Required Distributions: Changes You Need to Know
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called 10-year rule generally requires inherited accounts to be emptied within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death or within 10 years after a minor child beneficiary reaches age 21. This reduces the ability of most beneficiaries to spread out, or “stretch,” distributions from an inherited defined contribution plan or an IRA.
In 2022, the IRS issued proposed regulations that interpreted the revised required minimum distribution (RMD) rules. Final regulations have now been issued and are generally applicable starting in 2025. They basically adopt the proposed regulations, while reflecting some changes made by the SECURE 2.0 Act of 2022 and including certain changes in response to comments received on the proposed regulations. Under these regulations, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period. Account owners and their beneficiaries may want to familiarize themselves with these changes and how they might be affected by them.
RMD basics
If you own an individual retirement account (IRA) or participate in a retirement plan like a 401(k), you generally must start taking RMDs for the year you reach your RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). If you are still working for the employer that maintains the retirement plan, you may be able to wait until the year you retire to start RMDs from that account. Failing to take an RMD can be costly: a 25% penalty tax (50% prior to 2023) generally applies to the extent an RMD is not made.
The required beginning date (RBD) for the first year you are required to take a lifetime distribution is no later than April 1 of next year. After your first distribution, annual distributions must be taken by the end of each year. (Note that if you wait until April 1 to take your first-year distribution, you will have to take two distributions for that year: one by April 1 and the other by December 31.)
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
When you die, the RMD rules also govern how quickly your retirement plan or IRA will need to be distributed to your beneficiaries. The rules are largely based on two factors: (1) the individuals you select as beneficiaries of your retirement plan, and (2) whether you pass away before or on or after your RBD.
Who is subject to the 10-year rule?
The SECURE Act still allows certain beneficiaries to “stretch” distributions, at least to some extent. These eligible designated beneficiaries (EDBs) include your surviving spouse, your minor children, any individual not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
Significantly, though, the SECURE Act requires that if your designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
What if your designated beneficiary is not an EDB?
If you die before your RBD, no distributions are required during the first nine years after your death, but the entire account must be distributed in the 10th year.
If you die on or after your RBD, annual distributions based on remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the 10th year. Annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary’s remaining life expectancy.
What if your beneficiary is a nonspouse EDB?
After your death, annual distributions will be required based on remaining life expectancy. If you die before your RBD, required annual distributions will be based on the EDB’s remaining life expectancy. If you die on or after your RBD, annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary’s remaining life expectancy.
After your beneficiary dies or your beneficiary who is your minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the 10th year.
What if your designated beneficiary is your spouse?
There are many special rules if your spouse is your designated beneficiary. The 10-year rule generally has no effect until after the death of your spouse, or possibly until after the death of your spouse’s designated beneficiary.
What life expectancy is used to determine RMDs after you die?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).
When your life expectancy is used, the applicable denominator is your life expectancy in the calendar year of your death, reduced by one for each subsequent year. When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
Relief for certain RMDs from inherited retirement accounts for 2024
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD and the designated beneficiary who is not an EDB did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an EDB died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the EDB’s death).
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new regulations, apply to your individual situation.
New Consumer Protections for Weary Airline Passengers
Banks, hospitals, retailers, and airlines are still dealing with the fallout from the massive CrowdStrike IT outage in July. The tech meltdown impacted businesses across the globe, and airlines were hit particularly hard. This was not good news for the airline industry, which just last year had the highest number of flight delays ever recorded.1
The U.S. Department of Transportation determined that the delays and cancellations resulting from the CrowdStrike outage were “controllable,” or caused by the airline. As a result, most airlines were obligated to provide some sort of compensation and assistance to stranded travelers.2
Fortunately, there could be much-needed relief for airline passengers on the horizon, thanks to a new federal law and rules issued by the U.S. Department of Transportation.
Hassle-free refunds
In the past, airline passengers were forced to figure out how to obtain a refund by researching an airline’s website or waiting for hours on the phone with an airline’s customer service department. Airline passengers will be entitled to an automatic refund for:
- Cancelled or significantly delayed flights (e.g., departure or arrival times delayed by three hours or more for domestic flights and by six hours or more for international flights), regardless of the reason
- Significantly delayed baggage return
- Extra services (e.g., Wi-Fi, seat selection, or inflight entertainment) that were paid for but not provided
Airlines must issue refunds of the full amount of the ticket purchased within seven business days of refunds becoming due for credit card purchases and 20 days for other payment methods. Passengers who accept a ticket for a significantly delayed flight or are rebooked on a different flight to their destination will not receive refunds. The refunds must be in the form of cash or whatever original payment method was used to make the purchase (e.g., credit card or airline miles). Finally, airlines are not allowed to substitute for other forms of compensation (e.g., vouchers or travel credits) unless a passenger affirmatively chooses to accept an alternate form of compensation.
Protection against surprise fees
Many airlines advertise cheap “teaser” fares that don’t take into account additional fees — all of which can significantly increase the cost of a ticket. Airlines will be required to disclose various ancillary fees up front, such as charges for checked bags, carry-on bags, and changing or cancelling a reservation. They must also provide a detailed explanation of each fee before a ticket can be purchased. In addition, under a proposed rule airlines will be prohibited from charging families an extra fee to guarantee a child will sit next to a parent or adult travel companion.
When are these protections scheduled to take effect?
These consumer protections are scheduled to have different implementation periods over the next year. In addition, the rule on surprise fee disclosures was temporarily blocked by a U.S. Appeals Court last week. Visit the U.S. Department of Transportation’s website at transportation.gov/airconsumer for more information.
1-2) U.S. Department of Transportation, 2024
What to Know About T Plus 1 Trade Settlement
On May 28, 2024, settlement cycles on U.S. stocks and other securities will shift from two business days to one. For most investors, this shift will have little or no impact. But it will affect some investors and certain types of transactions. It may be helpful to understand the basics of this important change.
T+1 vs. T+2
The trade date (T) is the day your order to buy or sell a security is executed. The settlement date is the day your order is finalized, and when the funds used to purchase the security and any sold securities must be delivered. Put simply, T+1 means most transactions will settle on the next business day after the trade.
For example, under the current T+2 protocol, if you sell shares of a stock on a Monday, the transaction will settle in two business days on Wednesday. Beginning on May 28, 2024, if you sell shares of a stock on a Monday, the transaction will settle in one business day on Tuesday.
Who will T+1 affect?
T+1 will have minimal or no impact on most investors because most brokerage firms require cash or sufficient margin in an account prior to the investor entering any orders to purchase securities in the account. However, if your brokerage firm allows you to make a purchase without sufficient funds in the account, under T+1 you will need to deliver a check or initiate a funds transfer so that the funds are deposited in your brokerage account no later than the next business day.
Another potential effect of T+1 on some investors may be the tighter timeframe to deliver paper certificates for securities that are sold. This is rare today, because investors typically hold securities in their accounts electronically, and the shorter timeframe should not affect electronic transfers. However, if you do wish to sell a security for which you hold a paper certificate, you should be prepared to deliver it to the brokerage firm no later than the next business day after the trade is executed.
Securities affected include stocks, bonds, exchange-traded funds, certain mutual funds, municipal securities, real estate investment trusts, and master limited partnerships traded on U.S. exchanges. This change will not affect government bonds and options as their settlement is already set at T+1.
Establishing accurate cost basis
When selling a security, any capital gains taxes are calculated using the security’s cost basis, which is the initial amount invested plus any commissions or fees and reinvested dividends and distributions. Under most circumstances, the change to T+1 will have no effect on figuring cost basis. However, if you purchased a security through more than one brokerage firm, you would have one less day to provide information on the previous purchase(s) to your current firm. Once settlement is complete, your cost basis is established for tax purposes. The best practice is to make sure your current brokerage has full cost-basis information on any securities purchased at previous brokerages.
For more information, see IRS Publication 550, which offers detailed guidance on how to calculate cost basis under different circumstances.
Convenience and close attention
For some investors, one-day settlement may mean greater convenience. In effect, an investor will fully own a security one day sooner than under the current system. This could be helpful for an investor who wants to trade the security quickly or wants to participate in a proxy vote. However, T+1 will also require some investors to pay closer attention to how the shorter settlement time could affect investment, trading, or tax decisions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
FAFSA Glitches Delay College Financial Aid Awards for 2024-25
It’s been a tough financial aid season for college students and their families. The FAFSA (Free Application for Federal Student Aid) was redesigned and simplified for the 2024-25 school year, in what was supposed to benefit families completing the application. But a late rollout and the subsequent discovery of form calculation errors have led to processing delays and, by extension, delays for colleges sending out student financial aid packages for the 2024-25 school year.
Both new and returning college students are affected because students must submit the FAFSA each year to be eligible for federal financial aid. But the series of delays may be particularly painful for new students who are waiting to review and compare financial aid packages from multiple colleges before making a final decision by the general May 1 college admissions deadline.
A slow rollout for the new, simplified FAFSA
The FAFSA Simplification Act (part of the Consolidated Appropriations Act of 2021) gave the go-ahead for a shorter, more streamlined FAFSA. The new, simplified form was heralded as a bipartisan breakthrough and a win for families trying to navigate and complete the application. The full redesign was scheduled to take effect with the 2023-24 FAFSA but was delayed a year due to the pandemic.
The new 2024-25 FAFSA arrived with almost two-thirds fewer questions and a mandatory IRS direct data exchange tool to import income information from tax returns, two changes intended to make the form easier to complete. But the public rollout of the 2024-25 FAFSA was delayed three months, from the usual October 1 open date to December 31, 2023. This extra time was due to several new calculations and adjustments to the aid formula and the technical integration needed to embed them into the form. Along with a new aid formula, the terminology changed too: a new “student aid index” (SAI) replaced the well-known “expected family contribution” (EFC) as the yardstick for measuring a student’s aid eligibility.
Subsequent calculation errors
Once the 2024-25 FAFSA opened in late December, various online glitches disrupted public access to the form during the month of January. Then on January 30, the Department of Education announced that inflation adjustments were being made to the aid calculation, which opened a potential additional $1.8 billion in aid but would delay processing of the form until March, leading to delays in families receiving aid awards from colleges. (In a typical year when the FAFSA is available in October, students can start receiving college aid awards by the end of the calendar year, though timelines vary by college.)
Then on March 22, the Department of Education announced another form error that affected the student aid index calculation for dependent students who reported assets, requiring another round of reprocessing for all affected applications. The Department continues to provide information and tools for families on studentaid.gov about completing the 2024-25 FAFSA.
Colleges and students left scrambling
In the meantime, colleges need time to review incoming FAFSAs, model student aid eligibility, and package and communicate financial aid offers to students. The result is that high school seniors may not receive their financial aid packages from colleges until April, May, or even June, which means they might have to commit to a college by the May 1 deadline without fully knowing how much it will cost them out-of-pocket.
Families with high school seniors may want to contact individual colleges to see when aid packages might be expected and/or whether the college plans to extend its decision deadline beyond May 1. Returning students may also want to contact their college about their aid package. Due to the new FAFSA formula for calculating aid, returning students may discover that their aid eligibility (in the form of their student aid index) is higher or lower now, which could affect their aid package.
Source) U.S. Department of Education, 2024
International Investing: The Diverging Fortunes of China and Japan
The MSCI EAFE Index, which tracks developed markets outside of the United States, advanced 15% in 2023, while U.S. stocks in the S&P 500 Index returned 24%.1 One of the world’s hottest developed stock markets was in Japan, where the Nikkei 225 rose 28% in 2023, delivering the best performance in Asia.2 On the other hand, in China — which is still considered an emerging market — the benchmark CSI 300 Index lost more than 11% over the same period.3
Investing internationally provides growth opportunities that may be different than those in the United States, which could help boost returns and/or enhance diversification in your portfolio. It may help to consider the risks, economic forces, and government policies that might continue to impact stock prices in these two news-making Asian markets and elsewhere in the world.
A tale of two economies
Ranked by gross domestic product (GDP), a broad measure of a nation’s business activity, China is the world’s second-largest economy after the United States.4 Japan fell from third place to fourth, behind Germany, at the end of 2023.5
In February 2024, the Nikkei surpassed a peak last seen in 1989.6 Conversely, Chinese stocks fell more than 40% from their peak in June 2021, before turning up slightly in February and March.7
GDP growth in Japan has been lackluster; in fact, the nation barely averted a recession at the end of 2023.8 What has been driving the market’s outperformance? After battling deflation (or falling prices) for more than two decades, the emergence of inflation in Japan has been good for businesses. Japanese companies have been putting their capital to work, growing profits, and returning them to shareholders, which has attracted foreign investors. A weaker yen helped by making Japanese products cheaper overseas.9 The Bank of Japan ended the era of negative interest rates when it raised short-term rates on March 19, 2024.10
China’s GDP growth slowed to about 5.2% in 2023, as weaker consumption and investment cut into business activity. China is still growing faster than most advanced nations, but it’s contending with a years-long real estate crisis.11 Deflation has set in, while underemployment and youth unemployment have risen to high levels, damaging consumer confidence.12 Moreover, a visible government crackdown on the private sector has rattled investors and scared away many foreign firms.13 In early 2024, the Chinese government took steps to help stabilize the stock market that included boosting liquidity, supporting property developers, and encouraging more bank lending and homebuying.14
Global economic outlook
The International Monetary Fund sees a path to a soft landing for the global economy, projecting steady growth of 3.1% for 2024, about the same rate as 2023. Inflation, which has fallen rapidly in most regions, is expected to continue its descent.15
The downside risks to this hopeful outlook include fiscal challenges, high debt levels, and lingering economic strain from high interest rates. Price spikes caused by geopolitical conflict, supply disruptions, or more persistent underlying inflation could prevent central banks from loosening monetary policies. The possibility of further deterioration in China’s property sector is another cause for concern.16
A world of opportunity
It can be more complicated to perform due diligence and identify sound investments in unfamiliar and less transparent foreign markets, and there are potential risks that may be unique to a specific country. Mutual funds or exchange-traded funds (ETFs) provide a relatively effortless way to invest in a variety of international stocks. International funds range from broad global funds that attempt to capture worldwide economic activity, to regional funds and others that focus on a single country. The term “ex U.S.” or “ex US” typically means that the fund does not include domestic stocks, whereas “global” or “world” funds may include a mix of U.S. and international stocks.
Some funds are limited to developed nations, whereas others concentrate on nations with emerging (or developing) economies. The stocks of companies located in emerging nations might offer greater growth potential, but they are riskier and less liquid than those in more advanced economies. For any international stock fund, it’s important to understand the mix of countries represented by the underlying securities.
It may be tempting to increase your exposure to a booming foreign market. However, chasing performance might cause you to buy shares at high prices and suffer more severe losses when conditions shift. And if your long-term investment strategy includes international stocks, be prepared to hold tight — or take advantage of lower prices — during bouts of market volatility.
Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The return and principal value of all stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares. Foreign securities carry additional risks that may result in greater share price volatility, including differences in financial reporting and currency exchange risk; these risks should be carefully managed with your goals and risk tolerance in mind. Projections are based on current conditions, are subject to change, and may not happen.
Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) London Stock Exchange Group, 2024
2) CNBC.com, December 28, 2023
3, 7) Yahoo! Finance, 2024 (data for the period 6/01/2021 through 3/20/2024)
4, 13) The Wall Street Journal, March 18, 2024
5) CNBC.com, February 14, 2024
6, 9) The Wall Street Journal, February 22, 2024
8, 10) CNBC.com, March 19, 2024
11, 15–16) International Monetary Fund, January 2024
12) The Wall Street Journal, January 27, 2024
14) Bloomberg, February 7, 2024
Tax Relief Legislation in “Progress”?
Legislation that could benefit parents and business-owners is currently moving through Congress. The House has passed the Tax Relief for American Families and Workers Act of 2024. It now faces an uncertain future in the Senate. The legislation would make changes to the child tax credit and to certain business tax provisions. Some significant provisions in the legislation that may provide tax relief are summarized below.
Child tax credit provisions
If enacted, the legislation may increase the availability and amount of the child tax credit.
- The formula for calculation of the refundable portion of the child tax credit would be modified to take into account the number of children a parent has (effective for 2023, 2024, and 2025).
- The overall limit on the refundable portion of the child tax credit would increase from $1,600 in 2023 and $1,700 in 2024 to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
- The $2,000 maximum child tax credit would be adjusted for inflation in 2024 and 2025.
- In 2024 and 2025, earned income from the prior taxable year would be able to be used in calculating the maximum child tax credit if earned income for the current year is less than earned income for the prior year.
Business tax provisions
The legislation includes several business tax provisions that generally allow the acceleration of expense deductions.
- Under current law, domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021, must be deducted over a five-year period. The legislation would allow such expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2026, to be fully deductible in the year paid or incurred.
- For purposes of calculating the limitation on the deduction of business interest, the legislation would allow adjusted taxable income to be determined without regard to any allowance for depreciation, amortization, or depletion for taxable years beginning after December 31, 2023, and before January 1, 2026 (with similar treatment for 2022 and 2023, if elected).
- In recent years, the special additional first-year depreciation allowance, or bonus depreciation, has been decreasing under current law — reaching 80% in 2023 and 60% in 2024. The legislation would allow 100% bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026.
- Section 179 expensing allows the cost of qualified property to be expensed, rather than recovered through depreciation. The maximum amount that can be expensed is $1,220,000 in 2024, reduced to the extent the cost of Section 179 property placed in service during the year exceeds $3,050,000 in 2024. The legislation would increase those amounts to $1,290,000 and $3,220,000 in 2024 (and adjust for inflation in 2025).
January 24, 2024 Starts the 2023 Federal Tax Filing
IRS suggest steps to make tax filing easier
- Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2024. You may need to allow additional time for mail delivery.
- Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1959), and their instructions.
- File electronically and use direct deposit.
- Check irs.gov for the latest tax information.
Key dates to keep in mind
- January 12. IRS Free File opened. IRS Free File Guided Tax Software, available only at irs.gov, allows participating software companies to accept completed tax returns of any taxpayer or family with an adjusted gross income of $79,000 or less in 2023 and hold them until they can be electronically filed with the IRS starting January 29. Beginning January 29, Free File Fillable forms will be available to taxpayers of any income level to fill out and e-file themselves at no cost.
- January 29. IRS begins accepting and processing individual tax returns.
- April 15. Deadline for filing 2023 tax returns (or requesting an extension) for most taxpayers.
- April 17. Deadline for taxpayers living in Maine or Massachusetts.
- October 15. Deadline to file for those who requested an extension on their 2023 tax returns.
Tax refunds
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS expects to issue most tax refunds within 21 days of their receiving a tax return if the return is filed electronically, the tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.
2023 Year-End Tax Tips to Consider
This is a good time to review your tax situation for 2023. Allow enough time to complete the changes before year-end. Check with your custodian for the deadlines for completing by December 31, 2023. Following are some actions to consider before the end of the year. Many of these items will depend on your expected tax bracket in 2023 compared to 2024.
1. Defer income to next year
Consider opportunities to defer income to 2024, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
2. Accelerate deductions
Consider opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as qualifying interest, state taxes, and medical expenses before the end of the year rather early in 2024. Alternating, payments in 2014 may result in a benefit by exceeding the standard deduction.
3. Make deductible charitable contributions
If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)
There may be an advantage if you contribute appreciated securities. The gain on the securities will not be taxed if you held the security for more than a year.
For those 701/2 or older it may be beneficial to use direct payments using your required minimum distributions (Qualified Charitable Distributions.) To qualify for this strategy, it is important to meet the IRS requirement.
4. Increase withholding to cover a tax shortfall
If you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in time for 2023. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.
You can also have tax withheld from distributions from some financial accounts.
5. Save more for retirement
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2023 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to traditional and Roth IRAs combined ($7,500 if you’re age 50 or older).* The window to make 2023 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2024, to make 2023 IRA contributions.
*Roth contributions are not deductible, but Roth qualified distributions are not taxable.
6. Take required minimum distributions
If you are age 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the withdrawals by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount that you failed to distribute as required (10% if corrected in a timely manner).
7. Weigh year-end investment moves
You should not let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
What Happens if There is a Government Shutdown?
There are only a few days till the U.S. government may shutdown. It is possible that a last-minute agreement could avoid a shutdown. Following is an abbreviated summary of the federal funding process, the current situation in Congress, and the potential consequences of a failure to fund government operations.
Twelve appropriations bills
The federal fiscal year begins on October 1, and under normal procedures 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.
These appropriations are considered discretionary spending, meaning that Congress has flexibility in setting the amounts. Although discretionary spending is an ongoing source of conflict, it accounted for only 27% of federal spending in FY 2023, and almost half of that was for defense, which is typically less of a point of conflict. Mandatory spending (including Social Security and Medicare), which is required by law, accounted for about 63%, and interest on the federal debt accounted for 10%.1
It is obvious that it would be helpful for federal agencies to know their operating budgets in advance of the fiscal year, but all 12 appropriations bills have not been passed before October 1 since FY 1997. In 11 of the last 13 years, lawmakers have not passed a single spending bill in time.2 That is the situation as of September 27 this year. (One bill, to fund military construction and the Department of Veterans Affairs, has been passed by the House but not the Senate.)3
Continuing resolutions and omnibus spending bills
To delay further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date, generally at or based on the same level as the previous year. These bills are essentially placeholders that keep the government open until full-year spending legislation is enacted. Since 1998, it has taken an average of almost four months after the beginning of the fiscal year for that year’s final spending bill to become law.4
Even with the extension provided by continuing resolutions, Congress seldom passes the 12 appropriations bills. Instead, they are often combined into massive omnibus spending bills that may include other provisions that do not affect funding. For example, the SECURE 2.0 Act, which fundamentally changed the retirement savings rules, was included in the omnibus spending bill for FY 2023, passed in late December 2023, almost three months into the fiscal year.
Current Congressional situation
The U.S. Constitution gives the House of Representatives sole power to initiate revenue bills, so the House typically passes funding legislation and sends it to the Senate. There are often conflicts between the two bodies, especially when they are controlled by different parties, as they are now. These conflicts are typically settled through negotiations after a continuing resolution extends the budget process.
The Senate acted first this year, releasing bipartisan legislation on September 26 that would maintain current funding through November 17 and provide additional funding for disaster relief and the war in Ukraine. Although this is likely to pass the Senate later in the week, it was unclear how the House would react to the legislation.5
Late on September 26, the House cleared four appropriation bills for debate (Agriculture, Defense, Homeland Security, and State Department). It is unknown whether these bills will pass the House, and if they do, it will be too late to negotiate the provisions with the Senate. A proposed continuing resolution that would extend government funding and include new provisions for border security had not been cleared for debate as of the afternoon of September 27.6
Effects of a shutdown
The effects of a government shutdown depend on its length, and fortunately, most are short. There have been 20 shutdowns since the current budget process began in the mid-1970s, with an average length of eight days. The longest by far was the most recent shutdown, which lasted 35 days in December 2018 and January 2019, and demonstrates some potential consequences of an extended closure.7 However, in 2018-19, five of the 12 spending bills had already passed before the shutdown — including large agencies like Defense, Education, and Health & Human Services — which helped limit the damage. The current impasse, with no appropriations passed, could lead to an even more painful situation.8
Some things will not be affected: The mail will be delivered. Social Security checks will be mailed. Interest on U.S. Treasury bonds will be paid.9 However, some programs will stop immediately, including the Supplemental Nutrition Program for Women, Infants, and Children, which helps to provide food for about 7 million low-income mothers and children.10
Federal workers will not be paid. Workers considered “essential” will be required to work without pay, while others will be furloughed. Lost wages will be reimbursed after funding is approved, but this does not help lower-paid employees who may be living paycheck to paycheck.11 In an extended shutdown, the greatest hardship would fall on lower-paid essential workers, which would include many military families. Furloughed workers would struggle as well, but they might look for other jobs, and in many states would be able to apply for unemployment benefits.12 (Members of Congress, who are paid out of a permanent appropriation that does need renewal, would continue to be paid.)13
Air travel could be affected. In 2019, absenteeism more than tripled among Transportation Security Administration (TSA) workers, resulting in long lines, delays, and gate closures at some airports. According to the TSA, many workers took time off for financial reasons.14 Air traffic controllers, who are better paid, remained on the job without pay and without normal support staff. However, on January 25, 2019, an increase in absences by controllers temporarily shut down New York’s La Guardia airport and led to substantial delays at airports in Newark, Philadelphia, and Atlanta. This may have been an impetus to reopen the government later that day.15
Unlike federal employees, workers for government contractors are not guaranteed to be paid, and contractors often work side-by-side with federal employees in government agencies. In 2019, it was estimated that 1.2 million contract employees faced lost or delayed revenue of more than $200 million per day.16 A more widespread shutdown would put even more workers at risk.
While essential workers will maintain some federal services, furloughed workers would leave significant gaps. At this time, it’s unknown exactly how each agency will respond to a shutdown. In 2019, some national parks used alternate funding to maintain limited access, which caused problems with trash and vandalism and was deemed illegal by the Government Accounting Office. This year, all parks might be closed during an extended shutdown.17 Many other federal services may be delayed or suspended, ranging from food inspections to small business loans and economic reports.18 Delays in economic statistics could make it more difficult for the Federal Reserve to judge appropriate policy.19
Although a shutdown would cause temporary hardship for workers and the citizens they serve, the long-term effect on the economy would be relatively benign, because lost payments are generally made up after spending is authorized. A shutdown might decrease gross domestic product (GDP) for the fourth quarter of 2023, but if the shutdown ends by the end of the year, GDP for the first quarter of 2024 would theoretically be increased. Even if delayed spending is recovered, however, lost productivity by furloughed workers will not be regained. And an extended shutdown could harm consumer and investor sentiment.20
Surprisingly, previous shutdowns generally have not hurt the broad stock market, other than short-term reactions. But the current market situation is delicate to begin with, and it is impossible to predict future market direction.21
For now, it’s wise to maintain a steady course in your own finances. In the event of a shutdown, be sure to check the status of federal agencies and services that may affect you directly.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Projections are based on current conditions, subject to change, and may not happen.
1) Congressional Budget Office, May 2023
2, 4, 8) Pew Research Center, September 13, 2023
3) Committee for a Responsible Federal Budget, September 27, 2023
5, 6, 9, 18, 19) The Wall Street Journal, September 26, 2023
7, 11) CNN, September 21, 2023
10) MarketWatch, September 26, 2023
12) afge.org, September 25, 2023 (American Federation of Government Employees)
13) CBS News, September 25, 2023
14) Associated Press, January 21, 2019
15) The Washington Post, January 25, 2019
16) Bloomberg, January 17, 2019
17) Bloomberg Government, September 12, 2023
20) Congressional Research Service, September 22, 2023
21) USA Today, September 26, 2023
RMD Relief and Guidance for 2023
Earlier IRS proposed regulations regarding required minimum distributions (RMDs) reflected changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. IRS delayed releasing final regulations to include changes to RMDs made by the SECURE 2.0 Act of 2022, which was passed in late 2022. IRS issued interim RMD relief and guidance for 2023. Final RMD regulations, when issued, will not apply before 2024.
Relief with respect to change in RMD age to 73
The RMD age is the age at which IRA owners and employees must generally start taking distributions from their IRAs and workplace retirement plans. There is an exception that may apply if an employee is still working for the employer sponsoring the plan. (For Roth IRAs, RMDs are not required during the lifetime of the IRA owner.)
The SECURE 2.0 Act of 2022 increased the general RMD age from 72 to 73 (for individuals reaching age 72 after 2022). Since then, some individuals reaching age 72 in 2023 have taken distributions for 2023 even though they do not need to take a distribution until they reach age 73 under the changes made by the legislation.
Distributions, other than RMDs which cannot be rolled over, from IRAs and other workplace retirement plans can generally be rolled over tax-free to another retirement account within 60 days of the distribution. The 60-day window for a rollover may already have passed for some individuals who took distributions that were not required in 2023.
To help those individuals, the IRS is extending the deadline for the 60-day rollover period for certain distributions until September 30, 2023. Specifically, the relief is available with respect to any distributions made between January 1, 2023, and July 31, 2023, to an IRA owner or employee (or the IRA owner’s surviving spouse) who was born in 1951 if the distributions would have been RMDs but for the change in the RMD age to 73.
Generally, only one rollover is permitted from a particular IRA within a 12-month period. The special rollover allowed under this relief is permitted even if the IRA owner or surviving spouse has rolled over a distribution in the last 12 months. However, making such a rollover will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. However, an individual could still make direct trustee-to-trustee transfers since they do not count as rollovers under the one-rollover-per-year rule.
Inherited IRAs and retirement plans
Before the SECURE Act, RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2023 during one of the 10-year periods. (Similar relief was previously provided for 2021 and 2022.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, or 2022 and on or after their required beginning date (The required beginning date is usually April 1 of the year after the IRA owner or employee reaches RMD age. Roth IRA owners are always treated as dying before their required beginning date) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, or 2023 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, or 2022 and annual distributions were not taken in 2021, 2022, or 2023 as required (during the 10-year period following the eligible designated beneficiary’s death).
