Too many people wait until near the end of the year to consider key IRA actions and strategies. Your after-tax wealth is likely to increase when you plan the IRA strategies early in the year.
Here are some key steps most people should consider.
Donate via a QCD. A qualified charitable distribution (QCD) is the best way to make charitable contributions when you’re age 70½ or older.
You direct the IRA custodian to distribute money or property directly to the charities of your choice. The distribution isn’t included in your gross income. It counts toward any required minimum distribution (RMD) you have for the year.
The annual limit on QCDs now is indexed for inflation. In 2024 you can make up to $105,000 of QCDs. Learn the nuances of QCDs before taking action.
Also, consider the new type of QCD, the Legacy IRA.
Consider a Roth conversion. The next few years are an important time to consider converting all or part of a traditional IRA into a Roth IRA, because income tax rates are scheduled to increase after 2025.
Another good time to consider a conversion is any time an investment in a traditional IRA loses value. You’ll be converting the assets at a lower value than a few weeks or months earlier, which means you’ll be converting them at a lower income tax cost.
There are many factors to consider before deciding to convert all or part of a traditional IRA to a Roth IRA. That’s another reason to consider your strategies early in the year and look for a good time during the year to execute a strategy.
Take RMDs from your traditional IRAs. The first RMD now is required by April 1 of the year after turning age 73 for anyone who turns 72 after 2022. It will jump to 75 in 2033. Anyone who turned 72 before 2023 already should be taking RMDs.
Too many people wait until near the end of the year to take RMDs. There are at least two problems with that.
Events might intervene to keep you from executing the transaction by December 31. I recommend taking the RMD early in the year to be sure it is completed.
Also, many people don’t realize that IRA custodians become overwhelmed in the last few weeks of the year with transactions people procrastinated about all year. Some custodians won’t take orders for RMDs and some other transactions late in the year. Others let you submit the orders but say they can’t promise to have them executed by December 31.
You can satisfy all or some of your RMD by making a QCD. But you need to plan and coordinate the actions. The first distribution you take during the year is considered your RMD. You can’t take a distribution early in the year and later in the year try to change that into a QCD.
Know the RMD rules for inherited IRAs. The rules for inherited IRAs were upended after enactment of the SECURE Act in 2019 and were upended again in early 2022 when the IRS issued proposed regulations with several surprises.
You might be subject to the 10-year rule, which lets you take distributions in any pattern you want in years one through nine after inheriting but mandates that the IRA be fully distributed by the end of year 10.
But if the original owner of the IRA was taking RMDs, you have to take annual RMDs during years one through nine and fully distribute the IRA by the end of year 10. To further complicate things, the IRS suspended this requirement each of the last few years because the proposed regulations haven’t been finalized. The IRS hasn’t announced if the requirement will be suspended again for 2024.
Know the current rules for any inherited IRAs you have. The RMD rules for inherited IRAs apply to both traditional and Roth IRAs.
Consider new contributions. There no longer is an age limit for making contributions to either traditional or Roth IRAs. You can make contributions at any age. But your contribution can’t exceed your earned income from either a job or self-employment for the year.
If you have some earned income this year, consider whether you want to add to a traditional or Roth IRA.
Carefully consider IRA rollovers. There are many types of IRA rollovers to consider, but there are at least two that occur frequently. Most people should know the key rules for these IRA rollovers.
If you have money in a former employer’s 401(k) plan, you might want to move that money to an IRA using a tax-deferred rollover.
People with multiple IRAs of the same type might decide it is time to simplify their financial lives by consolidating into one IRA. This can be done through tax-deferred rollovers. It’s best to have the rollovers done directly from one custodian to another so you don’t risk falling in one of the traps of the 60-day rollover rule.
Rollovers are more complicated than people realize. Making a simple mistake or two can result in extra income taxes and even penalties.