tomorrow, but for most of the rest of us, we’re going to be talking about the April deadline for 2023 contributions. So April 2024 is the deadline for making a 2023 traditional IRA contribution. The second step is a conversion and conversions can happen at any time. These happen on a calendar year. So this is January to December. So if you want to do a conversion for 2023, you have to do that by December 31st. So to get into your question, well, what if you want to do a 2023 backdoor Roth contribution and you make your contribution in 2024 and you do the conversion then after that, obviously, right? So then what would happen is that this would be a 2023 contribution and this would be a 2024 conversion.

SECURE 2.0 Act

So the Secure 2.0 Act was a follow on to the Secure Active 2019. It was passed towards the end of 2022. There were a bunch of different retirement related provisions that were sort of going to be phasing in over the next couple of years. So I want to talk about a couple of things that are coming up in 2024.

One of these is that there’s more Roth options than ever to get money into Roth and they’re more advantageous than they were in the past. So, one really important factor is RMDs. For 2023, if you have a Roth 401(k) or Roth 403(b), or Roth employer account generally, you are required to take required minimum distributions for 2023. In 2024, those go away. So, one of the great advantages to a Roth IRA is that there’s no requirement to take RMDs. So, you can take advantage of that tax deferral, for the transactions that are happening inside of the account forever. It can grow as big as you can get it before you start taking distributions out. That was not the case previously for employer Roth plans. These were still subject to RMDs. So 2024, that’s no more.

Additionally, under Secure 2.0, if you’re a highly compensated employee, the idea was that you’re going to have to start making catch up contributions. So that additional contribution that you’re allowed to make this year, the maximum is $22,500 if you’re under age 50. And then there’s a catch up contribution of $7,500 to bring you up to a total $30,000. That catch up portion was going to be required to be Roth beginning in 2024. You all know the expression, don’t let the perfect be the enemy of the good. Congress did not do that. There was a lot of confusion in the way that they wrote this provision, including one pretty logical interpretation that said you’re not allowed to make catch up contributions anymore. So, the IRS has come out, they’ve clarified a bunch of different aspects about that. Catch up contributions are safe, and there’s a 2 year forbearance on this rule. So, if you were making pre tax catch up contributions, and you’re highly compensated, and you want to continue to do that, this rule has been delayed by the IRS as an administrative forbearance to allow employers to catch up with their plans and make sure that they can allow it and accommodate it and track it and do everything the right way. So, this does not take effect now until 2026.

Additionally, we mentioned the RMDs for beneficiary accounts. We’re expecting in 2024 that there’s going to be changes to how beneficiary accounts are treated. The IRS issued proposed regulations in 2022 that are not effective yet. They took them back. They said they’re going to clarify whether or not RMDs are going to be required from inherited accounts. So right now we don’t know the answer, but for 2023 there’s no penalty for not taking an RMD from an inherited account. So you’re technically not required to do it. Also the ages have changed. So I mentioned earlier, if you turn 72 in 2022 then your RMD age was going to be 72. Now it’s 73 all the way up until people born 1960 and later, their RMD age starts at 75. So it is really important to keep track of when your RMDs are supposed to start. They’ve also changed the penalty on failing to take RMDs. So every year, if you did not take your required minimum distribution, the former penalty was 50% of the amount that you were supposed to take out. Now, that has dropped down by half to 25%. And it’s only 10% if you correct it within the correction window, which is basically about 2 or 3 years and before you’re contacted by the IRS. So that’s a really beneficial change to the penalties if you learn after the fact that you are subject to RMD.

And then the other thing that I want to talk about briefly, because this is a very new and potentially very valuable rule. And we’re waiting on some more guidance about really how the mechanics of it are going to work. But, if you have children or grandchildren that you’re saving for college, it’s really hard to determine what the college costs are going to be in the future because tuition changes a lot, room and board changes a lot, they may get scholarships, they may not go to college. There’s just a lot of different variations that can happen. So 529 plans are a really valuable savings tool because it is like a tax free account. You put money in, you may get a deduction at the state level, but there’s no federal deduction. So it’s after tax money. It grows in the account tax free. And then if you take the money out of the account to pay for college expenses or certain other educational expenses, but usually it’s for college, that money will come out tax free. So all that growth is tax free. The problem is, if you take it out for a non-qualified expense, there’s a 20% penalty, plus tax on the growth. So, you really don’t want to be in a situation where your 529 plan is overfunded. But nevertheless, a lot of people are in that situation because it’s just so hard to estimate what the expenses are really going to be. So under Secure 2.0, effective in 2024, 2024 will be the first year that this has ever been allowed, beneficiaries of 529 plans that are overfunded can start moving the money from the 529 plan to a Roth IRA. It will go against their IRA contribution limit. So it’s subject to the IRA contribution limit. They have to have earned income for the year. So they have to be IRA eligible in that sense. And it’s a $35,000 maximum lifetime limit. There’s a bunch of other requirements too. The plan has to be around for at least 15 years. Your last 5 years of contributions won’t qualify. But for people who are in this situation where they just feel like they have money trapped in a 529 plan, and it’s never been able to come out without penalties before, this is a really, really important relief mechanism. Any further questions?

Schedule a Tax Reduction Analysis

Kathryn: We have a lot of questions and some are very detailed, so I don’t think we’re going to be able to get to all of these questions. Sign up for a free tax reduction analysis with one of our experienced professionals here at Pure Financial Advisors. You will learn how to legally pay fewer taxes than ever before, the benefits of the Roth IRA, and the myths and mistakes to avoid. Plus you’ll learn tax loss harvesting techniques that Amanda was talking about, tips for reducing taxes on your investments, and how to generate tax efficient income in retirement. This is a no cost, no obligation, one on one tax reduction analysis. It’s tailored specifically to you and your financial situation. So we hope that you’ll join us. Pure Financial is a fee-only financial planning firm. We do not sell any investment products or earn commissions. Pure Financial is a fiduciary, meaning that we are required by law to act in the best of interest of our clients. So we’re on your side of the table. Pure Financial Advisors has 4 offices in Southern California and new offices in Seattle, Denver and Chicago. We’re growing every day, but you can meet with one of our experienced professionals from online anywhere via zoom, or you can come into one of our offices. So I encourage you to do that.

Viewer Questions

But we do have some questions that let’s see if we can get to some. One asks, does IRMAA take into account standard deduction when looking at earned income?

Amanda: It does not. It’s based on your modified adjusted gross income. So that’s going to be your gross income minus your adjustments, and then plus your tax exempt interest. That’s the modification that applies for IRMAA. So if you have municipal bonds or something like that, where you’re generating tax exempt interest, there’s a line on your tax return. You’ll actually add that to your AGI to determine what your IRMAA tier is.

Kathryn: This one, they just asked, was there any benefit to waiting to file beyond the initial deadline, as an example, for Californians here waiting until tomorrow? Was there any benefit for anybody to wait until that time rather than doing it on April 15th or October 15th, et cetera?

Amanda: Sure. The answer is usually no. The main advantage is you just have more time. When you file an extension, you don’t get any additional time to pay. You can file late under the extension, but you still have to pay by April 15th. The interesting thing this year, California was not the only area with storm forbearances on filing, but it’s the biggest and it’s most of the state. And then we had that surprise, shift to November 16th. That’s actually a disaster declaration on the original filing deadline. So, because it’s a movement of the original filing deadline, it’s actually an extension to file an extension to pay and an extension of other deadlines that happened within the disaster period, including contributing to an IRA. So normally there’s not a benefit to electing to extend other than that you just get more time to make sure your return is accurate. But in this case, especially with interest rates how they are, if you owed taxes, you could hold on to your money in an account that’s earning interest and then just pay it now.

Kathryn: Got it. Can I use the qualified IRA distribution and give those funds to my children?

Amanda: There’s two pieces to this, right? The first one is, what’s a qualified charitable distribution? Unfortunately, even though it may feel this way, your kids are not going to qualify as charity. It has to be a 501(c)(3) organization. And even if you donate through a 501(c)(3) organization, there’s this lesser known rule that you can’t specify that it goes to the benefit of a specific person. So, for example, if your child is going to go on a church trip, you can’t donate to the church specifically for your child, but you can donate to the church knowing it might benefit your child. It’s a nuanced thing. So for the qualified tax free, qualified charitable distribution, it has to go to a charity.

The second component to it is, let’s say you take a distribution. From an income tax perspective that would be taxable. And then if you wanted to gift it to your children, then you’re concerned, actually, about the gift tax, which is a whole separate tax regime. The first $17,000 is not subject to gift tax and does not require a gift tax return. And that’s per donor, per donee. So you can give $17,000 to as many people as you want and your spouse, if you have a spouse, can give $17,000 to as many people as they want. So, if you are married and your child is married, you could do $17,000, your spouse could do $17,000, you could do $17,000 to their spouse, you can get all the way up to $68,000 without having a gift tax filing return.

Kathryn: Got it. We have time for a few more. So from a tax perspective, is there any difference between an IRA rollover to a Roth IRA versus direct contributions to a Roth 401(k) through your company? Any advantage to one over the other?

Amanda: From a tax perspective, not really. You’re giving after tax money to your Roth account. So you’re just not receiving the deduction. Or the other way you could do pre tax money to your employer account and then do a conversion. So your taxable income is going to be the same.It’s really just going to matter at that point, do you have more flexibility in your IRA? Do you like the investment options in your employer account? Some more practical considerations like that. Because really, the main advantage of the Roth style account is that you get all this tax free growth. So the higher growth that you have in that account, the better. So if you feel comfortable with the amount of growth that you’re going to get in your Roth 401(k) with those options, then from a tax perspective, it’s the same.

Kathryn: How do you determine your RMD?

Amanda: Your RMD is going to be calculated based on your December 31st value from the prior year. So 2023 RMDs are calculated based on your December 31, 2022 value. Next year, it will be based on December 31, 2023 for your 2024 RMDs. So you start with that value and then you go to the charts. It’s IRS Publication 590-B. That’s the publication that contains all of the RMD charts and you’ll look for the chart that applies. There’s 3 different ones. One is for beneficiaries. One is for people who are married to somebody who’s at least 10 years younger than them. And the other one is for everybody else, just account owners who are at RMD age, and you find your age for this year. And that will give you a number. You take your account value and divide it by that number and that’s going to give you the RMD.

Kathryn: So thank you so much everyone for joining us. We hope that you’ve learned a lot.

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